Re: Containing the Collapse

["John Gelles" <jjgelles@xxxxxxxx>]

Containing the Collapse    The war against Germany and Japan ended the
depression
    -- not generational succession or electoral politics.

    But it is easy to agree with James Cumes that supply of
    goods and services is what we need -- together with the
    purchasing power to maintain sales, profit, wages, etc.

    These needs require great imagination and outstanding
    management -- else hyperinflation will destroy any
    sloppy effort to rescue a nation by spending money.

    Our fate appears to be in the hands of Alan Greenspan
    George Bush, Dick Cheney and Jim Baker.  If these
    three are not smart enough to beat the Clinton years
    then I'll be a monkey's uncle.
                The wealth effect of the internet revolution
    helped Clinton.  That effect reflected a bare beginning
    of technology yet to come.
                We can expect the libertarian billionaires of
    IT, now educated in possible collapse, (with many
    profoundly chastened,) to see merit in government
    support to reorganize debt that threatens to slow IT
    progress and to open the coffers of treasuries and
    central banks around the world to spur building of
    evernet and other telecom miracles waiting to happen.

    As is said, it doesn't take a rocket scientist to see what
    money can do when you mange it right. So let's get with
    James' ideas, polish them up and spread them around.

    And while we're at it, let Colin Powell deal with
    Russia and China to give them political and economic
    incentives to become really rich and stable, -- and not
    make friends with terror that can kill them as well as us.

    Star wars may be a poor option. But a fair international
    police force with leadership by willing continental and
    nuclear powers, and forces recruited artfully that can
    professionally deal with terror, may be a better option.

        John Gelles   www.1944.org

----- Original Message -----
From: James Cumes (schulte-baeuminghaus)
To: pkt@xxxxxxxxxxxxxxxx ; gang8@xxxxxxxxxxx
Sent: Sunday, December 24, 2000 1:01 AM
Subject: Containing the Collapse

"If the Old Economy was an automobile, the New Economy is an airplane. In an
automobile, if anything unexpected happens, the natural and correct response
is to put on the brakes. But just as an airplane needs a certain airspeed to
stay aloft, so the New Economy needs fast growth for high-risk investment in
innovation to be worthwhile. And just as pilots have to learn how to deal
with a stalled and falling plane by the counterintuitive maneuver of
pointing the nose to the ground and accelerating, policymakers have to learn
how to go against their instincts by cutting rates when inflation goes up.
That's the only way to keep from crashing."

This emphasises an approach that we should have applied in the past. We
should not have thought in terms of "slowing the economy down" but rather in
terms of ensuring that the economy can maintain its momentum. More
particularly, we should not have used higher interest rates to "fight
inflation." Higher interest rates don't "fight inflation"; they are the
friend of inflation. Higher interest rates make inflation worse. Higher
interest rates reduce investment, productivity and production. Higher
interest rates provoke, cause, intensify unemployment.

Now that the economy is threatened with collapse, should we think in terms
of lowering interest rates? Yes, we should. We should always think in terms
of keeping interest rates as low as practicable. The more readily available
we can make funds for real investment, the greater the improvements in
productivity and the higher production will tend to be. There will be limits
to the extent that interest rates can be lowered. We must bear in mind the
need for a viable banking system and effective mobilisation of capital
within the community. We must bear in mind too the need to control the
direction in which low interest rates cause funds to move.

That again suggests the need to be more versatile and imaginative in our
macroeconomic policies than simply - and simplemindedly - to move interest
rates up and down - too often in directions that defeat our own purposes. We
should be prepared to use more direct controls to ensure that the flow of
funds does not create unsustainable distortions, for example, in real
estate, or on the stockmarket or in consumer spending.

------------------------------------------------------------------------
Once capitalist economies break down, they are hard to get running again.
------------------------------------------------------------------------
"If the U.S. economy gets stuck in a long Internet Depression, the
appropriate strategy is to hunker down, cut back and invest as
conservatively as possible. That will be the only way to survive and be
ready to take advantage of the end of the Depression, whenever it comes.

The downturn could be not only the dominant economic event of the decade but
also its major political event. If policymakers do not grasp the difference
between driving a car and flying an airplane, the U.S. could be stuck in a
long depression. At some point the recovery may require stronger measures
than simply cutting interest rates and boosting spending.

Just as the New Deal involved government intervention in the financial and
labor markets to stabilize them, so government may have to take a hand in
the high-tech sector to stabilize the New Economy. That's not politically
feasible now, but it's worthwhile to remember that the Great Depression did
not end until the political and financial leaders who were committed to
misguided deflationary policies were replaced.

In the words of economic historians Barry Elchengreen and Peter Temin, the
world economy did not begin to recover when these people changed their
minds; rather, recovery began when mass politics in its various guises
removed them from office"

The experience of Japan in the last ten years should be a warning. It is
indeed hard to get an economy running again when once it breaks down. First,
we must try to ensure that the economy does not break down. If events have
already gone so far that some measure of "collapse" is unavoidable, then we
should promptly employ a range of policies and measures to ensure that the
collapse is moderated in scope and depth to the extent practicable.

A lowering of interest rates is the first and most obvious instrument of
moderation. But even a lowering of interest rates will not have an immediate
effect, except on the psychology of the market which of course is important.
The buzz-word obsession with balancing the budget, eliminating deficits,
creating budget surpluses, paying off the national debt, has contributed to
the downturn and could intensify the collapse. Governments need therefore to
start thinking in terms of applying anti-cyclical budgetary policies, of
using their surplus positions to control the downturn, of applying spending
programs to stimulate consumer demand, of expanding public infrastructure
and other public investment to supplement and stimulate private investment.
They need to start thinking quickly and TO ACT PROMPTLY.

Taxation should be moderated and/or reformed so as to support and stimulate
expansion of private investment and with it improvements in productivity and
production.

Budgetary and taxation measures should be directed in these POSITIVE ways so
as to moderate pressures to cut back on employment and instead to stimulate
re-employment of the unemployed. That will not only moderate one of the most
painful features of an economic downturn but will also relieve what, in a
downturn, are often the largest and most immediate demands on government
spending. More public funds will then be available to enable governments to
apply other stimuli or to apply them more intensively, for example, on
infrastructure spending.

In all this, a variety of programs should be used in a POSITIVE way to
restore vigour to the economy. We should NOT think in NEGATIVE terms that a
recession or depression is the inevitable cost of returning to a growth
economy. If we do think in negative terms, we are likely to provoke a
collapse of long duration - perhaps of a decade or more - and the way back
to good health for the economy will require much more radical measures than
if we respond quickly and POSITIVELY, with a variety of well-directed
measures, to the threat which confronts us right now.
That threat is not only economic but could also be even more profoundly
social and political than it was in the Great Depression of the 1930s.

James Cumes