Thanks Curtiss, (occasional PKT economist, and constant
Cybersoc Director,) for the wisdom of Greider and Bernanke.
Greider, who has been one of my own most important boosters,
has also been a special hero to me. From the old days when
Secrets of the Temple started out in the New Yorker.
I hope some in these audiences will recall that Bernanke
and I have been taking the same line -- that the US can and
must print the money necessary to win now and in the long run.
We do not have to repeat all the mistakes of the past -- be they
outcomes of Hooverist or Stalinist stupidity.
I only wish the economic and social forums I like best
will hold this Greider essay in mind as they consider the
next few years of what Greider terms "a pivotal moment
[in history] that is approaching, one that may be both
dreadful and promising."
John Gelles
==================================================
DEFLATION
== Copyright by William Greider and the Nation Magazine ===
http://www.thenation.com/doc.mhtml?i=20030630&s=greider
by WILLIAM GREIDER
[from the NATION, June 30, 2003 issue]
At the risk of sounding like Chicken Little, I am going to describe
the economic situation in plain English. The United States is flirting
with a low-grade depression, one that may last for years unless
the government takes decisive action to overcome it.
This would most likely be depression with a small d, not the
financial collapse and "grapes of wrath" devastation Americans
experienced during the Great Depression of the 1930s.
But the potential consequences, especially for the less affluent
and the young, would be severe enough--a long interlude of
sputtering stagnation, years of tepid growth and stubbornly high
unemployment, punctuated occasionally with a renewed recession.
Depression means an economy that is stuck in a ditch and can-
not get out, unable to regain its normal energies for expansion.
Japan, second-largest economy in the world, has been in this
condition for roughly twelve years, following the collapse of its
own financial bubble. If the same fate has befallen the United States,
the globalized economy is imperiled, too, since America's market
for imports and its huge trade deficits keep the global trading
system afloat.
Most authorities, I should add, do not regard any of this as likely.
The great difficulty for policy-makers is that this doesn't much feel
like a crisis--not yet anyway, for most Americans. So where's the
urgency to undertake radical remedies? Some of Wall Street's best
forecasters, for instance, are predicting 4 percent US growth in the
second half of 2003. But Japan experienced false recoveries, too.
Nobody knows what will unfold if nothing is done, but the con-
sequences of waiting to find out could be horrendous for the broad
ranks of Americans. When the US economy corrects for its excesses,
it is always the innocents who are led to the slaughter first. Even if
the odds are only one in four that the worst will happen (as the Dallas
Federal Reserve Bank president recently estimated), it seems reckless
to gamble. Taking strong measures now would be messy and disrup-
tive to regular order (maybe wasteful if they aren't needed), but in the
present circumstances that would seem more prudent than a false
optimism that lamely repeats that the "good times" are right around
the corner.
A depression can be read as a "market signal" of a dysfunctional
economy that requires fundamental restructuring. Japan learned this
the hard way. In this case, such a signal may be flashing the need for
deep changes both in the American economic system and the world's.
Surely it is not too soon for Americans to ask themselves what might
be out of whack and how to correct things--starting with their own
much-celebrated economy.
I asked a financial economist at a major US hedge fund where the
United States appears to be at this point. "We are in the second or
third year of what Japan has gone through," he surmised. How much
longer might this go on? "Another ten years," he said, "if you think
about Japan, another ten years."
The good news, so to speak, is that the Federal Reserve is on the
case. At least Fed Chairman Alan Greenspan and colleagues now
acknowledge that the gravest danger lurking in this situation is a
general deflation of prices, and they promise to make sure that
doesn't happen. For many months, Greenspan and other governors
dismissed the growing anxieties expressed in financial circles by
describing the chances of deflation as "extremely small" and "quite
unlikely." After the indexes for wholesale and consumer prices both
fell in April, the Fed dropped those reassuring phrases. The chairman
instead announced that pre-emptive actions may be needed to head
off the threat.
Declining prices, if they persist generally, create a vicious spiral of
negatives--falling profits, more closed factories, shrinking employ-
ment and incomes, accompanied by waves of failing debtors, both
corporations and families. In short, a far larger calamity than
stagnation.
Though Greenspan doesn't say so in plain English, Fed governors
recognize the corrective action that may be required of monetary
policy: Pump up the money supply and deliberately induce rising
prices--that is, foster a renewal of inflation, their old scourge.
Rising prices provide an essential lubricant for any sustained
recovery because a dose of inflation helps businesses get well
and takes some of the depressive pressures off wages and debtors
of every kind. The central bankers, however, are facing a very
awkward moment. After twenty years of relentlessly reducing
the inflation rate to near zero and winning great praise for their
triumph, the governors are naturally reluctant to announce that
the "disease" they conquered has become the "cure."
But at least the Fed is thinking about doing something. Washing-
ton's elected politicians, by contrast, continue to act as if this is just
a temporary downturn in the normal business cycle, an opportunity
to score political points with measures that show folks they care.
Neither Republicans nor Democrats seem to grasp the enormity of
what the economy is facing. Their ignorance matters. Without a full
and contentious public airing of the cause-and-effect implications,
there is no way to develop the political foundation for undertaking
large and controversial measures. If Washington responds tentatively
with cautious half-measures, as Japan's government did for many
years, then the results for us may look a lot like Japan.
Basically, what's under way is a brutal unwinding of the delusional
optimism that reigned during the 1990s--excesses like the hyper-
inflation in financial assets and the swollen ambitions that led in-
vestors and companies to wildly overvalue their prospects for future
returns. The stock-market bubble was the most obvious expression
of excess, but not the most serious dimension. In an era of Internet
fantasies and collective self-delusion, business sectors (and their
financiers) over-invested on a grand scale and generally used bor-
rowed money to do so.
That is, business built too many factories, shopping centers
and office buildings--creating more productive capacity
than the marketplace could possibly absorb.
Consumers indulged in their own version of wishful thinking,
borrowing heavily to keep on buying, hoping the "good times"
would last long enough to bail them out.
This legacy of accumulated excesses lies across the American
economy like a heavy wet blanket--overcapacity in production, over-
priced financial investments, mountainous debt burdens for corporations
and households, and thus a deepening reluctance to invest or to consume.
Personal debt is now at an extraordinary 130 percent of disposable
income, up by nearly one-third since the mid-1990s. Manufacturing
is operating at only 72.5 percent of its productive capacity, greater
idleness than during the 1990-91 recession and approaching the
severity of the 1982 recession.
For producers of semiconductors and related electronic components,
capacity utilization has fallen to 65 percent. In telecom equipment, it
is at 50 percent. That's why there is so little new investment. What
company is foolish enough to build new plants when so many existing
ones are shuttered? And who would lend them the capital? If consumers
run out of capacity to borrow more or can no longer refinance home
mortgages, the collapse of aggregate demand will become far worse.
The US economy is unlikely to recover its full vigor until this dead
weight from the past is substantially reduced. In the meantime, the
struggle of companies (and other countries) to dump their excess
production by selling cheap, while also shrinking jobs and work-
weeks, threatens to make things still worse, eventually tipping into
a general deflation of prices.
The broader meaning of deflation, however, is that assets of almost
every kind, from financial investments and real estate to manufactured
goods and commodities, are being revalued downward--slowly, steadily
correcting for the falsely optimistic asset valuations achieved during the
boom years. The overvaluations, though most dramatic in Japan and the
United States, were transmitted worldwide through trade and the hyped-
up energies of global investing. In this sense, deflation is already under
way and started five or six years ago with the violent financial collapses
that swept across developing nations in Asia and that continue to
stalk weakening economies on other continents.
China, given its burgeoning low-wage output, is now the world's
main deflationary engine. Its exports are under-pricing Japan's and taking
market share away from other poor countries, thus forcing rival producers
to lower prices still further (China now has the largest trade surplus with
the United States, surpassing Japan). When too many goods are chasing
too few buyers, the main game is to make sure someone else gets stuck
with the unsold surpluses.
In another era, there would be clamoring voices not only from the
political sphere but also from business and finance demanding bold
action by Washington. In this era of conservative orthodoxy, there is
general complacency and silence, as if everyone agrees that the ugly
possibilities will go away if nobody talks about them. Aside from
subdued kibitzing of the Fed by selected financial experts, there is
no debate on these momentous matters. Governing elites are deeply
enthralled by "market fundamentalism" and dare not speak of the
alternatives (or perhaps don't even know about them).
The principal remedies sound to them like liberal heresies. And they
are. This political passivity may give way once the presidential campaign
heats up. Howard Dean was evidently the first Democratic candidate to
invoke the "d word" when he recently warned Iowans: "If we re-elect
this President, we'll be in a depression."
In broad strokes, the government has the power to intervene on three
fundamental fronts to remove the depressing overhang from the past.
First, the Federal Reserve can deliberately induce price
inflation to counter the deflationary forces and excite what Keynes
called the "animal spirits" of business leaders. Rising prices will also
automatically ease the debt burdens of borrowers by diluting money's
real value (that's why creditors always adamantly oppose inflation).
Second, Congress and the White House can simultaneously
launch a major stimulus program composed of public spending and
quick-acting tax cuts, thus running up far larger budget deficits than
the Bush Administration has engineered. Whether the money builds
schools and highways or hires more schoolteachers, it creates new
jobs, incomes and business activity.
Finally, if these steps are insufficient, the government may
have to intervene more directly and manage a substantial liquidation
of debt burdens--either arrange ways to write off failed loans (as it
did in the savings-and-loan crisis of the 1980s) or create more lenient
terms for the indebted companies and households, much like a banker's
"workout" for a financially troubled business.
If this negative cycle worsens to extremes, only the federal
government can interrupt it and push the economy in a positive
direction. The basic task, as John Maynard Keynes explained in the
thirties, is to get the money moving again. The government does this
by borrowing idle wealth from the private sector and spending it or
distributing it to taxpayers who will--thus putting the money to
economic uses and stimulating business activity. Federal deficits, in
other words, are an essential element in the solution--very large
deficits if you intend to jump-start a $10.7 trillion economy.
Yes, borrow-and-spend therapy increases the national debt, but the
renewal of economic growth will handle that.
(The alternative--doing nothing--means allowing events
to take their own course toward destruction and multiply-
ing failures.
"Liquidate labor, liquidate stocks, liquidate the
farmers, liquidate real estate," Andrew Mellon
advised Herbert Hoover after the 1929 crash.
"It will purge the rottenness out of the system.")
The political choice is, Act now or wait and see. In terms of this
three-pronged crisis prevention, only the Federal Reserve has shown
any awareness of what may be required of it (revive the economy by
reviving inflation), perhaps because the Fed's historic disgrace was
its failure to act after 1929.
Last fall, Fed governor Ben Bernanke reassured the
worriers in a boldly stated speech: "The US government
has a technology, called a printing press (or, today, its
electronic equivalent), that allows it to produce as many
US dollars as it wishes at essentially no cost....
A determined government can always generate higher
spending and hence positive inflation."
To underscore the commitment, Bernanke said the Fed is prepared
to use unorthodox tools to expand the money supply if short-term
interest rates (already close to zero) can be cut no further. Instead of
buying only short-term Treasury notes to inject new money into the
economy, the central bank may purchase long-term US bonds or
foreign bonds. It may accept corporate debt, private bank loans and
mortgage securities as collateral for the Fed's direct lending to banks
--a way of pushing bankers to lend more generously to business.
In fact, the Fed has far broader powers inherited from the Great
Depression--the ability to make emergency loans to private busi-
nesses or state and local governments in extreme circumstances.
But will the Fed act? Some financial insiders are not persuaded by
the official statements. One told me that only three or four of the
key decision makers on the nineteen-member Federal Open Market
Committee take the deflation potential seriously--those who closely
followed the slow-motion unwinding of Japan.
By comparison, the more visible fiscal debate in Congress is utterly
out of sync with present reality, since both parties are dodging the
"d word" and its implications. The White House, I am told, is deeply
worried in private, but won't say so for fear of adding to the
public's anxieties.
The GOP's misdirected tax cutting does help modestly,
putting money in motion by enlarging the federal deficits,
but Bush is pursuing "trickledown" Keynes--help the
wealthiest households get back their zest as consumers,
and the rabble will surely follow.
Democrats, on the other hand, are still playing the
loser's role of Herbert Hoover and worrying obsessively
about the rising deficits--wrong economics and bad
politics too.
Instead of fighting the last war, a clearheaded opposition would
be leaning hard on the Fed and the White House for immediate
preventive actions, advocating easy money, credit reform and
aggressive public spending to restart the economic engine.
If things deteriorate further, who knows, the government's deficits
may have to grow twice as large to become effective therapy. While the
political climate is not yet ripe, forward-looking progressives should
already be drawing up a grand list of spending projects--repairing the
tattered infrastructure and launching innovative public investments
that speak to the future. If the money builds real improvements for
society, it will not be wasted, even if the Chicken Littles are wrong.
The third avenue for dealing with the potential crisis--reducing the
mountainous debt burdens on families and businesses--is a far more
controversial challenge and fraught with the potential for insider
favoritism. Rescuing the big boys while allowing others to drown
has been the conventional approach in recent decades, including the
banking bailouts engineered by the Fed. But a lively political debate
might inspire broader remedies that are both more equitable and
more effective.
Just as the S&L bailout fifteen years ago aided major
financial players, government could create a "resolution trust
corporation" for people--an agency that supervises debt workouts for
households, gives them more time to catch up with mortgage and credit
card payments, and imposes these relaxed terms on the financial
industry, with government guarantees against failure. That would
represent stimulus with a democratic bottom line.
More likely, we will see one industrial sector after another line
up for emergency bailouts, and the government, including the Fed,
will pick winners and losers, defending politically influential elements
of the status quo in the name of protecting the soundness of the system.
If fundamental restructuring is also in store for America, the US
economy has advantages that Japan's lacks. The American system is
more flexible and able to adapt--more willing to throw the losers
over the side--while Japan's dense webs of business-financial relation-
ships promote mutual loyalties that are very difficult to dismantle.
On the other hand, Americans may discover in the next few years that
the United States is not the economic powerhouse described in popular
lore. Technological strengths notwithstanding, many US sectors have
steadily lost market share, both at home and abroad, to foreign com-
petitors (think of Boeing being surpassed by Airbus as the leading
producer of commercial airliners).
"Painful adjustment" means facing up to some long-suppressed truths.
Washington's single-minded championing of globalization, for instance,
has been good for US multinationals but not for the balance sheet of
the American economy, which is underwater and has been for years.
That is the meaning of the huge trade deficits, the accumulating
indebtedness that inevitably will produce a painful reckoning in
standards of living (as a nation, we manage to consume more than
we produce by borrowing every year from abroad).
But the even larger reality is that America's weakening position
signals the need for a deep restructuring of globalization as well.
*** =========Begin Greider Error ================***
The globalized system the United States launched and protected
throughout the cold war decades approaches its own reckoning
with the dilemma of too many factories and not enough buyers.
[ There are NOT too many factories for the "stuff" we have
that billions of the poor still lack. Admittedly, some change
is in order to reduce the per capita "stuff" -- but if we arrange
for more money to be owned by the poor, we will need more
not fewer factories.
Greider's main, point to enhance the economic power of
ordinary people, can be applied globally -- and that will take
care of today's apparent excess capacity.]
Escaping this condition will require fiendishly difficult diplomacy
(made more so by the Bush Administration's cockeyed imperialism),
but the risks are historic in dimension (the global trading system
disintegrated after 1929 as worldwide depression led nations to
protect their own producers and markets from foreign competitors).
[ Bush's leadership, called "imperialism" here, is the one
thing that could make the Greider proposals real. Else, we
will need a Democrat unafraid to fight for freedom AND
unafraid to spend AND reduce taxes simultaneously: Who?
Perhaps my friend James Galbraith has a name?]
*** ========= End Greider Error ================***
First, leading nations must join to launch worldwide stimulative
policies and persuade rising nations like China NOT to bring down
the system by overwhelming rival producers. The fundamental solu-
tion, however, involves the kind of moderating reforms advocated by
anti-globalization activists worldwide--rules to rebalance the system
and genuinely promote wages as well as output, financial terms that
give developing countries more time and space to seek their own
distinctive economic plans, plus new institutions of governance that
are truly equitable and democratic, instead of corporatized lawmaking.
That's a very tall order for statesmanship in a world presently governed
by small-minded men.
Meanwhile, the economic dysfunction in the American system involves
many other contentious questions, including the overbearing scale of
certain dominant enterprises. The spectacular costs of allowing ever-
growing bigness in corporations are reflected every day in the news
(think of the doomed AOL Time Warner merger that has lost more
than $200 billion for investors, or the scandalous behavior of financial
mega-firms like Citigroup, or the conglomerate homogenization of
broadcasting).
The gathering evidence also suggests that the mass-consumption
economy that has flourished since World War II may at last be running
out of gas. Too many indebted consumers are tapped out or will be in
hard times. Who's going to buy all this stuff? Is this weakened condition
related to the gross and growing wage inequalities of the past two
decades?
The "market signal" of small-d depression might be saying: Don't
invest more in the old stuff since we've already got too many shopping
centers. Start investing in "problems" the country has long neglected--
see these really as economic opportunities.
Invest in the energy technologies and industrial transformations
required for the post-hydrocarbons age of ecologically sustainable pros-
perity. Invest in healthcare and transportation and production systems to
deliver safe, healthy food. Invest in the smaller, more nimble firms ready
to do things differently. Invest in people--the human development that
begins with children at a very early age.
These and other investment opportunities are where the future
jobs and higher returns are most likely to be found. The status quo
interests will naturally resist such shifts in purpose and deploy their
political muscle to block any promising departures.
But a fundamental restructuring at least would open the way to
think anew, to strive for a different kind of politics.
If the Chicken Littles turn out to be right, a pivotal moment is
approaching, one that may be both dreadful and promising.=
== Copyright by William Greider and the Nation Magazine ===