As an amateur student of history and economics, unschooled in either, I often have visions of larger entanglements of the two and enjoy the process of unraveling them. Such has occurred in following the economic woes of Communist China and the wild perambulations of our own supposedly capitalistic economy. The two are illuminations of each other in comparing and contrasting. They provide a stimulus for finding hidden meanings in our country’s history. As well as some foreshadowing of possible nightmares in that history.
While we are distracted by our latest client-based forever wars in the Middle East and Eastern Europe (the local adversaries in each being clients of China and Russia), China’s spectacular house of cards is teetering. Residential real estate, to pacify the potentially unruly masses, was promoted far beyond any rational market basis, and has been leading the involution of their economy. For example, Evergrande, one of their foremost real estate conglomerates, is in formal bankruptcy proceedings in Hong Kong, as are many others on an informal basis. Over twenty million housing units remain unfinished, undelivered, or unsellable, and as capital created by government decree floats away like an overfilled helium balloon, so does any use of these properties and land as leverage to sustain the banking system. What little news about that arcane system escapes CCP censorship does little to demonstrate any survivability of their banking beyond the central bank. Thus, the newest diktat of the CEO is to manufacture China’s way out of economic collapse. However, their domestic population has become skittish about spending, with much sensation of personal wealth having disappeared along with undelivered real estate. Instead of spending as a sequel to production, the Chinese population is increasing their historically high level of saving (and increasing their historical habit of buying gold), and beginning to invest in foreign entities, and foreign land that produces commodities, especially if dollar denominated. Additionally, Evergrande’s EV auto division has entered bankruptcy, and multiple consumer-oriented subsidiaries of other real estate conglomerates are also sinking fast under the weight of parental debt. Brain drain may be strictly limited by the CCP and allowed temporarily only for the sake of theft of intellectual property. Capital flight less so and accelerating. China’s usual access to capital, selling goods cheaply to foreign markets, is also sputtering. Despite the challenge Temu and Shein are presenting to Amazon, unsold and uncommitted goods are still piling up in Chinese warehouses and ports as Westerners retract their spending (with reasons noted below). A kind of “ghost debt” has been detected recently; huge amounts of off the book debt incurred by cities and other smaller governmental units, at the encouragement of the CCP, have been uncovered and may far overshadow central government debt. These smaller governmental units have little or no assets, given the real estate meltdown, with which to repay many private and public creditors. Many of them and their associated banks are too small not to fail; China’s central banking system is too big to fail. The level of cutoff remains to be seen.
The reductions in China’s consumer spend ability is being repeated here in the United States. Consumption by the lower ends of our income groups is dropping rapidly as witnessed in fast food, restaurants, and car dealerships. Various U.S. manufacturers of real goods such as agricultural machinery are already responding to this drop in demand with reduced production and layoffs. Construction of new production facilities for automobiles, clean energy generators, and other goods, even by foreign investors, is being put on hold. Given the rapidity of our recovery from the Pandemic Recession, and the availability of internationally cheap goods, how can this be?
The constant self-reinforcing stories by our Mainstream Media of the surprising strength in our economy due to pent-up consumer demand from our government’s Pandemic restrictions in consumption of certain goods and services and huge amount of inflationary money created by the Federal Reserve and Treasury has been a smokescreen for underlying weaknesses and problems now coming home to roost.
Our commercial real estate sector is well into a deflationary spiral due to our government’s policy of lockdown during the Pandemic, destroying many employers and restructuring our newly dominant service economy with employment by remote workers as well as many others deciding not to work or to work less with increasing availability of government entitlements. Banks and other lenders had kicked the can of commercial real estate loans down the road with short-term restructuring, but they and the borrowers have now reached a fork in that road. One tine leads to the insolvency of the borrower, the other to devaluation of the lender’s reserves and a fire sale of the property to a new owner who may or may not be able to use it for its built purpose. Seizures of commercial properties are accelerating. Buyers of those distressed or seized properties are less available at current interest rates. Banks, now with increasing reserve requirements by the Fed, are more risk averse. Private lenders such as venture capital funds are entering the void, with lesser self-perceived risk since most of their capital has been acquired as “fantasy funds” due to the huge wealth transfer from the real economy to the fiscal economy as noted below. Meanwhile some businesses are engaging in a forward-looking method of bankruptcy. They have invented “synthetic risk transfers”. The basic result is that the debtor does not have to repay the full principal and interest if the use they put the credit to is not sufficiently profitable. Reminiscent of “mortgage-backed securities”, anyone? They must still find customers who can pay. But many of these firms have long practiced scavenger capitalism. They acquire, strip all useful assets to sell piecemeal for private profits, and leave a carcass to rot in the light of day or be cleaned up by governmental janitors through socialization of any residual debt.
A similar situation is seen in the residential real estate sector for private buyers and the increasing percentage of corporate buyer-owners. Due to governmentally induced monetary inflation, then the rise in interest rates to reduce that inflation along with growing reductions of the expansion of the money supply as well as requirements for increasing bank reserves and the contraction through failure of smaller and regional banks, fewer properties are coming to market. Those that do are largely unaffordable to the largest population in that market. And given the long-term “inflation” induced by increasing governmental regulation of building codes, new properties are too expensive to build. All are becoming too expensive to insure under governmental rules.
What are the other effects of the Fed’s fight against itself? The Federal Reserve has been unwinding its huge asset purchases done since 2008 for the sake of “quantitative easing” to whoever will buy those assets at whatever price they can get. Meanwhile, they hide their true current bankruptcy (the presence of debt far exceeding the real value of true assets) by marking their debt asset instruments not to market, i.e. what those assets are worth presently at the time of sale, but to maturity—what they would be worth if held to the end of their term. Any private business found to be doing such is immediately charged with fraud. Some of those private businesses called banks are now required to hold higher reserves and pass more stringent “stress tests” to reassure the Fed and the FDIC, among others, that they could survive a bank run or sudden meltdown in the value of booked assets. Those same banks are dealing with lesser demand for credit creation (loans) at current interest rates in the current unsure business climate. Fewer depositors bless those banks with their hard-earned dollars for use as lendable capital since the banks can pay so little interest themselves. Is that juice really worth the squeeze?
Many banks are silently under intensive care. Some have expired spectacularly, only to be resuscitated by the FDIC and Fed through seizure. The residuals are then force-fed (like corn to a goose) to a larger regional bank. But some of these banks are likewise choking on these purchases, as seen with NYCB (New York Commercial Bank). This process of force-feeding smaller banks to larger may gradually infect larger banks as the Fed requires them to rescue the lesser debt obesities, or those larger banks seek to expand their markets by buying up distressed regionals on the cheap (with similar risks to venture capitalists buying up distressed real estate, and perhaps a similar carcass to be left behind). But perhaps our consumerism, if not our outsourced production capacity, can sustain our financial tower of wooden blocks as fate and various factions pull out blocks one by one?
Maybe not. U.S. vendors are piling up inventory, taking advantage of cheaper Chinese goods and other sources to avoid being caught short on the supply side as happened during and after the Pandemic. They also look forward to a possible East Coast dock strike, as occurred on the West Coast, and potential closures of the Suez Canal by conflict and the Panama Canal by drought. This may lead, given recently changing consumer behavior, to a glut of such goods backed by tenuous credit. Massive discounting of the goods and the underlying debt may be required.
Another marked pressure on the supply side of capital is a continued and accelerating demand for private wealth confiscation via taxes and fees to support ever increasing government entitlements and new benefits to “buy” voter loyalty and support the massive influx of as yet unproductive unassimilated migrants. Some additional such measures will be required to stave off the known fiscal demise of Social Security and Medicare. Floated proposals, often by both major parties, include progressive taxation up to 70-80% of income, taxation on total wealth extant, taxation on any unrealized capital gains in held wealth, sizeable tariffs that increase consumer prices and reduce consumer choice, extinction of private health insurance (and its resulting contributions of private capital to private investments in the private economy), replacement by government funded one payer health insurance, national rent control (important since few if any will be able to own their residence), universal free education for all residents with/without citizenship through college, establishing a universal living wage, and finally progressing to a universal basic income, all subject to COLA (cost of living adjustments) which I will rechristen PPRA (purchasing power reduction adjustments). Many others are gestating in the womb of collectivism.
What factors or events have rescued us before and led to prior explosions of the American economy, and can we therefore repeat them? The two bases seem to be sudden technological innovations and warfare. Combining the two has often led to a fusion reaction of economic energy. Let’s review a few modern examples.
WWI and especially WWII, both of which we participated with great initial reluctance, resulted in the reduction and destruction of most of the advanced industrial productive capacity in the world. That capacity resided mainly in Western Europe and North America where the Industrial Revolution developed due to the Enlightenment, accidents of fate and geography, and rapacious colonialism. As a result, only the United States remained as an industrial power, having been steroidally enhanced by our wartime expansion. We became almost the sole provider of goods, services, and money (via credit and direct investment) to the rest of the world leading to the massive enhancement of the private wealth and economic advancement of a new middle class in America. This persisted throughout the 1950’s and 1960’s. Acquisition of a college education, and home ownership, both became aspirational realities for the Greatest Generation thanks to government largesse for our veterans funded by this dominated international market. During WWSII our population had cooperatively forgone may routine consumptions in daily living for that war effort while also receiving the benefit of massive increases in employability regardless, for the first time in history, of gender. As noted, the massive amount of debt incurred to support the war effort and the international recovery that was funded was easily supported by the re-expansion of the international markets with most profits flowing back to the U.S.
We inadvertently recreated this process with the Space Race—a war with the Soviet Union without casualties and leading to marked acceleration in the next phase of industrial development in technology through digitalization.
A coincidental sustainment of military-industrial production and innovation was needed to support the Vietnam War, but political error in limiting that war similar to that in the Korean War led to unsustainable popular opinion support, especially when government propaganda was found to be false. That period of inflationary debt creation and spending led to the malaise of the 1970’s accompanied by the further rise of administrative interference in the private economy and a massive increase in debt-funded spending to support the golden years of unrestricted Medicare spending. A kind of deflation of the private economy proceeded, on top of which a deflation of the military-industrial economy as well. This was dangerous politically and diplomatically, contributing to Russian adventurism in Afghanistan and our Iran crisis. Our ultimate weakness was revealed by our government’s inability to use maximum needed force to free our hostages. Great Britain, masters of the seas, fought a long war over Jenkin’s Ear; we, masters of the world, would not fight over fifty-three Americans. A more intense repeat of our Korea and Vietnam debacles on a small scale.
Public dissatisfaction with the above factors led to the Reagan presidency, and massive new government spending on the military-industrial complex for another “war without casualties” with the Soviet Union. We conducted this war through buildup of neglected military capacity and technology, and especially through the renewed technological innovation of the Space Race via the Strategic Defense Initiative (aka Star Wars). In response, the Soviet system, precisely because of its centrally controlled structure, could not afford guns and butter and finally collapsed economically and politically.
Meanwhile, back at the farm……
We had opened Western markets to China by the Nixon initiatives and finally our sponsorship of China’s entry into the World Trade Organization. They rapidly advanced over decades from a 19th century agricultural backwater into and through their own Industrial Revolution. Eventually the CCP recognized the failures of the Soviet system and adopted a form of state-directed corporatism, which has until recently as noted above been successful. Similar rapid advancement began in India after the long readjustments to decolonization after WWII. Japan had advanced rapidly enough that Reagan introduced various tariffs to protect American industrial production from high quality, less expensive Japanese goods. This did not prevent Japan’s own version of post-war expansion. Europe simultaneously began to realize beneficial economic commonalities to be gained by encouraging political commonalities.
At home in the U.S. during the 1980’s and 1990’s, with minimal American involvement in direct military conflict our economy stabilized and even achieved a balanced budget for a time. The Spector of Medicare and Social Security remained just over the horizon.
Then the world transitioned to a new kind of international warfare of non-state actors against states, the asymmetrical warfare of terrorism. This was a recrudescence of an old historical process based in religious and cultural enmity. Once again, the U.S. began its bankrupt policy of “forever” limited warfare as public and diplomatic philosophy morphed, thanks to technological promise, into a more acceptable sterile form wherein we did not make war on nations or populations, but on particular well-defined (by us) subgroups, choosing to spare the population at large, their infrastructure whenever possible, and their state sponsors. Massive spending for very sophisticated weapons of limited destruction to conduct state terrorism on non-state terrorists who used cheap unsophisticated weapons of more massive destruction without moral limitations. This production capacity of the military-industrial complex sponsored and used new technologies that were beneficial to the economy as a whole but coincided with a massive realignment of the types and amounts of employment domestically. And a massive extinction of our capacity to produce cheaper simpler weapons.
More sophisticated digital products required and enabled less numbers of more highly skilled employees to manufacture/maintain them and began to markedly reduce the employment density of many of our industries and services beyond the military-industrial complex. But the expectations of benefits of those employees, no longer driven by patriotism, continued to expand.
Due to our opening of commerce with China, Mexico, Asia, and other countries that were equally desperate to increase their wealth, employment, and domestic governmental hegemony with the same unconcern about employee welfare demonstrated in our own Industrial Revolution of the late 1800’s, production of goods fled to those new indentured servant countries and the U.S. became an economy almost entirely focused on services and consumption without the need for delayed gratification. None of which induce much habit of capital accumulation, aka savings. This coincided with continued expansion of interventional capitalism domestically with a shift into the new Industrial Revolution of manufacturing capital. Production of money, credit, and monetary derivatives became the new technology and market for the new robber barons. The marginal limit of this new market is digital currency whose dangers are well documented in the failures of FTX and similar entities. These are a series of fit currencies based not on a commodity, not on “full faith and credit” in a government, but on “full faith and credit” in a computer-based digital mineshaft dug with invisible algorithms.
The invention of digital currencies was perhaps derived from the penultimate failure of markets in real goods, the massive collapse and readjustment of 2008-2009. Unlike the similar event of the early 1900’s wherein private bankers rescued the U.S. federal banking system; this time the federal government rescued the banking system. Thus began an unholy marriage between government and private capital manufacturers. Both are cooperating in a seemingly endless spiral of production of invested/investible “capital” out of thin air. An ever-widening, ever-ascending spiral of capital creation, spending, and expansion (i.e. further capital creation) with both the partners recognizing each is “too big to fail”, and each expecting the other to pay the credit card bill when it finally comes due.
Given wider domestic and international reach and responsibilities, currently our government is assumed to be the senior partner. But this is gradually changing beyond the public eye as international corporatism begins its ascendancy to power from mere influence. This is the direct clearly stated goal of the World Economic Forum, enhanced by collegial relationships with other organizations such as the World Health Organization. The intended goal is to rationalize (make rational, limit through rationing) all governments worldwide under benign corporate governance. Big Brother will not be a government per se, rather an international interlocking directorate. No monopolies or oligopolies ever exist without government influence or action. Witness the openly corrupt oligopolies of current day Russia, and the more closely held, less openly corrupt versions in Communist China. One is still relatively “private”, the other fully “civic”. Both are variations of the perverse vision of Marx’s “dictatorship of the proletariat”.
As the U.S. and other Western economies are gradually subsumed by international corporatism, the competition between that system and the more fascistic systems of Russia and China may be a final contest for worldwide economic hegemony. But first, one or more of present economic systems is due for a reckoning.
Russia has massive unrealized reserves of natural resources, agricultural land reserves, and a hardy population that is world class when educated. But they have no cultural “memory” of self-realization. Historically they have either been serfs, little other than slaves, or nobility without requirement for agency. They transitioned to a terror-based autocratic rule little different from Tsarist society, with the same results. Absence of ownership and personal agency persisted under Stalinism. After an all too brief period of Perestroika, their old system reemerged with corrupt oligarchs empowered by and empowering a ruthlessly centralized political authority. That central authority will not manage the country to any benefit of its populace. It will require subservience while rewarding the minimal number necessary to maintain supportive functions. Any others can be considered cannon fodder. I cannot see any progression for that society other than as an unacknowledged economic client of China.
China has many tentacles deeply entwined in second and third world economies and may be able to extract enough wealth from these to save itself from the deflationary collapse that seems signaled by the many cascading weaknesses in its economy.
The U.S. on the other hand has many obligations to many other countries, military and economic, but primarily to its own population. While its two main entitlement programs, Medicare and social Security, are known to be bankrupt in the near future and in no foreseeable way sustainable before or beyond that date in about one decade, both public and public officials refuse to admit and deal with this fact. Despite that fact, all agree on a “truth”—these programs cannot fail, cannot be changed, and will be saved.
Despite that fact that that magical truth, many more benefits and entitlements are evolving as new economic narcotics for an insatiable dependent populace. Socialization of national debt whose interest payments alone will shortly exceed “spending” on defense and then on those two entitlement programs will of necessity be the true basis of equity. All will share equally in the destruction of any/all private wealth or capital in service to the debt. In return, all will share equally in any “production” of capital via a universal basic income based surely on a central bank digital currency. This will allow full tracking of economic compliance.
The above is one evolution of current processes that would occur probably not in the immediate lifetimes of its main progenitors, the Baby Boomers, but partially within those lifetimes. Two obvious caveats are:
Will international corporatism allow this to happen, and how will they moderate it to their own advantage?
Will our government, as policeman, chief marketeer, and banker to the world, allow, adjust and shepherd our population through a collapse of our current system and its reemergence with a sustainable commodity-based currency (such as gold)?
Given our history in the Great Depression wherein governmental policies actually prolonged that economic disaster and we “rescued” ourselves responding to the state-based terrorism of Japan and the Third Reich, that second reckoning seems unlikely. After all, what massive existential challenge other than war with China and/or Russia could engage us in solidarity again, and what productive capacity would be left after that presumed nuclear conflict?
Other outcomes exist that I cannot foresee with my limited knowledge and intellectual capacity. Under all of the possible scenarios noted above, individuals still have the option of personal well-being and responsibility. Some can hoard hard assets and hope to be the personal bankers of the future. Many can develop self-sustainment on the land. Others can develop or husband the skills that will always be required in any society, however small and at whatever technological level. For some few, Atlas may yet shrug.
Postscript:
After writing the above I came upon an excellent article in the WSJ by John Michaelson: “The Case Against Low Interest Rates”. As a highly experienced, trained, and knowledgeable capitalist, he makes excellent arguments and his whole article is well worth reading and contemplating. I was pleased to find that my own unschooled thinking seemed to match some of his, which I quote below:
Cheap money was supposed to fuel economic growth, but—like most model-driven panaceas, unconnected to empirical reality—it didn’t deliver. Artificially low interest rates retarded the growth they were intended to accelerate. They enabled corporate giants to fend off or buy out challengers, eased the pressure to innovate, diminished incentives to improve productivity, and enabled poorly performing enterprises (and executives) to linger long after they should have been put out to pasture. (his summation of the effects of the 2008-2009 rescue)
(On our response to the Great Depression)
The financial crises of 1929 and 1974 were followed by periods of innovation and the slaughter of complacent incumbents. Our attempt to treat a financial crisis by saving the banking system with prolonged low rates unquestionably saved the wealth of investment-firm partners. But it did so at the expense of the middle class, and it perpetuated economic somnolence.
One of the least-recognized consequences of the low-rate regime is the way it undermined social cohesion by facilitating what may well be the largest wealth transfer in history, from the middle class to the highly affluent who own stocks, bonds and real estate. (here recurs my thesis of a new market, not in goods or services, but in pure capital created out of thin air)