Interesting development among Greens on the economy - they seldom discuss the issue. Where are we headed?
RB: A recent feature of the now predominant suburban middle class attitude is the way to prosper forever after is to invest spare savings in stocks. This psychology is reinforced by unprecedented stock market gains unseen since the stock market run ending in 1929.
TF: As an investment instrument during late stages of a boom or when seeking a new low the stock market for the little investor is in effect the largest gambling casino east of the Mississippi.
RB: Investing in stocks is like buying a goose worthless except laying golden eggs.
TF: Nice analogy. Well put. You omit floating bonds and new stocks, the chief economic value of the Wall St market.
RB: Since nobody can predict mass psychology's course with certainty any more than one can predict when the Beanie Babies market might collapse, nobody can predict when speculative stock value assumptions will collapse with panicky realizations that everyone must cash in and unload overvalued stocks to avoid heavy losses.
TF: The economy and the stock market have only a loose tangential linkage through investment decisions and availability of wealth. Real wealth as Adam Smith said when he founded economics is based in productive capacity and distribution mechanisms, not in treasury bullion or the Dow Jones Industrial average.
RB: All you can do is to point out that gaps between reality and expectation widen and that this same pattern is a recurrent historical cycle.
TF: Are great expectations a global phenomenon? I'm not sure Wall St investment dreams are shared in Nigeria, Cambodia or Guatemala. Ambitions of rich and poor dividing North and South become of greater rather than lesser magnitude, don't they?
RB: Important factors in global economy obscure sound calculation of the value of long term returns on global investments.
TF: Creation of uniform measurements, life styles and living standards still mitigate against uneven resource distribution and global wealth.
RB: In the long run aggregate world economic health is determined by whether the world's mines, factories, software firms, retailers, pizza parlors etc together find willing markets for goods and services they provide.
TF: Neo-Keysian argument. In a global economy effective demand may in the intermediate range outpace available supply and financial instruments funding them, creating a stagflation bottleneck of global proportions.
RB: Deep down this persistent historical pattern is due to the fact that economic feedback between aggregate supply and demand in a national capitalist economy is sluggish and inefficient and has a built-in time lag. The root problem is lack of efficient economic feedback that could closely link supply with world demand whether domestic or global economy. Thus Indonesian or Japanese bankers offer easy credit to favored capitalists, gambling that rising world demand will make these investments pay off.
TF: Long run intelligent investments providing real supply to needs based on sound economic growth will pay off. Not in 1800s or 1900s industrial economies this is a stable 3 - 4% per annum. Not wide boom and bust swings we witness in birth pangs of global infrastructure.
RB: Wall St and Japanese bankers, the Federal Reserve and other influential players public and private have a strong interest in economic tricks, employing policies meant to obscure the fact that effective world economic demand may fall short of supply.
TF: However in the long run a global network of international business should smooth out rather than exaggerate business cycles. Look at the marketing revolution e-commerce brings to discussions of international relations - not to mention what that will do to perceived threats we imagined 5 years ago in the WTO!!
RB: One problem here is increasing economic integration of global economy works against this averaging of national demands.
TF: It isn't averaging but widening the gap between rich and poor, domestic and international. In view of what you said on the political side of the spectrum of the debate, Greens and Progressives should at least have the most to offer.
RB: Another problem is much of the world is in recession or depression with the U S acting as an effective source demand but at the expense of enormous U S balance of payment deficits now approaching $150 billion per year. Asia can hardly afford to pay much cash for U S exports.
TF: Effective and derived Asian demand is not restricted to the underclass but internationally based businesses, making trade policy and their restrictions in the WTO much more critical in this economic adjustment than it did in the 1920s with such vehicles as the Smoot Hawley Tariff. Won't the action of the WTO itself largely overshadow domestic import export policy - as that was one of the original goals or the Brenten Woods agreement, in reverse??
RB: There's absolutely no reason to believe the pattern of inefficient feedback between aggregate supply and aggregate demand imbalance, backed by global credit extended on the basis of faith that someday things will get better, should not remain as serious a problem as it has historically been within domestic capitalist economies in the past, when the same principle is applied globally.
TF: You discount the Internet and global telecommunication which should provide feedback in a nanosecond. This kind of instantaneous stimulus and response will create a new dynamic the global market structure not followed by developmental investments, as you implied?
RB: It's happened before. One main difference is the world economy tends to operate in slow motion compared to domestic economies. The same underlying type of crisis due to an insufficient world demand for goods and services can now be better obscured by domestic policies designed to conceal this imbalance and delay the final day of reckoning, perhaps for a number of years while the underlying imbalance spreads.
TF: I'm unclear how domestic policies conceal this imbalance. The classic neo-Keysian model presumes a closed economy. I have no clue as to where any noted succeeding economist elaborates on the global marketplace though I found sources. Glider's "Wealth and Poverty" and other works such as Politics of Rich and Poor are no help, being restricted to the neo-keysian motif.
RB: The Depression triggered an international capitalist business cycle operating in slow motion affecting most of the capitalist world, although not as seriously as the U S.
TF: 1920s world recession began with Europe's inability to recover from the Great War. Industrial capacity was expended on the fields of France, as had the flower of England, leading to such anomalies as the 1926 London general strike well in advance of our own investment crash. Harsh penance exacted of Germany in reparation in the treaty of Versilles kept Germany's economy destitute and ushered in the Nazi Party and Hitler after the World sank into global depression about 1930 and created domestic sympathy for fascism in our own country to boot!
RB: No better example of an international imbalance exists today than in Asia, especially Japan. Most of Japan's largest banks are insolvent. 75% of Indonesia's businesses are bankrupt. Korea's situation is similar. Asian debt to equity ratios are typically much higher than ours, meaning Asian banks are more dangerously overexposed if demand contracts for a long period.
TF: What about the rumor of the Asian Co-Prosperity sphere's recovery? I thought China could avert devaluation.
RB: Much of the world is in the worst recession since the 1930s world depression. U S exports to Asia fell 20% since the recession. Brazil is also in recession. This is not enough to seriously affect the US economy on its own.
TF: No, but if declining demand also effects the European Union, likewise high tech, and they as they appear to be doing, likewise falter in the international arena, the stage is set to repeat 1929 - is it not?
RB: Recently there's a decline in U S business investment and corporate profit. The most important bright spot in world economy is now the high current level of consumer spending among U S affluent. As previously noted, this largely attributes to perceived wealth due to speculative stock market gains.
TF: Our economy is expected to overheat due to labor shortages and bottlenecks regardless of the investment market. Would that too not likewise trigger a world decline in supply leading to an anti-Keysian supply side liquidity trap bringing on maybe another round of stagflation we never solved other than an arms race and multi-trillion dollar deficit spending under Reagan? What would that do to fiscal policy domestically once we were tied to international market and monetary structures?
RB: Maybe the fate of world economy hinges on the psychology of affluent U S stock market investors and how much discretionary income they're willing to gamble on international investment before sufficient world demand no longer exists to pay off global investments of international corporations, the basis for global economy.
TF: Foreseeable bottlenecks are more macro and aggregate supply than demand.