recession

One day it will dawn on us that this is no ordinary recession. This is not a fiscal or credit crisis. Another trough in the usual boom and bust cycle. This time Keynesian prime-pumping won't work (if in fact it ever did, contrary to legend). We cannot spend or inflate our way out of this one. And if we do the reverse, if we cut back spending and implement austerity and conservation measures, we will only be taking our foot off the gas pedal-----not braking our motion toward the cliff. And the poor and the unemployed will suffer a disproportionate amount of the pain. Traditional left wing or right wing strategies are obsolete. The problem they would attempt to solve is much deeper than they imagine, and beyond their comprehension.

Debt snapshot

The following is a snapshot of American federal indebtedness as of February, 2012:

U.S. Tax revenue: $2,170,000,000,000
Fed budget: $3,820,000,000,000
New debt: $1,650,000,000,000
National debt: $14,271,000,000,000
Recent budget cut: $38,500,000,000

Now, if we strike the last eight zeros of each item, we can imagine this predicament in terms of a household budget:

Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
Total budget cuts: $385

OK, now let's go even further. Let's suppose that a family argument ensues over who is more competent to manage family finances---Mom (a "progressive")----or Dad (a neo-con Republican). Of course, in a real family situation, the kids---however mature and well-educated, would have only a token voice in determining how the household should be run----much like the voters in America (that's what makes this a good analogy).

Like the national family of the United States, this family is riven by a deep ideological divide. Mom thinks that the way to get out of debt is to borrow more money and spend it. Dad, on the other hand, thinks the answer is to borrow more money and spend it. See the difference? No wonder public discourse is so extreme and heated! There is just no common ground anymore.

However, Mom the liberal Democrat thinks that a lot of this borrowed money should be spent on "entitlements", after all, the kids are "entitled" to dental care, medical insurance coverage, good clothes and all the electronic toys that allow them to be active participants in the social media. All you need to do is pass a Constitutional amendment guaranteeing peoples' "rights"---- and bingo---- the people will have them. First class medical coverage for everyone. In-state college tuition fees for all the children of millions of illegal aliens. Fat union paychecks and pensions for public sector workers. New physical infrastructure in place of what is crumbling around us. All those good things. We can pay for it by selling the Chinese more Treasury bills. Nothing like more pseudo-purchasing power to get the economy rolling again. As Chris Clugston puts it,

Pseudo purchasing power

“Pseudo purchasing power enables us to increase our ‘current’ procurement level of natural resources and of the manmade goods and services derived from those resources, through fiscalimprudence—that is, by liquidating our previously accumulated economic asset reserves, by incurring ever-increasing levels of intergenerational debt, and by underfunding investments critical to our future wellbeing.” http://www.wakeupamerika.com/PDFs/On-American-Sustainability.pdf

Dad the neo-Con, meanwhile, thinks the borrowed money should be spent on a high-tech security system and firearms and weapons training. Maybe the house will be foreclosed but by God, he will defend it from anyone who threatens his American way-of-life! American taxpayers pay a trillion dollars for military protection each year, not counting the money spent on homeland security. But the underlying costs of running the society that the defence industry protects will continue to rise to the point that this "protection" will become unaffordable. Who then will guard the seaways that allow passage of vital imported non-renewables? The Chinese?

The truth is, both Mom and Dad are spendthrifts, and neither have a clue that "money" and "credit" do not constitute real "wealth". You don't 'stimulate' a corpse by an injection of adrenaline nor a moribund economy by "quantitative easing" or another "New Deal" or "green" stimulus package. Stimulate demand by any means you like, but eventually a re-flated economy would run into the brick wall of diminishing and prohibitively expensive natural non-renewable resources. Is that not what happened in the eight year run-up to 2008? http://iopscience.iop.org/1748-9326/5/4/044006/fulltext

There is one critical entry that did not show up in this balance sheet. The per capita consumption of the metals, minerals and fuels which as a citizen of America's industrial economy, each American draws down: 38,000 lbs. per year. This is capital, not income, and it will never be replenished. http://www.mii.org/pdfs/percapita.pdf

The Greek disease masks a much deeper malady. And lynching bankers, taxing the rich or changing governments will not cure it. If only it were that simple.

Tim Murray

March 24, 2012

Should I feel humiliated by being outdone by the excellent reportage of James Sinnamon on All Things Italian?

I've neglected to report much news concerning the current situation, but when I had a look at foreign papers (English, American, French, Italian, Swiss) that I often read, I found out that was plenty of news about Italian immigration policies.

Unfortunately or fortunately, depending on your outlook, the era of globalisation has opened up the gates of information and everything is dashing forward into the open, mud, dirt and all.

So this is the news.

I have to make some considerations.

In spite of growing popular support for more rigorous measures to face the irresistible immigrant wave, the Italian Government has not succeeded in stemming the tide. It has tried half-hearted measures to grapple with difficulties from left-wing protests and business sector’s pressure, for fear of being labelled "racist"- the ultimate insult for any democratic government.

But there’s a basic hypocrisy, underneath all this tarantella of reciprocal buck-passing .

First of all, it is almost impossible to halt the phenomenon: it is a flood to which we weren't prepared and have no coherent response. It is an historical phenomenon, common to all Western nations, but also to any nation, which is perceived by the outsider as offering more opportunities for survival than its own. The whole world is a common, a place of free exchange for hungry and dispossessed people. Most of us are concerned with our land-base, our nation, our corner, which seemed secure and where we had the illusion of absolute control. We do not see the wood for the trees.

We have entered a new Middle Ages, when marauding armies were razing and plundering our civilisation. Today we have to thank the gods because the invasions are, on the whole, pacific, if not orderly.

With eyes wide shut, Italians are torn asunder among hard choices, ignoring the global context.

The whole nation is guilty of two basic defects:

Ignorance and complacency.

Days ago, a popular demonstration took place in Lampedusa, the well-known Italian island symbol of lawless immigration. Loads of immigrants arrive there to be housed in special structures (Centri di accoglienza) before the authorities decide what to do with them. The demonstrators, lead by the Mayor, protested against the Minister Maroni's decision to build another similar structure in another part of the island, because the first one is not sufficiently capacious for the ever-growing number of invaders… sorry, immigrants.

Ahem! In case you didn't grasp the irony of it, the locals were chanting together with the immigrants escaped from the Centre "Freedom! Freedom!" Yes, free the immigrants, as long as they can leave the island and go to other parts of Italy ( and thus the whole of Europe), I suppose.

This is an intractable problem, full of paradoxes. The puzzling allegiances, the partisanship, shift from day one to day two without warning, according to changes in the weather, gossip, or the muddled self deception of a highly suggestible and politically exploited population.

In such a disoriented cultural climate, once the immigrants have reached our soil, no government action is possible without political upheaval , or the menace of economic collapse, which may strike one way or another .

But wait! Recently the Italian Parliament, among bi-partisan jubilation, has passed some laws against illegal immigration! One of the most astute and realistic of them, that will represent the strongest deterrent to anybody determined to set foot on Italian soil, is the threat to fine from 5.000 to 10.000 € when caught in such criminal activity….Really? Do politicians get paid to deliver such ludicrous crap?

Talking about ignorance, things are not so simple and I must explain a few sobering facts.
Historically , the waves of immigration fluctuate depending on outside factors, not just local economic demands. We must distinguish the Lampedusa's problem (people coming from African countries torn by wars and religious madness) and the people coming from other parts of the world and from East Europe, who have practically being invited by complacent government of any colour, to help our "economic miracle" (read: doing the jobs that locals won't do and to pay our pensions).

People who arrive by sea are most of the time coming from war zones and are therefore protected by laws and the Geneva Convention. We cannot , I emphasise cannot, legally send them back without first checking their status. Therefore, the demonstrators cannot aim at the Italian Government, except in the case of suspicion of conniving with the refugees, for local gain. (see note :

"It appears that the immigration issue can also be a source of business. In some very poor realities, like Crotone, in the Southern areas of Calabria, 40 jobs have been created to serve the local Immigration Centre and a navette service brings the illegal immigrants to the near town of St. Anna, where they tour the place and beg from the passers-by. It is a rather bizarre way to create employment in an area afflicted by poverty . " )

I give you an example: during the war in Kosovo, 33.000 people left the Balkans for Italy, creating an emergency.

Ten years after, no more Kosovars. By the end of 2008, 31.097 people have requested political asylum , mostly from war areas, like Somalia. 75% of the immigrants that reach Lampedusa are political refugees.

Looking at the statistics, Italy last year had 38.000 immigrants, one for every 1.500 residents, which I consider an enormous sum, but then Norway, Germany and Sweden have 7 refugees for every 1.000 locals.

(Corriere della Sera, Saturday 31st January 2009)
To be accepted as a refugee there are in theory stringent rules that include: identity and passport check, plus convincing proofs that the person has escaped from a dangerous zone and is persecuted . A lot depends from his/hers credibility . The police require long procedures, which may last months. The long delays open the opportunity’s door for people who otherwise couldn't prove their refugees status, and will escape the bureaucratic system to enter an underground system of criminality.

The story of immigration shows the misery of Africa, where young people cannot hope for a future, nor can they rebel without incurring imprisonment or death. Their dangerous voyage lasts sometimes more than a year of suffering, hunger and beating. Bands sell them to other bands always exploited for occasional work. The puny amount of money they earn is regularly stolen and they may end up in prison if they cannot pay the ransom required to continue the journey. Corrupt police sell them to other traffickers. Finally they depart from Libya on a last horror journey, and when finally – if ever ! – they reach port, find themselves in a Limbo, the prize of a residence permit in their pocket, but victims of the Mafia, vagrancy and poverty.

Gone is the better alternative of working - even at lower wages - for some industry of the North : in the current economic decline, there’s no more work, for newly arrived immigrants who cannot speak the language. The mixture of prolonged misfortune, bureaucratic indifference, criminal exploitation and impossibility of integration are dangerous ingredients leading to social unrest and augment proportionally the danger of the current economic collapse.

One strategy consists in avoiding their arrival. We have to start at the origin of the Exodus. It is no good to try and get rid of crows if we keep on throwing our rubbish in the garden. The crows will come again and again, because they know that, in spite of our shouts, we need them to clear out the rubbish.

And here we have complacency.

I speak mainly against the hypocrisy of Western societies. The only society which I know that is still able to control its borders, through strict policies and a strong sense of identity cultivated by centuries of isolationism and self-sufficiency, is Japan. Japan, in contrast to all the advanced industrial democracies of the world, restricts severely immigration (including refugees and unskilled foreign workers). Personally, I can observe that this is the main the reason why Japanese society maitains its uniqueness as a homogeneous nation, in the face of other industrial nation’s loss of cultural identity and any vestige of decent civil behaviour. It is all written in Japan's immigration laws and policies .
(see: Japanese Laws and Policies Concerning Immigration(Including Refugees and Foreign Workers))

(See Note:
"One famous pro-immigration economist, Julian Simon, in his book The Economic Consequences of Immigration, promotes the idea that immigration contributes significantly to economic growth. Noticeably absent from the analysis in his book is the case of Japan, a country that has had virtually no permanent immigration since WWII, yet whose economy grew remarkably faster than the United States', even granting that it started from a lower GDP base, become the world's second-largest economy.")

The Exodus towards Europe had starter long ago, when this continent – and England- earned the title of the Affluent Society. The asylum-seekers were normally fake refugees, more attracted by our standard of living then fleeing from political oppression, and were called “economic migrants”. Our cities have grown accordingly together with a surplus of people, slums have grown with them and so has waste, a conspicuous consequence of wealth. We have become accustomed to servants: even our low classes have benefited, so to speak, from a surplus of attendants to their basic needs. During economic and population growth we were already addicted and doomed to explosion. We have started to forget what is like to work, there have been too many underlings, maids, domestics, subordinates, wage-slaves, to sustain the pleasures and the exuberance of our civilisation.

Moreover, there’s never been a neat solution to the dilemma of new workforce for the jobs that Italians didn' want to do . The Italian demographer De la Zuanna has observed that the arrival of immigrants which constitute the working force needed for the European economic miracle, create a new influx of immigrants, because of their aspirations for their sons: to climb the social ladder, go to University, do office jobs, whatever, but never oh never follow in the steps of their parents. We will need yet more immigrants to :

a) do the dirty low-status work they will refuse to do
b) pay for their pensions

The cycle will have no end.

I wonder: if this capitalist era founded on continuous growth should vanish, and we will inherit the collapse of our mode of existence, predicted by gloomers and doomers, how can we continue to support/being supported by more outsiders?

Italy has no more means to assist its own poor: notwithstanding the mass unemployment, it continues to import people who cannot anymore employ and that are destined to live and die at the margins of society.

So far we have lived without reflecting on the capacity of this Earth to sustain us all and our descendants in a state of bliss.

So many people have moved in the past, from time immemorial, looking for a mythical Eldorado, to look for better pastures, to escape persecution, or simply to dream of adventure, that it seems to represent a fundamental trait of human nature.

In our times, pulled by images that our culture is broadcasting like a tantalising siren, young men and women escape dire conditions of poverty and fear, to risk sinking in the Mediterranean sea, convinced that it is sufficient to touch the magical land and be saved, delivered from all ills.

And now, in view of an economic downturn, the stupidity of such open-border policies is revealed: we are all getting poorer, and our cities cannot provide anymore the mythical lure of before . From long years of intemperance we are all waking up with a hang-over.

The fault is with us, with our throw-away societies, with our need for somebody that clears up the mess we make, for someone that will do the work that our spoiled children won’t do. Parents gave their children what they never had in their lives, small and big luxuries according to their status and possibilities, which are always above the previous standards. Even affluent families, in the past, exercised some constrain over the more superfluous requirements of their children from whom it was expected to be judicious and maybe a bit too parsimonious: that was how most family wealth was protected and augmented for a posterity which has squandered it.

We have refused to look after our old parents, which we secured inside Old People Homes cared for by African nurses or at home served by Philippino maids, we have refused to dirty our hands on a building site, we have even eliminated from our schools the old style teaching of manual skills, convinced that our children will never need touch an implement, we employ gardeners, rubbish collectors, fruit pickers. Even more scandalous is the fact that some of these ex-servants are better at earning a living than our home-grown quality. New enterprises manned by ambitious Moroccans, Albanians, Vietnamese, are have sprouted all over our cities. And then we are hypocritically indignant that part of the world that we employ to clean our bottoms or offer a service that we are unable to do, should be thrown back into the sea? But are we serious? What effort at social engineering can stop the coming population tsunami, if we are unable to survive standing on our own feet?

At the moment, the people of England, France, Switzerland, Russia, Italy, (and we expect more in the coming days) are all out on strike, demonstrating against… the bad weather. They might as well address God asking for miracles. They are not in the mood to accept just one more foreigner to take just one more job. Nationalism is rampant , the ugly sort, because it is not the fruit of concern for one's country, beauty , biodiversity, culture . It is the selfish expression of a people who has forgotten what it means to be masters of one's own destiny , to pull up one’s socks and learn to live again, frugally and responsibly.

This article is based on highlights from a lecture by George Soros, at the London School of Economics to launch his new book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (PublicAffairs, May 2008). Early in this lecture, Soros situated the beginning of current problems down to deregulation as practised by Thatcher and Reagan from 1980. He gave four reasons why he believed the US economy (and the world economy as it is impacted) will go into recession: 1. The decline in housing prices is still accelerating and is going to overshoot on the downside the same way as it overshot on the upside. We are not yet half way in the decline in housing prices. We will have at least 12 more months of increasing foreclosures and so on. 2. The consumers who have been relying on the double digit rise in housing prices for their ‘piggy-bank’ have withdrawn equity from their mortgages at a rate in excess of the current account deficit. This peaked at around between 8-900 billion USD in 2006. Now the outlook has changed and they are facing declining housing prices where at least 15% of regular mortgage-holders will be 'underwater' in their mortgages. Savings will therefore have to increase. The American consumer will cease to be the motor of the world economy which they were for the last 25 years. 3. The banking system is severely impacted, despite its 'quite impressive ability to raise capital'. The willingness of banks to lend to finance business is also going to impact capital and spending etc. 4. The situation now carries simultaneously the threat of inflation and recession. This is partly because the dollar has ceased to be the unquestioned accepted reserve currency, which up until recently allowed the American consumer to become the economic motor of the world and permitted the US to consume over 6% more than it produced. When asked if 'we' [the world] are heading for recession, Soros said, “Yes”. Asked about Europe, it was obvious that Soros saw the European economy as different from that of the US. He anticipated, for instance, problems for Spain, but not for Germany, because Spain has had a housing bubble but Germany has not. He expressed the opinion that these kinds of different outcomes will give rise to 'serious tensions' in the EU, because up until now the EU has been characterised by convergence rather than divergence'. Now there will be divergence. Also, the ECB (European Central Bank) has an 'asymmetric directive'. Its job is 'to prevent inflation, not to maintain growth'. As a result it is keeping interest rates steady rather than reducing them. That and, most importantly, the exchange rate, because lowering interest rates quite radically has led to a decline in the value of the dollar and that 'decline in the dollar has effectively exported the recession to Europe'. But 'the UK and the US will probably be more affected'. On the possibility that hope of continued growth might lie in the developing world "decoupling" from developed world: Might it be true to say that if the US consumer stops dragging the world along, the world will still be dragged along by China and India whose growth will mitigate the recession?. “There is a very substantial difference between the developing and the developed world which has positive and negative aspects. It may lead to avoiding a world wide recession but on the other hand it could be responsible for inflationary pressures which can make problems bigger for the developing world. There is a difference but there is no decoupling. We are Siamese twins tied together." Soros said that there is a "Need to improve the quality of regulation. It is not enough to regulate the money supply; you also have to regulate credit. This is because credit conditions do not always correspond to the money supply. Markets tend towards extremes of optimism and panic. Therefore you have to have minimum reserve requirements and optimum reserve requirements. They need to be made variable. That is the way to prevent asset bubbles from developing. Greenspan is right to say it is difficult to identify a bubble and to know when to interfere. It may be difficult but you cannot escape the duty. Keeping the economy on an even keel is an art, not a science. Regulators have to accept this additional duty … It is not enough to bail the system out when it collapses." Markets can behave faster and regulators are slower and more bureaucratic; you need both. Soros stated that he thinks that "market fundamentalism is a very convenient belief for the 'haves' because it justifies their having it. In other words, they prosper (that includes me, [he added] by the way, among the haves but I don't share this view on market fundamentalism). It's a wonderful excuse for pursuing your self-interest to the detriment of the common interest because there is a theory which says says that the common interest is best served by everyone pursuing their own interests. So its a very convenient belief and that is why it has such great currency and that's why you find that it is generally people with lots of money who are supporting and propagating this belief. There is a connection. The impact of the price of oil at $130 on US inflation... "I have given this a lot of thought because it is really quite disturbing, the price of oil. And I would say that there are four factors involved. One, the increasing difficulty and cost of finding and extracting oil. People talk about "Peak Oil, but that is a misnomer for increasingly expensive oil. So that is number one. "Secondly because of the decline of the dollar you now have a backward- sloping supply curve, that is to say, the more the price goes up the less incentive the oil-rich countries have to convert their oil reserves underground, which appreciate in value, into dollar reserves above ground, which depreciate in value so you have a backwards sloping supply curve. There are also other factors involved, namely that many of the oil reserve countries are in the hands of desperates who mismanage the economy ... Iran or Venezuela and so on... You know it's easy to be a Bolivarian revolutionary when you have oil at over $100. That's the second factor. "Thirdly the main areas of demand growth are in China and in the oil producing regions of the Gulf and Russia. And in those countries the price of oil is subsidised and therefore the rising prices don't have an effect on demand. In the US, yes. But in those countries and that's where the real growth is... the price does not influence demand. "And fourthly there is a trend following speculation and it is now having a major effect on the price of oil and you see that in the rise of far out delivery ... the real big move has not been in the cash price of oil but in the futures price several years out. And that does affect the cash price as well ... so there is now a bubble aspect also. So those four factors are responsible for the rise in oil. Again there is this sort of Greek tragedy aspect of it. Yes, if you have a serious recession in the developed world, it means that demand does go down and the the price will be affected, but first you have to have the recession for that to happen, and the rise in the price of oil actually hastens the outset of the recession and that is part of my argument why this crisis is different from the previous ones." You can download the entire lecture from the London School of Economics site at www.lse.ac.uk/resources/podcasts/publicLecturesAndEvents.htm.