zenpundit.com

The last global economic crisis of this magnitude helped spread Fascism, Communism and the economic primitivism of State Autarky. I expect that, if a relatively decent bounce-back cannot be engineered to loosen credit markets, we will see countries moving in authoritarian and autarkic directions in 2009, using managed trade barter deals to evade currency fluctuations or devaluations. Black Globalization will explode as ordinary citizens seek to escape new economic controls.

A convenience that, for middle income states, will soon harden into habit with the help of vested interests who benefit, relatively speaking, by reducing social mobility and economic fluidity in hard times.

Thought German might fit the Wagnerian mood of the markets today in a brief post discussing the economy. A few links on related tangents that I found intriguing, and then a brief comment:

John Robb –  A Real Nuclear Option in Finance

John relishes being not only out front but the edge thinker. He’s right that derivatives have to be addressed though I’m not qualified to comment as to “how”. I haven’t the faintest idea and the sums that derivative markets leverage vastly exceed our planetary GDP ( that’s right, not the economy of United States, the GDP  of planet Earth)  In particular, I wonder how you monkey with one class of derivatives without spooking the traders in other derivative instruments into stampeding us over a cliff in ten minutes. OTOH, Robert Paterson, who unlike me really does understand derivatives and the nuances of trading, agreed with Robb, who offered:

One solution: Nuke entire parts of the system. In short, destroy the system’s network connectivity. For example, credit default swaps ensure that failure will spread through internetworked contracts. Nuke CDS derivatives ($60 trillion or so) by making them illegal. Destroy parts of the network in order to save the remainder — firewalls and firebreaks.

Fabius Maximus –  No coins, no COIN

FM sees the economic crisis forcing huge changes in American foreign policy, defense structure, military doctrine and acquisitions:

In most of these money is no object in the pursuit of security (or other goals, often quite chimerical).  That is an exceptional way of thinking.  More so when one considers how our current account deficit has steadily increased since 1971 (when we went off the gold standard) – and the even more rapid increase in the foreign debts that finances the annual deficit.

That era will close soon, and the United States will return to earth.  Like everyone else, we will have to consider what foreign adventures we can afford before starting them – weighing their costs and benefits – and stop wars whose costs spiral out of control.  This will force a military revolution more profound than any since WWII, when we entered the “money is no object” era for weapons and foreign wars.  

….Not that the annual budget wars were not fought fiercely, but they will be conducted differently once budgets start their rapid and long-term decline.  Like any organization thrust into radically changed environment, restructuring – drastic changes in structure and doctrine – will be needed.

Maritime, air, and land – our approach to all will change.  Maintaining full-scale forces against purely theoretical future threats will become impossible.  Seeking dominance in every theater will become unrealistic.  Prioritization will become imperative.

FM also offers up  A solution to our financial crisis . Right now, China, the leader in global dollar reserves is in a position where our crash is their crash and their crash may be the end of the PRC as we know it. Good time to strike a deal.

Tom at HG’s World cites Niall Ferguson in Ferguson’s greatest area of expertise, as an economic historian:

The End of Prosperity, or A Better Future?

Historian and author, Niall Ferguson penned this article in Time magazine, about the question that is on everyone’s mind if not their lips. “Are we headed into a second Great Depression?”He begins: “Congress’s initial rejection of the Bush Administration’s $700 billion bailout plan calls to mind an unhappy precedent. Back in 1930, the Senate passed the Smoot-Hawley Tariff Act, which raised duties on some 20,000 imported goods. Historians define this as one of the critical steps that led to the Great Depression – a tipping point when the world realized that partisan self-interest had trumped global leadership on Capitol Hill.”He explains what happened to tip the scales.“The U.S. – not to mention Western Europe – is in the grip of a downward spiral that financial experts call deleveraging. Having accumulated debts beyond what’s sustainable, households and financial institutions are being forced to reduce them. The pressure to do so results from a decline in the price of the assets they bought with the money they borrowed. It’s a vicious feedback loop. When families and banks tip into bankruptcy, more assets get dumped on the market, driving prices down further and necessitating more deleveraging. This process now has so much momentum that even $700 billion in taxpayers’ money may not suffice to stop it.”

Like Tom of HG’s World, I’ve been a big fan of Ferguson and have numerous books of his on my shelf . That said, it’s very odd to me that he not mention another parallel with the Great Depression of a Federal Reserve in the hands of a relatively new Chairman after the long tenure of an outsized and much respected predecessor. Or the inability of the Fed to effectively coordinate with European counterparts ( several days after loudly bloviating about American weakness/incompetence by the German Finance Minister it appears that he might have better spent his time addressing German and EU economic fundamentals. Good Lord, even by politician standards, what an asshole!) which back then scrambled to ditch the gold standard like a poor relation carrying hepatitis.

The solution, if you can call it that, from my crude perspective would be to gather the Fed with other central banks, treasury and it’s G-8 finance ministry counterparts plus China and the biggest sovereign funds and agree on a few, very simple, lowest common denominator “brakes” or safety nets to backstop the system, plus a 2 year “hot money” flight tax to give a window of time to let the markets settle and work out clear minded reforms rather tha jerry-rigged insider looting binges posing as band-aids. That and driving what money/credit remains toward entrepreneurship and innovation rather than another burst of McMansion consumption by a demographic of dudes without any verifiable means of support.

This scheme won’t create any rainbows. It would be a tourniquet but better a tourniquet than an amputation.  If we come out with a recession on the scale of 1981-1982 we should consider ourselves to be fortunate. The Great Depression has begun to pass out of living memory but reviewing the mistakes of those years might be instructive.

I have not had time to come up for air in the previous week, much less post intelligently on a subject rife with complexity like the turmoil on Wall Street. This is unfortunate because it’s a very important story and it seems to be taken by the MSM with about the same gravity as SNL skits. Here are two recommended posts on the subject:

Nissam Nicholas Taleb – THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS

The author of The Black Swan extends his theory into strategy while critiquing the causes of the current mess. A must-read piece ( hat tip Lexington Green)

Fabius Maximus – Another voice warning about the nationalization of AIG

FM should get some credit where credit is due. The 4GW school ( and to an extent Fabius) were subjected to complaints that 4GW thinkers were long on criticism and short on solutions and blind or disdainful of economic variables. Fabius has made a special effort since he’s started blogging to concentrate on these areas and integrate economics into the 4GW critique. His post is rich in links and normative argument.

My own opinion? There are no levers scaled to the size of an even quasi-integrated global economy and the best that can really be managed in terms of intervention would be to get all of the major central banks on the same page on one or two relatively simple interventions, along with Treasury and the major holders of dollar reserves. They might be harnessed for a limited, stabilizing, effect but I think we have to accept that the global economy has shed it’s old skin from the nation-state Keynesian era once and for all.

Globalization and Its Discontents by Joseph Stiglitz

A partially wrongheaded book but an interesting one.

I say “partially” because Stiglitz intermixes sophisticated and nuanced understanding of market function and evolution with – at times, intellectually comical – bromide level asides for the anticapitalist yahoos who never took Econ 101 but want to lean on the intellectual authority of his Nobel Prize as they argue across the kitchen table. The second aspect that I find intriguing with Stiglitz so far, is that his (admittedly one-sided) description of the IMF is of an insular, stovepiped, hierarchical, rigidly dysfunctional institution that ignores empirical results of it’s policies and actions. That part I can well believe.

Stiglitz, who has an overriding leftish political agenda, blames IMF institutional culture on “market fundamentalism” of the Chicago school of economics, but he’s describing an organizational-informational behavioral pattern common to most second wave, industrial era bureaucracies. One shared by the US military, the IC, academia and (formerly) by IBM and most institutions of the decidely non-free market Soviet Union. The IMF simply isn’t the home for P2P networks and it acts like the lumbering dinosaur it is – large, brutish, powerful but slow on the uptake and oblivious to much of what goes on around it.

In a sense, though I’m sure Stiglitz never thought of it this way, he’s calling for economic COIN for developing nations rather than the 2GW version of market liberalization practiced in post-Soviet Russia. That’s a meritorious point but I inclined to think that the heavy left politicking Stiglitz sprinkes in his writing will prevent that message from reaching ears that might otherwise be receptive.

The choir he’s preaching to is in no hurry to open up markets anywhere.

My Chicago Boyz fellow blogger, Dan from Madison, posted up on an important book – an economic history of Nazi Germany during WWII by Adam Tooze entitled The Wages of Destruction: The Making and Breaking of the Nazi Economy:

“Book Review – The Wages of Destruction: The Making and Breaking of the Nazi Economy”

….I have just finished up a book by Adam Tooze called The Wages of Destruction: The Making and Breaking of the Nazi Economy. This book is about WW2 from an economic point of view. The book doesn’t really talk about generalship, tank tactics, or anything else military except in economic terms.

This book is simply outstanding. The beginning portions in particular are very dense and will require a basic understanding of economics to comprehend. I had to re-read several portions, especially in the first two hundred pages. Carl, who recommended the book to me, is an expert in economics and admitted to me that he even had to re-read portions. That aside, after you immerse yourself in this book you are in for a real treat and will learn a lot.

Too many times students of WW2 like myself tend to think of things happening in a vacuum. As an example, I knew that the Germans stormed across Europe in 1939 and 1940, but gave very little thought that this massive army didn’t just “appear”. The German economy had to be managed very effectively for them to be competitive on the world stage.

It was fascinating how the German economic minds managed their production in the thirties, all the while trying to escape from under their war reparations. In detail it is discussed how these minds bashed each other on how to manage their currency, trade, and raw materials.

Also interesting are many predictions by those close in Hitler’s circle of people that once the US got into the war on the side of the Allies all was lost. Germany simply could not produce enough of everything for long enough. After reading this book I can say with relative certainty that even if D-Day had failed, eventually the Allies would have prevailed, simply from the numbers involved. Not to mention Berlin would have been nuked, but that is certainly grist for another post.

Albert Speer, who for a time when he enjoyed Hitler’s favor as the Reichsminister for Armaments and War Production, was able to rationalize the crazy-quilt, quasi-planned, neo-autarkic Nazi economy by pushing decentralization (“industrial self-responsibility”) in the face of opposition by ambitious rivals (like Sauckel), corrupt gauleiters, the SS leadership and Nazi radicals. Such was Speer’s organizational abilities and skill at bureaucratic intrigue that Nazi Germany was actually becoming more industrially productive in the face of Allied bombing and invasion – to a point. Eventually, as Speer realized, critical resources such as wolframite, chromium and oil would simply become unavailable and the war machine would have come to a sudden, screeching, halt in late 1945, early 1946 at the latest, regardless of the progress of the Allied armies.

Economic strength and efficiency does not predetermine victory in war but the longer the war, the greater the weight economic power will have on the outcome.