-Caveat Lector- from: http://www.zolatimes.com/V3.3/pageone.html <A HREF="http://www.zolatimes.com/V3.3/pageone.html">Laissez Faire City Times - Volume 3 Issue 3</A> The Laissez Faire City Times January 18, 1999 - Volume 3, Issue 3 Editor & Chief: Emile Zola ----- The End of Laissez Faire? by Wolf DeVoon Last September, as global financial markets were crashing, the economics editor of The London Times, Anatole Kaletsky, noted with approval the soothing words of Alan Greenspan, which created a temporary stock market rally. "[C]apitalism can prosper only with the support of sound government," Kaletsky declared, and went on to say that capitalism would survive global crisis, but "free-market fundamentalism won't" (Anatole Kaletsky, "Farewell Laisser-faire," The Sunday Times, Sept. 10, 1998). Now first let me note that Anatole Kaletsky is a sober, well-informed, intelligent man. I've often admired his ability to brush aside all the transparent hoopla of governments and brokers, identifying long-term trends and economic principles that matter most. His writing style is crisp and lucid. I wish there were more editorial page writers with Kaletsky's commitment to reason, clarity, courage and objectivity. In truth, I envy the man. He richly deserves the position of privilege and public trust conferred by The London Times. On those many occasions when I've said that better minds should do the work of defending human rights, it was Anatole Kaletsky's class of cranium I specifically hoped to invoke as the powerful champion I know I am not. All that said, when Kaletsky is wrong, he is terrifyingly wrong. Analyzing the uptick in global share prices immediately after Alan Greenspan's evasive, carefully-worded intimation that the Federal Reserve would inject additional liquidity this year, Kaletsky argued that the Wall Street response to Greenspan's hint of lower interest rates and easy money "implies a recognition that capitalism can prosper only with the support of sound government -- that political institutions have a legitimate and indispensable role in managing the capitalist system." Bloody hell. With friends like that, markets need no gravedigger. Whether he came to praise capitalism or to bury it, Kaletsky implicitly justified fascism, especially the "sound government" variety pioneered by Adolph Hitler, Ferdinand Marcos, Idi Amin, General Soharto, and every tinpot demogogue who ever held his hand out for soft loans backed by the IMF or U.S. tax dollars. Unbelievably, Kaletsky goes on to say that free-market theory "is now in full retreat" and that economic direction by government is "the consequence of an historical conjuncture... ranging from Roosevelt in the United States to such less savory economic heroes as Hjalmar Schacht, the president of Hitler's central bank." If it was foolish for a State Department policy wonk (Francis Fukuyama) to proclaim the End of History as a victory for capitalism, Kaletsky has cobbled something infinitely worse: the End of History as the rationing of freedom. Lenin was quoted exactly so: "Liberty is precious, so precious it has to be rationed" -- and there is little ambiguity in Kaletsky's version of the statist creed. He insists that there has been a global paradigm shift; we cannot rely on market forces; the necessary role of government is to stabilize and manage macro- economic demand on an ad hoc, pragmatic basis: "How exactly governments do this -- through interest rates, taxes, currency management or whatever -- depends on ever-changing conditions. But the fact that capitalism requires some degree of external management is impossible to dispute," Kaletsky sniffs. Oh, yeah? I'm a simple tradesman, so I'm going to dispute it in parables, not paradigms. "Capital" means capital plant and equipment. When it's time to cut a bar of steel in half or punch a tunnel through a mountain, all the haircuts, sovereign debts, central bankers, and newspaper columns in the world ain't gonna do it. Long before your paper banknotes and derivatives can be swapped, some jerk like me has to pick up a capital hammer and hit a capital nail accurately on its head to get the job done. However decorative and amusing Disney movies, tourists, sportsmen and priests purport to be, in reality consumption contributes nothing to the work of production. Whether the capital in question is a paintbrush, or a petrochemical plant, or an oil rig, or the pipe-welding robots and steel mills that make it possible to exploit a naturally inaccessible, dangerous, useless raw muck, the productive power of tangible investment in the form of industrial plant and equipment is the literal (and largely forgotten) basis of capitalism. I know this seems distant from Kaletsky's thesis -- that central bankers and sovereign fiscal policy exert a beneficial and stabilizing influence upon otherwise chaotic "capitalist" markets. However, I ain't quite done, yet. Before you can have a market, you need goods. Pieces of paper and taxes are not goods; they are merely claims to goods. Let's talk about actual physical goods: food, clothing, shelter, energy to keep us warm in the winter, mechanized transport, medicine and sanitation. These are tangible, life-sustaining physical goods that free societies enjoy in great abundance and which primitive peoples ruled by "sound governments" do not. Almong the many impoverished there are always a few rajahs and popes, an army of thugs in uniform and slugs in office, doing nothing. The Russian government is filled with such people. But half of their starving population is digging potatoes by hand, while the other half sweat like feudal serfs, digging up raw material for export, because no one wants their "value-subtracted" manufactured products. State-owned plant and equipment add nothing to their primary industrial output -- which they are unable to produce without Western partners, Western technology transfers, Western bank loans, Western subsidies, and a steadfast evasion of unprecedented environmental ruin. Why? Because Russia historically was and remains an exponent of "sound government." Its entire economic history is a ghastly torture, if measured in human suffering, and a vicious satire of inescapable justice when viewed in the context of Western philanthropy. There would be no rusting Russian nuclear arsenal in the hands of starving peasants had there been no British traitors, no gullible American apologists and secret deals, no conniving French militarists and atomic carpetbaggers who gave it to them. The latest heir to the bankrupt Russian museum of failure, prime minister and ex-KGB thug Yevgeny Primakov recited the "sound government" paradigm for the press, quoting Mr Kaletsky's catechism, chapter and verse. "The government should intervene in economic affairs and regulate them," Primakov decreed, promising to model his communist-led government along the lines of Roosevelt's New Deal, with jobs for the boys and more printing press play money. From their respective tombs, DeGaulle and Lenin probably smiled with satisfaction. The show will go on. And from their political progeny in Washington and Paris, London and Bonn, a chorus of mainstream approval issued in trilingual huzzah, cheering the new kleptocracy and its promise of "sound government" -- an outbreak of mutinies and murders in the Russian nuclear submarine fleet notwithstanding. Presumably, antisocial behavior such as hoarding food for the winter or refusing to pay taxes can be overcome by reviving the traditional Russian method of regulation. Informants will be rewarded, and market "speculators" will be shot. It is pointless to pretend that the situation in China is much different, or that while too much tyranny is bad, a little tyranny is just right. Alongside wealthy Western democracies, light-handed regulation of the market is no less repressive and foolhardy than more catholic examples of dictatorship. I have made the point elsewhere, that our War on Drugs has been a laughable failure. It is easy to demonstrate that the licensing of professions and imposition of minimum quality standards tends to drive quality down, not up. "Bad protection drives out good," Alan Greenspan once argued in the pages of The Objectivist, twenty years before he joined the ruling class. Now, the Fed chairman prides himself on saying nothing, and in mockery Kaletsky quotes Greenspan's famous reply to a Congressional committee, who thanked him for being so clear: "If that is the impression I have given, then I'm afraid I have been misunderstood." We need to look at capitalism from a simple, proletarian perspective -- at the level of nuts and bolts and seed grain. Freedom rewards study, forethought, frugality, fidelity, intelligence, initiative, willingness to experiment, and showing up for work every day, ready to work whether it's fun or not. Anyone who has ever worked on a farm, in a factory, bakery, restaurant or hospital knows what I'm talking about. This is not an issue of supervision. Ninety percent of the time, the boss isn't there, or he doesn't fully understand the problem at hand, or he expects you to solve it without breaking the rules (or without getting caught breaking them) because he hired you to get the job done without a lot of guff. There's the hay, there's the hooks -- get it off the truck and in the barn, as fast as you can. Complaining about the heat, or how dusty it is in the barn, or how unfair it is that you're an unskilled day laborer does not recommend anyone for continued employment as a ranch hand. Dragging a plank to the side of the truck and doing the job faster than anybody else will get you a pat on the back and a smile -- and probably another day's work. Keep it up, for a year or two, and you'll become a trusted member of the enterprise. This is the reality of work, whether the work is skilled or unskilled, physical or mental. If you can figure out an effective solution that achieves the specified outcome (or a substantially better result), most employers will recognize and reward productivity. It is in their interest to recruit and retain competent people. No employer deliberately selects lazy sycophants and lobotomized stooges. Except in government. Political office rewards conventionality, seniority, multiple meaningless rituals, symbolic gestures, half-truths and evasions, deliberate delay, trading the unearned, shaking hands, smiling, empty pladitudes and feigned concern, absolute allegiance to the party line and the party leader, secret deals, backbiting, paranoia, and showing up at cocktail parties to beg for money whether it's dignified or not. Don't accuse me of making this up. I ran Paul Soglin's mayoral campaign, and I worked for the Department of Energy during the Carter Administration. I know precisely whereof I speak. The political class does no work and produces nothing, except photo opportunities and sound bites. It is not surprising that Bill Clinton found time to play with Monica Lewinsky in the Oval Office. Ronald Reagan preferred to snooze, and GS-11 bureaucrats are rarely at their desks. The culture of indolence is highly contagious. Try asking a complicated question at a police station or a city clerk's office. Capital plant and equipment is the lifeblood and sinew of private enterprise. The vast bulk of productive investment is NOT financed by the so-called "capital markets," nor from government hand-outs or tax breaks, but instead from retained earnings. Proper maintenance of plant and equipment is a crucial priority for every factory, every farm, and every pilot of an 18-wheeler. Freedom implies responsibility. If your competitors have better technology, they cut costs and win customers. The free market economy is a school in permanent session, teaching every participant the virtue of practical education. We don't always enjoy learning to use new tools -- but we do it, to stay in business and to make ends meet. Until very recently, the secular trend across all indu stries throughout American economic history has been falling prices and rising productivity. The computer on my desk cost $1000 and quietly outperforms any $1,000,000 mainframe built 30 years ago. None of this applies to government. The bulk of state investment is NOT obtained from operational revenue or taxation, which barely cover the salaries and pension benefits of a constantly growing number of government employees. Badly-timed, over-specified, bloated investment in state plant and equipment (weapons, office buildings, roads) are funded by the one and only "capital market" that governments care about -- the sovereign and tax-exempt municipal bond auctions. About a third of this debt is held by State and Federal employee pension funds; another third by foreigners who don't trust their own governments and rightly see the U.S. Treasury as the strongest thug in a world of weaklings. If shit comes to holler, the U.S. Government can legally squeeze more wealth from its semi-free citizens than any six European welfare states. Knowing this, U.S. bureaucrats, legislators, military planners and school districts have no incentive to maintain their plant and equipment. Dependence implies irresponsibility--and whether you view the government as a recipient of our willing charity, or as a thief who holds taxpayers at gunpoint, the essence of the game is dependence. Government makes nothing, sells nothing, earns nothing. Their "free public education" consists of student unions, Marxist economics, media studies, boring public policy debates, and football games. Their entire strategy is to elaborate and expand governmental operations, preferably to do less with more. If this is doubted, please check the budgets. You will find that the U.S. military spent more, fighting less. The FBI and DEA have more agents, making fewer arrests of career criminals. Social Security and Medicare are out of control, suffering the same fate as Britain's "free" NHS, for the same demographic and technical reasons. A Ponzi pyramid cannot succeed by robbing Peter to pay Paul, with increasing numbers of idle Pauls and an eroding number of taxpaying Peters. These are well-known problems. There is no known solution -- except to 'fessup and say that we have too much government, too little liberty. Liberty is a profoundly unpopular idea. You won't catch Hillary Clinton admitting that she was wrong about "free health care" or her choice of political partners. Throughout the world, terrified bankers and stock brokers are whimpering their conversion to Anatole Kaletsky's faith. "What is certain," Kaletsky assures them in confident, fatherly tones, "is that the era of laisser-faire ideology is fading. Capitalism's own incomparable instinct of self-preservation will see to that." My hammer and nail have an instinct of self-preservation? -- even if I leave them out in the rain, or give them to a starving Russian? This is what happens when, like Kaletsky, you stretch an abstraction to the outer limits of anthropomorphism. "Capitalism" is physical plant and equipment -- not internet marketing services that will never make a penny of profit, nor "emerging market" paper that sunk 40 percent in nominal value this year and is 100 percent worthless if you were dumb enough to invest in Malaysia or Moscow. What Kaletsky (and many people) mistakenly call capitalism is, in reality, intangible "financial services" conducted by intermediaries who trade claims to wealth at varying dates and terms of payment. In J.P. Morgan's day, it was called banking. This is the economic engine that is allegedly pulling America into a healthier and happier "service economy," since we no longer make things. Because it has no furnaces, factories, or chemical effluents, it is 100 percent eco-friendly. Like the government which regulates financial services and enforces debt contracts, banking is inert of productive power. All the bankers and brokers in the City of London couldn't make a ham sandwich without help (farms, factories, oil wells, refineries, power plants, transportation, butchers, bakers, and candlestickmakers to decorate the table). I am not opposed to banking, but I think we need to see it in full context. Signing pieces of paper do not create goods. Sovereign debt is no better than the taxpayers who are obliged to deliver the physical goods it claims to own in the future. This is the problem in Russia, comrade banker. They have no future. The industrial "tiger" economies of Asia (where people are busy producing iron and steel) are in equally deep trouble, according to Andrew Hunt, chief economist at Dresdner Global: "In Japan, Pakistan and India you are going to have the equivalent of the Great Depression of the 1930s." Brazil raised interest rates to 30 percent, trying to keep depositors from leaving. Malaysia made foreign exchange a crime. Why? To understand what's happening in the global economy, we have to snore through the Parable of The Two Fortresses. In the Western Fortress, happily isolated from the rest of the world on the top of a spectacular mountain range, a racially homogeneous people lived peacefully in a prosperous, orderly, democratic society. There was no crime, no poverty, and excellent health care for everyone. They had more money than they knew what to do with, because foreigners kept depositing funds and bidding up the price of their currency (the Swiss franc). The franc kept rising and rising in value. It was hurting their ability to export coocoo clocks. So, the government decided to lower interest rates, desperately trying to devalue the franc, so their coocoo clocks and chalets would be worth less. Meanwhile, in the Eastern Fortress, happily isolated from the rest of the world on a beautiful volcanic island, another racially homogeneous people lived peacefully in a prosperous, orderly, democratic society. There was no crime, no poverty, and excellent health care for everyone. They had a completely different problem, because they were manufacturing and exporting too many digital clocks. They sold so many digital clocks that they had a huge pile of dollars and francs. With so much cash floating around in their economy, bankers bid up the price of a hamburger to $50 and a dinky one-room office to $1 million. But exports slumped and the banks suddenly ran out of cash, having loaned too much. So, the government decided to lower interest rates, desperately trying to inject more money (more inflation) to stave off a catastrophic series of bank failures. When we consider that the two fortresses, Switzerland and Japan, are factually the wealthiest and most highly educated nations on earth, it makes you wonder: how clever is Bill Clinton? So far, he hasn't had to face anything more complicated than a prayer breakfast. But worse -- infinitely worse -- is the interest rate medicine that Switzerland and Japan chose to prescribe for their sick economies. Go on, take a guess. Zero percent would be close, in round figures: 0.25 percent in Japan, 1.25 percent in Switzerland. Next, central bankers in Japan will start paying people to borrow money, like the printing press quacks in Russia, and it won't do any good. The giveaway discount rate "doesn't change anything at all," according to Brian Turner at Henderson Investors, because the Swiss franc is perceived as a safe store of value. Same story in Tokyo: "It will not have a positive impact on the real economy. It cannot take Japan out of a deflationary spiral," said Susumu Kato, chief economist at Barclays Capital (International Herald Tribune, Sept 11, 1998). So, what's this "real economy" that's causing the trouble? It's real capitalism. Real goods. America ain't buying enough clocks. The world produces more clocks than anybody needs or wants. Before we discuss what people need and want (and can afford), think again about the Parable of the Two Fortresses. The Japanese government injected liquidity to prop up failing banks, encouraging their people to save less and consume more. The Swiss government used the same monetary weapon to suck money out of their banks, hoping that exporters will save more and consume less. These are 100 percent contradictory policy goals, and neither of them will work. It demonstrates in a nutshell what is wrong with government central bankers tinkering with interest rates. If interest rates are set artificially high, they choke profits, capital formation, investment and output. Set low, they flood the market with cheap credit, bad loans, and inflation. It is impossible for government to "fine-tune" the real economy by raising or lowering interest rates. Milton Friedman won a Nobel Prize for explaining this better than I can, but the basics are not hard to grasp. Money is a token, a claim to goods. The amount in circulation is meaningless -- it can be a lot or a little. Inflation, initially penalizing savers and lenders and confusing everybody else, achieves no lasting transformation of the real economy. Wage and price controls are twice as dumb, forbidding the market to function. All such attempts to "manage" economic activity are counterproductive. All financial assets (banknotes, shares, government bonds) are claims to physical goods. What we are witnessing in the global financial markets is a spasmodic revaluation of what's worth what, in terms of physical goods. Oil is not priced in dollars -- in reality, dollars are priced in oil, machine tools, etc. The value of money and other, less-easily traded financial assets (30-year bonds, for instance) often fluctuate relative to one another because the quantity and risk of holding these goods-tokens vary over time. If there are fewer banknotes or T-bills in circulation, they are deemed more valuable. Stocks are slightly different, because you get to vote as a shareholder, but they function monetarily the same as all other financial assets. The share price of an individual company will rise if the company is making profits. But when the share price of EVERY company rises and few are profitable, the market is repricing the value of dollars, not stocks. If it takes more dollars to buy a broadly representative basket of shares -- say, the S&P index -- then dollars are effectively going down in value. The thing to keep your eye on is physical commodities: gold, copper, zinc, oil, pork bellies. And that's why professional investors are nervous. Commodity prices are crashing, along with weak demand for manufactured goods. Cash is fairly scarce. Everybody is invested up to their necks in stocks and bonds. It is an unprecedented financial gridlock: nobody wants to sell, because everybody and his banker made huge "paper profits" on the stock market, allowing them to borrow against it and consume on a lavish scale, and experts unanimously chant that being a long-term investor is best. There's no transaction fees, no capital gains tax, no decisions to make, no inventory, no employees, no physical plant or equipment. Party on, pension dudes! What's wrong with this game is the awkward fact that, in reality, there is no money machine. I learned that in Corporate Finance 101. If there was such a thing as a "money machine," it would bankrupt the world the moment you switched it on. In plain English, you can't get something for nothing. If you ever planted a crop or helped harvest it, you know that production creates physical goods. A pure "service economy" of designer hair salons and Disneyland rides can't grow a single stick of celery. But this did not prevent America and Western Europe from attempting a new form of colonialism, getting others to do the work of industry for the benefit of party animals in "the developed world." It's an ancient story with a modern twist, tempting Asia and Latin America to trade, export their goods to Los Angeles and London, in exchange for technical advice and consumer IOUs. Except now, the jig is up. Japan and Switzerland have vast, illiquid paper assets they can't trade, and there's nowhere safe to invest. (Russia looked okay last year -- but that was wishful thinking. Western bankers have lost about $250 billion there.) If big players try to cash in their portfolio of U.S. stocks and bonds, the market will crash, wiping everybody out. The financial world is holding its breath from day to day, hoping Greenspan can save them. How they suppose the Fed can do this is a mystery, since the most any central banker can do is futz with interest rates and print more paper claims to the same physical assets. Kaletsky knows this is true and should have said so. When he praised central bankers and credited them with providing market stability, what it amounted to was congratulations for inaction. Greenspan's policy, like the Bundesbank's, has been "say nothing, do nothing." Base rates haven't budged significantly for a decade. Bankers appreciate a steady macroeconomic landscape. Instead of fretting about wholesale monetary changes, they can focus on managing customer accounts, apportioning credit without guessing about inflation. If Greenspan dumps the anti-inflation regime, brokers will have to bet in the worst of all possible worlds, with the Fed pushing cheap money at them and no way to guess whether a dollar might be worth 90 cents or a dime, five years from now. Inflation won't significantly devalue the U.S. dollar, since America is always the safest haven, so maybe we'll follow Switzerland and Germany into a fairly mild recession. But theories count for little in real capitalism. If you take a physical inventory of U.S. heavy industries, you will discover there ain't none. Environmental law makes it a crime to pump oil, or cut timber, or smelt copper. At the moment, who cares? -- commodity prices are low and Korea is begging for work. We have a modern, well-equipped Navy. The G7 percent and Russia will do whatever Clinton tells them to do. I've changed my mind. There's no crisis. Kaletsky's right. Governments know what's best. Fuck economics. It's too complicated. I think I'll surf some porn sites. Brazil just raised its central bank rate to 50 percent and doesn't have a hope in hell of making interest payments on billions borrowed at home and abroad. Nor will Brazilian kleptocrats cure their fundamental problem of deficit spending (currently 7 percent of GDP), with or without another IMF band-aid, assuming that the IMF is still in business later this year when Brazil's debt comes due. The IMF is out of cash, having loaned 70 percent of its funds to "sound governments" like Indonesia and Russia. Paul Abrahams, writing in the Financial Times (Sept 14, 1998) says that the Japanese government has been quietly intervening to support the Nikkei share index, pumping $750 million a month into the weakest "first division" stocks to keep the average share price from collapsing -- and they've been doing it for nine fucking years! During that period, the Nikkei lost 72 percent of its value, despite the fact that the Japanese people worked harder, saved more, invested more, and produced more per capita than anyone else on the planet. That's why I'm outta here. Porn makes more sense than Kaletsky's sovereign philosopher-czars. Soon after Kaletsky's article appeared, Japan's central bank announced plans to double its purchase of Japanese government bonds, adding $5 billion a month of inflationary "liquidity" to the economy. William Campbell, an economist at J.P. Morgan, said: "The long-term implication of this is that the bank is taking the first steps to monetise the debt." Japanese company bankruptcies in August increased 13.4 percent year-on-year; new bankruptcy debt is piling up at $1 billion per month. The Japanese government, under pressure from the U.S. Treasury, proposed to spend $100 billion to rescue failing banks. Opposition politicians rejected the plan, saying it was "vague, hard to understand, and absolutely not enough" (Financial Times, Sept 15, 1998). Quite right. $100 billion is only 10 percent of the total $1 trillion non-performing bad paper held by Japanese banks, every bit of it created by bureaucratic dithering of a "sound government." Japan's $1 trillion of bad debt equals 30 percent of GDP -- a central banking crisis four times worse than Brazil. I stated Japan's financial crisis in dollars (instead of yen), because all money-tokens ultimately point to real goods, and Japan owns $1 trillion of American assets. Watch what happens when they try to collect our IOU. -30- from The Laissez Faire City Times, Vol 3, No 3, Jan. 18, 1999 ----- Published by Laissez Faire City Netcasting Group, Inc. Copyright 1998 - Trademark Registered with LFC Public Registrar All Rights Reserved Disclaimer The Laissez Faire City Times is a private newspaper. Although it is published by a corporation domiciled within the sovereign domain of Laissez Faire City, it is not an "official organ" of the city or its founding trust. Just as the New York Times is unaffiliated with the city of New York, the City Times is only one of what may be several news publications located in, or domiciled at, Laissez Faire City proper. For information about LFC, please contact [EMAIL PROTECTED] ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. 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