>X-Sender: [EMAIL PROTECTED] >Mime-Version: 1.0 >Date: Wed, 16 Feb 2000 01:11:00 -0500 >To: [EMAIL PROTECTED] >From: Tim Rourke <[EMAIL PROTECTED]> >Subject: A WORLD IN ECONOMIC CRISIS*C >X-MIME-Autoconverted: from quoted-printable to 8bit by >dijkstra.uwaterloo.ca id BAA14874 >Sender: [EMAIL PROTECTED] >Precedence: bulk > >http://www.transnational.org > > >A WORLD IN ECONOMIC CRISIS* > >By Johan Galtung, dr hc mult, Professor of Peace Studies >American Ritsumeikan Troms" Witten/Herdecke Universities >Director, TRANSCEND: A Peace and Development Network >----------------------------------- > > >5. The dependent crisis cluster: gross imbalances/asynchronies >Let us go more deeply into consumption, building on Say's idea >about changing propensity to consume with increasing purchasing >power. We have distinguished between four levels of consumption: > > Level 0: Below meeting basic needs: Misery > > Level 1: Just meeting basis needs: Poverty > > Level 2: Normal consumption: Normalcy > > Level 3: Luxury consumption: Luxury > >The assumption is that the point of gravity in the consumption >pattern, the average level, increases with increasing purchasing >power, except for fundamentalist puritans who stay at Level 1 or >below, and the spend-thrift who tries a jump to level 3. > > Crisis I is what we have when a high and increasing part of >the population lives in misery, at Level 0. If in addition we >also have Crisis II, then there is no way out through investment >in modern equipment for land farming or ocean farming. If in >addition the other factors for the production of necessities, >like land/soil/water, and seeds, are bought, polluted/diverted, >and patented, then there is no traditional way out either./27/ > > If we now bring in consumption at Levels 1, 2 and 3 then >the vicious circles operating, churning out crises, expand: > > increasing un/underemployment leads to > > decreasing purchasing power, leading to >increasing un/underemployment leading to increasing misery, and > >decreasing purchasing power leading to increasing bankruptcy. > >The crisis is tapped out as ailing and dead people (Crisis I) >and ailing and dead companies (Crisis III). However, company >managers, CEOs are much better insured than ordinary people, >sometimes with golden parachutes. They do not die, they are >recycled before death. Yet their minor troubles make headlines >in the corporate press. > > Let us then add two more levels to this Say-type analysis. >What do people with much money do with their money when they >have reached the limits to consumption, because there are only >24 hours available, it is difficult to make sleep that >expensive,/28/ and the consumptivity has its upper limits for >most? Even caviar and champagne, and skiing at Gstaad CH or >Aspen CO, combined with some cruises, will draw a yawn after >some time. Answer: the money is used to make more money, meaning >a transfer from the productive economy (where consumption is >such a problematic part) to the finance economy. That gives us: > > Level 4: Investment > > Level 5: Speculation > > Level 6: Gambling > >There is an increasing level of risk/recklessness at work here. > > At level 4, investment, the money is earmarked for a >company for which the capital-holder feels some responsibility >beyond the profit motive, and some long term commitment. > > At level 5, speculation, such as short-term, foreign >portfolio investment (FPI), the link to any specific company is >broken. The agent/computer searches for maximum profit at >minimum cost, including time costs. The more "exotic", virtual, >the financial object, the higher both risk and profit. We are >now very close to gambling, but not yet quite there. > > At level 6, gambling, any link to the productive economy is >broken. It is money for money, mediated by some chance device, >loaded or not. Again, the higher the profit the higher the risk. >The ultimate risk is total loss and major indebtedness, and the >lonely shot at night. The crisis is tapped out as suicide, and >as the burden to the bereaved and the indebted left behind. > > The deficit in capital for the most needy, in misery, is a >problem for themselves: they starve, die from under/malnutrition >(some time ago at the rate of 40,000 children per day). > > The deficit in capital for the less needy is also a problem >for companies producing and marketing normalities and luxuries: >they overproduce relative to demand and go bust, a minor problem >for the CEOs, a major problem for the employees. > > The excess in capital for the super-rich, however, is less >a problem for them, and more a problem for everybody else. For >one thing, capital given to speculation is capital taking away >from productive investment, as the family of any gambler (or of >any other kind of addict) knows: capital given to gambling is >capital taken from the family. In the macro-economy this means >less capital for productive economy investment, including taking >the risk of low return for any money invested in necessities for >the needy. If they risk losing much in speculation, why not lose >a little investing in necessities? The answers are obvious: the >former risk comes with the possibility of great gains, the >latter not. Moreover, misery is not very chic, in, these days. > > Investing in production of normalities and luxuries, when >the supply already outstrips the demand in at least a dozen >major branches/29/ due to overproduction, makes little sense >even if it does not carry the stigma of investing in "needy" >losers. In addition investment in the production that could help >the needy, in a subsistence rather than growth economy, is labor >and not capital intensive; a shadow from the traditional past. > > On top of that: investment is long term, time intensive, >out of touch with the quick rhythms of post-modernity. Who wants >to wait thirty years for a return when thirty seconds will do? > > Capital is made available for finance economy speculation >to the tune of a $1.3 trillion/day dynamism; by far outstripping >another poor habit of humankind, a global military budget to the >tune of $1000 billion=1 trillion/year. It has been proven again >and again that saving capital and investing it in the productive >economy, when correctly done, can spur economic growth, if not >economic distribution. "Trickling down", much praised but rarely >seen, seems to need some plumbing of clogged pipes by the state. > > But high levels of speculation can take place unaccompanied >by any productive economy dynamism. The incredible dynamism of >the finance economy, with a DJI growth of 28% in 1997 as opposed >to a productive economy growth of 1-2%, indicates that little or >no value was created. Value is shifted upwards, assuming gains >by and large to be proportionate to the risks taken, meaning >that "to he who has (much) more will be given"./30/ > > Instead of the neutral word-pair "productive/finance", used >here, many authors use "real/virtual". This may be misleading. >Anyone visiting a stock exchange witnesses a theater of the >absurd, but only because it is unfamiliar to most of us. We >associate the economy with means of production to produce, in >return for the means of consumption; and we do not recognize >these means in computer games at a level of abstraction (hedge >funds, options, futures, derivatives) beyond comprehension. It >looks more like a casino, place your money, win or lose. > > The problem is that the finance economy is not quite real, >nor is it quite virtual. The coupling to the productive economy >is weak, but it is not zero. Currencies carry the names of real >countries, bonds of real states, stock of real companies; as >opposed to Monopoly, or roulette/baccarat/what not in a casino. > > Take a stock as an example; an IOU, a redeemable credit >given to a company. Those who buy it gamble on that company. >The company shows a handsome profit after write-offs, dividends >are paid, earning/price ratio is satisfactory. So far so good. > > Then the rumor about that stock goes around and the finance >economy takes off with its own logic, similar to any other >economy: increased demand leads to increased value leads to >increased demand. The company can get good capital issuing >more, but not too much more, supply=stocks, expanding production >capacity, increasing the output/supply. Again, so far so good. > > Then comes the sundowner: the company has overinvested. >The problem is not diminishing returns due to an imbalanced >factor profile, but no return at all due to market saturation. >Inventories exhaust the storage capacity. The cash flow >dwindles to a trickle. Raw materials keep coming in to feed the >production process. Even the usual ninety days to pay the bills >prove insufficient. After some expansion of the delay comes the >contraction period: COD; no cash, no delivery! What should not >happen happens: the ships turn around, trying to sell their >cargo elsewhere. The value of the stock suffers a steep >decline. The company can no longer improve the cash flow by >selling (overvalued) stock, and buying its own stock at more >realistic prices is also out, given lack of cash. Others will >buy, possibly with a take-over, hostile or not, in mind. > > If this happens to many companies in the same country the >willingness to receive payment in the national currency will >decrease and the value of that financial object is also in for >a decrease, slow or steep, in other words devaluation. The >ground is now prepared for foreign take-over, hostile or not. > > One way in which speculation differs from investment is in >the neglect of concrete, real world, information. Speculation is >based on how well stocks (or generally financial objects) are >doing on the financial markets; investment is based on how well >products are doing on product markets. Another difference is the >speed of financial transactions. Checking for overproduction >takes too much time. They all make the same mistakes. > > And yet the coupling is there, indicated in the example >above from South Korea late 1997. The companies in trouble were >also chaebol, state enterprises susceptible to dirigisme and >cronyism. But they also had overproduction in common, probably >much more important. The IMF used the situation to apply its >standard prescription, not doubting the "wisdom/discipline of >the market". How could they doubt their own God, when on a >mission to exorcise Satan, the State, from the corporate realm? > > We have now located Crisis IV in the interface between >overfinancing and overproduction. Just like Crisis I and II >belong together, so do Crises III and IV. Speculation makes a >lot of money available to companies doing well, but continues >doing so long after the company has ceased doing well and may in >fact do very badly. Supply side economics has its limitations >if people simply do not have the purchasing power. They may buy >on credit (cards), and seek refuge from creditors in bankruptcy. >But somebody will suffer badly down the line, and ultimately the >overvalued company. The crunch is the cash flow, that is where >the famous "lack of confidence" ultimately shows up: the company >is not deemed creditworthy. The company goes bust; the employees >are added to the ranks of unemployed (1.7 mio in Korea after the >crash, in a country with agriculture in shambles). > > The investor, close to the company, as opposed to distant >and reckless speculators, has a clear algorithm: he would check >the value of the stock against the quarterly reports and look at >the branch as a whole for possible signs of saturation. The >danger of overevaluation lies in the decline and fall, whether >slow or quick. The former gives more time to accommodate, the >latter cuts the agony short. The CEO, knowing the dangers of >supply side economics, will have demanded parachute insurance. >The investor has already done so in a major institution of >capitalism: the limited (responsibility) company. > > How about the investor in a foreign country when all of >this happens not only to one company but to several, and to the >country itself in the sense of currency devaluations of 50-75%? >Instead of accepting the applauded punishment and discipline of >the market they demand "compensation or else no more investment" >so that the sources of foreign capital will "dry up". The name >of that insurance company is, of course, the IMF, but only in >the sense of making loans available to the failed state so that >the state can redeem the foreign investors, and then service the >loan. Incompetence obviously is rewarded, not punished. The >risk is carried by the labor-seller, not by the capital-holder. > > If the company stock is "out of synch" with performance, we >would expect a crash, quick or slow. If the stock exchange of >a country is "out of synch" with its performance, we would also >expect a crash, quickly or dampened by official optimism and >spreading over time, branches and companies. The disjunction >between productive economy overproduction and finance economy >overvaluation is at the root of the system. It is intrinsic to >hyper-capitalism, the crises showing up at its weakest points. > > Thus, the early warning indicator would look at the ratios >between the growth of the finance economy, dF/dt and the growth >of the productive economy, dP/dt, in other words dF/dP. Another >approach would be the ratio of the elasticities, dF/F/dP/P. >Both could serve as indicators of imbalances; the optimistic >hypothesis being that the imbalance is only an asynchrony and >that the leading economy will fuel the lagging economy. The >underlying hypothesis is that a healthy economy presupposes some >kind of balance between the two given that the financial objects >are supposed to have their productive economy counterparts. Any >such hypothesis, however, would have to allow for some margin of >imbalance or asynchrony, especially given the long term tendency >of stock exchanges to grow more than the productive economy (but >not 10-15 times more). > > Would it be better if the speculators cut the link to the >productive economy, left the stock exchanges and their computer >terminals, and settled in the world's casinos instead? > > Yes, in the sense that they and those who depend on them >would have to carry the ultimate price (suicide) themselves, >assuming that they gamble with their own money. Speculators >seem to believe that they have/31/ a carte blanche to gamble >with other people's money, letting them carry the burden of the >losses, including landing them in misery (structural homicide). > > No, in the sense that speculation is not only gambling but >some kind of investment that may also finance worthy enterprises >The problem is that it goes out of hand. The problem beyond >that is how to rein it in again. We may disagree about how to >do that. But there is hardly room for disagreement about an >economic system that serves us so badly as hyper-capitalism. > > >--------------------------------------------- > >NOTES > >* The author would like to acknowledge the valuable comments by >participants in seminars where this paper has been presented, >particularly at Ritsumeikan University 4 November 1998 and at >Universit“t Witten/Herdecke 9 December 1998; particularly >Akifumi Fujita. I am also as always very grateful for comments >by Dietrich Fischer, and for comments by Ash Amin. The paper was >written when the author was Fellow at the Swedish College for >Advanced Studies in the Social Sciences, Uppsala, Spring 1999. > >----------------------------------------- > > >24. Gosplan = State Planning (Agency), responsible for the >conception and execution of the Five Years plan (Petiletka) >adopted by many countries all over the world, to the point of >becoming one of the few contributions of the Soviet Union to >world culture. > >25. Human Development Report, New York: Oxford University >Press, 1998; for the United Nations Development Programme. Even >a world class paper like the International Herald Tribune >sacrificed only a paltry 40 column-lines on this major mirror of >world reality. > >26. If we reduce the basic material needs to five, food- >clothes-housing-health and education, then one might argue that >the first three find their expression in number 4, health, and >measure the health status as infant survival (100% - infant >mortality) and the life expectancy. To this should then be >added an indicator of education, for instance literacy, as ma >measure of access to symbolic interaction. Add it up and we get >the kind of reasoning underlying the Human Development >Indicator, HDI. > >27. And from this on, of course, massive starvation, massive >migration and massive violence will dominate the picture. > >28. Well, that depends on the imagination. An expensive >bedroom with many-dimensional air-conditioning and sound, light >and fragrance conditioning would only be the beginning; >imitating a morning in nature any place in the world, on >command. The water-bed, suitable night clothing and cosmetics, >and medication to regulate the sleep, would follow. Then, for >subliminal learning, a language course under the pillow, plugged >into the brain, would follow. After some work, a sleep at >$1,000/night should be marketable. > >29. Many branches are mentioned in various articles as >suffering from overproduction as result of overinvestment: cars, >consumer durables, beer, cement ("Assessing the Downside of >Foreign Direct Investment" by Philip Bowring, IHT, 30-31 January >1999); cars, datachips, steel, chemicals, computers, >frigidaires, clothes, videos, washing machines ("Hva med >overkapasitet?", by Diedrik Kemkers). Then, there is the case >of the 80 million cars chasing 50 million buyers, see R. J. >Barnet and John Cavanagh, "A Globalizing Economy: Some >Implications and Consequences", in Mazlish, B. and Bultjens, R., >eds., Conceptualizing Global History (Boulder: Westview Press, >1993). > As a special case take the economy of a rich country, >Norway, now also in economic difficulties. Peder Martin >Lysestol sees four major factors: [1] increasing dependency of >the whole economy on oil, [2] increasing oil production in spite >of overproduction on the world market, [3] investment of oil >revenues in the finance economies of 31 different countries with >a drop in interest from 12.3% to 2.1% from the first to the >second quarter of 1998 alone; [4] a increasing focus on >Southeast Asia and Eastern Europe as markets for Norwegian >export in general. Evidently Norwegian decision-makers are not >well informed about the world economy. > That one implication is deflation is picked up relatively >few, an exception being Gary Shilling, "the deflation guru of >Wall Street" (see IHT, 30-31 January 1999). He mentions retail >prices in China, Sweden, Switzerland and Japan; USA should have >been added, but "the Consumer Price Index is inflated by at >least one percentage point." If the deflation could "catch down" >with the decrease in purchasing power lower down in society then >fine for the consumer, but companies would go bust. > >30. Robert J. Samuelson, in "Look Out, the Great American Boom >Cannot Last", IHT, December 30 1998, quotes Standard & Poor's >Index of 500 stocks that went up 27% in 1998 (as of Christmas >Eve), following 34% in 1995, 20% in 1996 and 31% in 1997. The >second thing that cannot last, according to him is "the national >shopping spree": "In 1998--consumers spent nearly 100 percent >of their current incomes". And he mentions amazon.com as an >example of a highly valued stock in spite of the fact that "for >the first nine months of 1998 it lost $78 million ($1.60 a >share) on sales of $357 million". > >31. As Surendra J. Patel expresses it in his "Financial >Turbulence in Southeast Asia: Seeking Solutions", World Affairs, >Jul-Sep 1998, pp. 65-78: "It is revealing that the total >"rescue" package offered by the IMF under its stiff >conditionalities comes to about the same sum which the foreign >investors insisted on being paid by mid 1998. Obviously, the >IMF package was intended to rescue foreign investors, and not >the East Asian countries. Here is a re-enactment of what >happened in Mexico" (p. 73). Or Brazil for that matter: "The >chief beneficiaries of these procedures will be U.S. bankers, >who hold much of Brazil's estimated $140 billion of short-term >debt. For their part, the U.S. banks have been unwilling to >provide Brazil some breathing room by converting their short- >term loans to long-term ones - perhaps because they are betting >the IMF-U.S. plan will step in and absorb the risk" (In These >Times, November 29, 1998). >
