G20 Summit: global currency, nationalize banks, IMF review of US, UK, Switzerland

Europe 2020 http://www.europe2020.org cites the above three actions as urgently necessary in an open letter to the upcoming G20 Summit participants. They have correctly forecast the unfolding events of the world financial crisis for several years now, and they believe that the world will have a decade or more of economic decline and political chaos unless these three actions are underway by this summer. The last of the three, the assessment of the U.S., United Kingdom, and Swiss economies by the International Monetary Fund seems the least likely to happen. Speaking for my own country only, can you imagine the blow that would be delivered to the national psyche by this event? It seems unimaginable from a domestic political point of view.

So let's keep an eye on the outcome of the April 2nd G20 meetings.

Our Sham Economy - by Krugman and Kunstler

See Jim Kunstler's latest posting

http://www.kunstler.com

"Under a Flourescent Moon"

and Nobel-winning Paul Krugman's NY Times article from last week

http://www.nytimes.com/2009/03/23/opinion/23krugman.html

Both these guys are saying the same thing (that a massive wealth has been lost from the U.S. economy and there is no way to avoid the repercussions), although Kunstler fleshes it out and makes it sound even scarier with a more rabid tone. I add this observation: this is not a case where we have lost the wealth and a counterparty has gained it, instead it's more like somebody who places a bet when they don't have the money to cover it. This wealth has disappeared from the world system (it actually never existed). All the worldwide economic activity that took place based on this wealth will now unravel.

Health Care, Energy, and Education

President Obama listed these as his top priorities in a press conference yesterday. I couldn't agree more, particular for the first two. Providing health care for every citizen is the duty of a civilized country. Beyond that it will allow great innovation in the private sector (how's that, you free market types) because suddenly the average Joe on the street won't have to work for a giant corporation just so his kids can go to the doctor. The promise of health care for all must also come with the warning that there are limits to what we can provide; any workable plan has to stay within its budget. But the basic idea of making this available to all is a huge leap forward for this country, and if Obama can accomplish it he will have done something that other presidents have not been able to do.

By choosing energy as a priority President Obama has correctly identified the Achilles' Heel of our society and economy. Unfortunately his focus is on finding new sources of energy and perpetuating the car as the main means of transportation. This is a mistake and I hope his administration realizes this quickly. What we should be doing is finding ways to conserve energy and move away from the car, replacing it with public transportation and social models that require less commuting. We should also begin scaling back our lives to greatly decrease our energy consumption.

Education is always a good idea and should be available to all, regardless of income. I don't think it will have the same importance going into the future as it has had in the past, because I don't think we can continue being an ever higher tech industrial society, due to limitations on energy.

How about we just do nothing?

So if the stimulus is a bad idea because there is no sound economy to return to, what happens if we just do nothing? Well a Keynesian infusion of government spending was proposed because the economy is no longer functioning; if we do nothing then we must expect the economy to continue in a disfunctional state and for this to get worse. Obviously this is also bad. The only other alternative that I've heard proposed is some sort of tax cuts, which I view as a much weaker version of the stimulus since they don't have nearly the same money multiplying effect. So tax cuts are pretty much the same as doing nothing. If we do nothing then at best case we're looking at 10 years or more of Great-Depression-like conditions, and at worst case a Soviet Union-style collapse. But I don't think the stimulus will save us because we do not have a sound economy to revive. At best case the stimulus may give us a couple of years of recovery until the price of oil goes back up again and then we'll be right back where we are now, at worst the stimulus may have no or little effect and will hasten the likelihood of the U.S. defaulting on its national debt. To be fair to President Obama, at least he's trying to do something to change the situation, and he's using an approach that would have worked in the past, but won't work now. We need a much more radical solution, and even if he comes to this conclusion he will have his work cut out for him convincing the american public.

What we need is an orderly transition into a new economy, one that takes into account the reality of steadily more expensive oil and the fact that we have maxed out the carrying capacity of the planet. This is not some utopian dream; if we can't make ourselves think like this then we will pay the price very soon as our environment continues to degrade and provides for less and less of our needs.

The sort of new economy we need will have a very large place for the small farmer, and will use a lot less energy. This is all very possible and could be a very good life for all of us, just different than what we're used to.

Less Can Be More

Let's be clear about this, an honest assessment of the future in this country calls for a significant decrease in our standard of living. This is because we have paid for our current extravagance with fake money from the housing bubble and with a retail economy based on cheap oil.

However, we still have enough resources for everyone to have a very good life, if we get sensible about how we use them.

First, forget about owning a car and driving all over the place, or about flying places for vacation. Also, there's no use or need for so many of us to be dressed in nice clothes sitting in a cubicle all day.

One of the first things that has to change is we have to become a lot more involved in raising food, maybe personally, or maybe by creating an economy that encourages more small farms. This isn't necessarily bad, I'd rather spend a day working out in the garden (even hard work, which it frequently is) than inside a cubicle. And with some of the ideas being developed in sustainable agriculture, farming doesn't require nearly as much weeding as in the traditional method.

National health insurance must be a top priority, I applaud President Obama for focusing on this. As you frequently hear, we are the only developed industrial country that does not have this. While our economy winds down and more and more people lose their jobs, this issue becomes even more important, since we have depended on employers to provide healthcare. Suddenly many more people will be uninsured.

If you've never read Scott and Helen Nearing's "The Good Life", this book describes an extreme example of the benefits of simplicity and self-sufficiency. Not everyone will want to take it to this level, but we've gone a long ways in the other direction as a society and we would greatly benefit from a return to the land.

Stimulate Demand for What?

Classical Keynesian economics says that when the public stops spending, creating a shortage of demand, the government should step in with massive public spending to get economic activity circulating again. As Paul Krugman demonstrates in his example of the baby-sitting co-op, hoarding behavior brings an economy to a halt but the expansion of money in circulation restores the system. To apply this to our economy, often times this can be accomplished by the Fed reducing the interest rate, making money easier to borrow. Right now the interest rate is effectively at zero, so we don't have this option. But if the government spends money, this can also have the same restorative effect.

Here's my question: the examples of the baby sitting co-op and of public works projects during the great depression were both cases where the underlying economy made some kind of sense. In the baby sitting co-op couples are trading baby sitting service, something that they all need. During the depression farmers were growing food and industry could create washing machines or electric power lines. Farmers wanted electricity and washing machines and were willing to trade food for them. Since the companies themselves did not need grain and eggs, they needed a functioning economy to make this exchange possible. But what about when you have an economy like today, which until recently was based on being able to sell a house for more than you bought it for, or being able to get food or a manufactured product at a cheap price in a foreign country and sell it in the U.S. for a little bit more after transporting it here using cheap oil?

Now demand is falling in our economy, but does it do us any good to restore it when we should not expect the housing market to return to the unsustainable pattern of the last few years, and when our import based retail economy is pretty much just another version of Newman and Kramer using the mail truck to drive bottles to Michigan where they got 5 cents more (surely you've seen this Seinfeld episode)?

When Do You Break the Bad News?

President Obama has been in office for less than two months and already he has many plans in motion and is projecting an image of confidence in the middle of an extremely shaky economic situation. Also, his plans assume and depend on an eventual recovery of the economy. The nature of this recovery has not been defined but it seems like it is assumed to be a return to previous "normal" levels. Does this mean 2006 levels for various indicators, the housing market, etc.? I'm not sure, but I'm pretty sure it doesn't mean a significant reduction in standard of living, or a drastic change in lifestyle.

However, it sure seems like we must expect a much lower level of consumption and personal spending, because the money that was driving all of this (the housing bubble) never really existed.

So the President's plans are going to meet an economic reality that is much worse than he and everyone else is expecting, although I give him a lot of credit for really trying to be realistic about his budget and numbers. The problem is, he happens to have arrived at a moment in history when a big change is required, and people aren't prepared to think this way.

So either he knows this and for political reasons can't say it yet, or he doesn't know this and will be blind-sided by it.

What Should the Recovery Look Like?

The idea seems to be out there that if all goes well, in a year or two or maybe five we should see the DOW return to above 10,000, housing prices should gain back some of the 30 percent of value they have lost, unemployment should be below 5 percent and people should start buying cars, houses, and stuff again just like before.

This at least implicitly assumes that the terrible situation we see now is happening because our economy is merely out of adjustment and with the apropriate corrective measures it should be humming right along again. John Maynard Keynes said something similar about the Great Depression - comparing it to an automobile he said that we were having "magneto problems" but that the basic engine was sound. Now some 70 years later I don't think that we can say this anymore. The basic system is not sound, in fact it is rotten to the core and is a sham confidence ponzi game that has been going on for at least the last 30 years due to money created through credit or the last 60 years due to the widespread availability of cheap oil.

So for years we have been living with this dislocation and enjoying ourselves, but now reality is intruding.

Some have pointed this out in a limited way. Paul Krugman mentioned the other day that the problem with all the plans for helping the banks is that no one seems to realize that the bad assets are actually bad. Instead they expect to get value for them at some point, somehow, so that these losses won't have to be put on the balance sheets.

But the problem is more than just bad mortgages and credit default swaps. 70 percent of the US economy is based on consumerism: buying and selling stuff to each other. This does not create value, and is not the basis for a sound economy.

So a realistic assessment of what the recovery should look like might be:

- full employment at 20 hours a week
- everyone has somewhere to live (shelter)
- everyone has food
- everyone has health care
- everyone can get where they need to go by public transportation
-local agriculture is the norm rather than giant agribusinesses, and everyone has access to community garden land