How We Got to Our Current Economic Problems

A little while ago, Nature (582, 461) ventured an item on our economic problem, and it is of interest to reflect on this. Most economic presentations, especially those that concern politicians, involve microeconomics: what happens to individual, families, businesses, etc. That is natural because that is where the votes lie, and to some extent it is what politicians can control. The main point of the Nature article revolved around macroeconomics, which involves cross-border capital flows, the role and behaviour of central bankers, the role of global financial markets, and the role of the US Federal Reserve, which, despite its grandiose name is actually not a government owned or controlled institution. The owners of the Federal Reserve are effectively members of the plutocratic class that own the economies.

In 1944, Franklin D Roosevelt decided to make some attempt at fixing the macroeconomic situation and he invited qualified experts to set up a useful system to form an international financial system that represented the needs of diverse geographical regions with diverse economies. Of considerable interest, bankers and financiers were barred, as Roosevelt did not trust them to put aside their own interests. FDR understood them very well. The result was the Bretton Woods system, named after where the procedures were devised. This arguably worked well, although I have little doubt it could be criticized.

In 1971 Richard Nixon dismantled that system and replaced it with, er, not much. A special place arose for the US dollar, which, because the US economy was so large that no single transaction would appear on the overall “balance sheet”, this was the only real currency that was considered to be stable. The idea was, if there were anything resembling an idea, let the market rule. A subsidiary idea was (although this was never openly stated) it gave a special position to the Federal Reserve, who could print what they felt like printing. The market is the proper place for fixing the price of things that are traded according to available supply and demand, and each of those is free of external constraints. The concept is, if something is in short supply, the price rises and new suppliers enter the market. However, if a cartel can control supply, say, as with OPEC in the 1970s, price rises get out of hand, but great profits are made by the cartel. Currencies can be open to manipulation. The very rich can withhold to raise the price and sell at huge profits when more is needed to settle other trading. You see a large number of very rich people who got that way by trading currencies, generally through inside knowledge of what is going on in the broader market. However, that trading does not create anything of value; it merely skims from those who do, so such trading is little better than a bunch of parasites who also precipitate the financial crises we seem to have gone through since 1971. Of course, on the other side of the argument, the value of a nation’s currency should not be set by politicians with other agendas, because long-term, only too many suffer.

This market rules system has led to much greater world trade, it has raised the living standards of many, but in the western world it has done this by permitting the very rich to become ridiculously more wealthy while punishing what we can loosely call the working class. Manufacturing has been shipped to the lowest cost labour, and the multinationals from a limited number of countries built manufacturing complexes, often with very little regard to the health of the local population. Pollution occurred at levels that would be totally unacceptable in the countries where the companies have headquarters. I recall driving through Cubatão, which is just inland from Santos in Brazil, one evening in the mid 1980s. One chemical plant was pouring out clouds of white stuff, which I provisionally guessed was phthalic anhydride. The health effects of this sort of pollution on the locals were terrible, there was no excuse for this, but because general safety and pollution control was absent, the product would be cheaper. So the net result was that a surprising amount of manufacturing fled the West to places that did not care, while workers in the West joined the unemployment queues.

Thus fortunes for the very rich increased dramatically, but at the expense of the not so rich, many of whom became the new poor. The real money was made by bankers, and as they grew richer, not by doing traditional banking but by selling financial “products”. After the 2007-2008 crisis, you might think things improved, but no, the world is still flooded with junk bonds, leveraged loans, and huge debt. You might have expected the US Federal Reserve to act responsibly and limit the potential for excess credit, but after 2009, why, no, they allowed the private credit market to expand to $US 9 trillion. Since a certain virus struck, the Federal Reserve has made a massive cash injection, but where has this gone? Largely to bail out what the Nature article calls “Monetary chicanery”. In short, the bankers pass go and again collect 200 billion.The question then is, can markets provide affordable health care, affordable housing, affordable higher education, security in times of crisis? I leave you to find your own answers, but I suspect the answer will often be no. Then there is the question, what will happen to all this created money? So far it is sitting harmlessly on ledgers, but what happens if enough of the rich decide to cash out at the same time? Who saves the poor, and the innocent? This is a system that needs fixing, but where do you find the fixers? Not from those who have the resources to fix it because they are the major beneficiaries.

6 thoughts on “How We Got to Our Current Economic Problems

  1. The relocation of production and services from rich countries to poor countries, helped to half billion Chinese and probably the same number of Indians and other Asian people to cease to live in humiliated poverty. The truth is the working class in the US and Europe paid the price by reduced standard of living relative to other sectors of world population. 
    The Chinese and Indian population didn’t get the same working conditions as the workers in US and Europe, but still their life has improved dramatically, when getting enough to provide food and shelter for their families. The difference between starving and not starving is infinite, while the difference between big or small television set is limited. 
    Of course the super rich have many faults. They don’t take responsibilities beyond narrow interest of their businesses. There are exceptions, but very rare. The solution cannot be to expect from the super rich to be better, than any ordinary homo sapiens is. The solution has to be by political intervention of the representatives of all the society. They are responsible to restrain the brutish force of the super rich. Unfortunately in the US it is not happening at all, and in Europe it is not happening enough.  
    It is easy and popular to blame the bankers, speculants on stock exchange, etc. Much harder is to point on the real problem. The monetization of the US politics. Even a president with the very best intentions have no capacity to overcome this obstacle. The result is, what we see in the political scenery. And it is irreparable within the existing system. 
    Historically no political leadership,made a system change that would weaken it’s own power. Only revolutions do it. Are we ready for this? 

    • Thanks for the comment. Fully agree with your first two paragraphs, except that to some extent it is the rich should have some responsibility for the poor conditions because they shift their manufacturing there and they know about health and safety issues. To the extent they ignore hose to make more money they are part of the problem. It is good to help the poor, but not so good by converting your middle class to become the poor.

      My issue with the bankers and speculators is that they could be part of the solution for the working class if they put their minds to it, but it is easier to make money the way they do, and it does not help the general economy.

      • The billioners and the super rich, they do take responsibility, after all they are part of the society,

        https://www.forbes.com/sites/hayleycuccinello/2020/03/17/billionaire-tracker-covid-19/#2d225ed57e69

        But, there is a system problem and not individual philanthropy problem. After all it is all about relocating resources, and why would be an individual, be it even a billionair better in it than a politician or any other person. Remember, even a billionaire has only one bottom and one mouth, so most of his resources he has to relocate to the economy and society.
        The system problem is capital-market economy, based on fierce competition of everybody against everybody, and it can take very ugly features. On the other hand any other system, without competition, as Merchantelism that was based on monopols, or Communism, that was state monopoly, was much worse in allocating resources, than the system based on competition.
        Still competitive economic system may be based on mutual guarantee. But the question will always be, where this mutual guarantee starts and where it ends? Is it between the capitalist and his employees, or the capitalist and his co citizens?
        Then the well being of the Chinese worker and the middle class is lost for you. Or maybe mutual guarantee for well being is between the whole human rase, then to give up the second or third dwelling and car should be fair enough, when against it stands the nutrition of Chinese worker and his family.

  2. EugenR just because you are part of society does not make you responsible. Justification for that can be seen in the way many respond to the current virus problem. There are always individuals that do not behave in the best interests of the whole, and billionaires are more likely to be in this set, if for no other reason than you have to be very focused on your own issues to get to be a billionaire.

    Agreed about allocation. The basic problem in economics is, in my opinion, how to reward everybody fairly.

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