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.