End of neoliberalism = stand off between deficit and surplus countries – We saw in the previous chapter that the financial crash of 2008 signals the fact that the neoliberal economic paradigm has reached the end of its useful life. We have seen how this paradigm is based on a fundamental division of the world economy: on one side the ‘neoliberal’, or ‘deficit’ countries, which have shifted production to countries with lower wages and lower costs – on the other side these latter countries in which production has been shifted, the ‘surplus’ countries (also called ‘neo-mercantilist’ by some analysts). The former keep on posting trade deficits year after year, thus accumulating unsustainable debts, while the latter keep on posting trade surpluses and accumulate the obverse side of the un-repayable debts, toxic assets. This arrangement has loaded the international financial markets with fraudulent titles, resulting in the financial collapse of 2008. The neoliberal paradigm is by its very nature structurally unsustainable, and the collapse of 2008 has made clear that any more expansion of the world economy based on these premises is no longer possible, as it is pointless for the creditors. At present the surplus countries are no longer very happy to export their goods and to invest the money thus earned in the American dominated financial markets, as they know that their trading partners are now maxed out. Giving any more credit to them means simply giving them licence to create money for the financial markets, and basically service their debts with asset price inflation, essentially by debasing their currencies, as interest rates are now very low. Repaying the debts is pretty much out of the question, except by selling off assets, something that the weaker deficit countries (what we have called the ‘periphery’) are increasingly being forced to do. At this point what we are seeing is a stand off between the stronger debtors (the hegemonic deficit countries, or the ‘centre’) and creditors (the surplus countries). The latter at this point have no interest in maintaining the current arrangements (neoliberal paradigm under American hegemony) while the hegemonic ‘neoliberals’ are trying to hold on to it for as long as possible. The stand off, which in economic terms translates into what has been called ‘secular stagnation’ consists of four aspects, already outlined in the previous chapter (The Neoliberal Economic Paradgm) and which I will now recall, starting from the words of Paul Mason (Post Capitalism p. 21):
‘In the wake of the 2008 crisis, the [global]current account imbalance has fallen back – from 3 per cent of global GDP to 1.5 per cent. …The conditions for this are stark: that China does not return to its old rate of growth, nor America to its old rate of borrowing and spending…..Post 2008, the shrinking current account deficit has persuaded some economists that the risk posed by the imbalances is over. But in the meantime another key measure of imbalance in the world has grown: the stock of money held by the surplus countries in other currencies – known as foreign exchange reserves. While China has seen growth fall back to 7 per cent and its trade surplus with the West reduced, its foreign exchange reserve pile has actually doubled since 2008 – and by mid 2014 stood at $4 trillion. Global foreign exchange reserves had likewise grown from under $8 trillion to approaching $12 trillion by late 2014.
The [trade]imbalances always posed two distinct dangers. First, that they would flood the Western economies with so much credit that the finance system collapsed. This happened. Second, more strategically, that all the pent-up risk and instability in the world gets pooled into an arrangement between states, over debt and exchange rates, which then collapses. This danger still exists.[Paul Mason here refers to the collapse of the current, dollar dominated, international monetary system]. If the USA cannot go on financing its debts [mainly with QE now that toxic assets are no longer trusted and real growth is nowhere in sight] then at some point the dollar will collapse. Nevertheless, the mutual dependence of China and the USA and, at a smaller scale, of Germany with the rest of the Eurozone, ensures the trigger is never pulled. All that’s happened since 2008, via the build-up of foreign exchange reserves, has to be seen as the surplus countries taking out ever larger insurance policies against an American collapse’.
We now must expand on the four issues touched upon by Paul Mason
1) imbalances reduced at the price of stagnation -The surplus countries no longer trust their debtors and therefore are cutting down on the purchase of financial titles representing consumer credit to neoliberal countries. This results in decreased exports and has partially reduced trade imbalances, which have been halved from 3% to 1.5% or world GDP. The price to pay for this is a long standing economic slow down for both deficit countries (forced to do austerity in order to contain trade deficits) and surplus countries (unable to go back to their previous rates of export based growth) – hence the present state of the world economy which has been called by Larry Summers (Treasury Secretary in the Bill Clinton Administration) ‘Secular Stagnation’. We have thus entered a phase of transition, in which the austerity that has been implemented to various degrees in the deficit countries, while reducing trade imbalances, also reduces the volume of economic activity across the board, causing recessions, poverty, and failure of public and private finance in various states.
2) Saving glut stored in gold and real assets – Having reduced the credit that they are giving to their customers, surplus countries are now sitting on a pile of cash, invested less and less in the stock market (in the likes of subprime mortgages, derivatives etc.). This money is now increasingly being kept either in real assets (buying up prime real estate, as well as public and private assets of the neoliberal countries, but also the so called ‘land grab’ in third world countries, and finally more liquid assets such as art, or even crypto-currencies) or in assets that are, officially or unofficially, part of the international monetary system: foreign exchange reserves (government bonds) and gold reserves. Thus they are buying up an insurance policy against the collapse of the dollar, but also preparing for a new monetary system…
3) Neoliberal strategy– At the same time the ‘core’ neoliberal countries (or rather the elites ruling them) have a strong vested interest in maintaining in place the current ‘arrangements between states’, in other words the current international monetary system based on the dollar, and its consequent geopolitical order. They strive to maintain it on ‘life support’, with the familiar combination of a) loose monetary policy (low interest rates, QE etc.) for the financial markets to keep investors happy mainly with capital gains (asset price inflation) and thus avoid capital flights and b) austerity for the real economy, whose main objective is to keep imports, and therefore trade deficits, under control, and this way maintain the credibility of the current international monetary arrangements (the dollar standard). Austerity is imposed more strictly on the periphery (with its corollary of asset price deflation, bankruptcy and sale of assets to repay creditors). There is another, more ominous and non-economic measure that is being applied to keep neoliberalism on life support: c) making sure that there is no alternative (i.e. destabilising both politically and militarily those countries, such as the ones with strategic positions along the BRI projects, that might coagulate around Russia and China to set up an alternative trading and monetary block).
4) Surplus countries’ strategy– there is an additional factor, coming from the surplus countries, which also contributes to keeping neoliberalism on ‘life support’: their vested interest in the current system (as their elites, but also their governments, have huge amounts of money invested in it) and in an orderly transition has made sure that so far they haven’t pulled the trigger and have actually cooperated to maintain this very precarious equilibrium. But we must not lose sight of the fact that, although at the moment they are co-operating in keeping the current monetary system in place, at the same time they are also working on the creation of an alternative one.
Stand off = transition– Basically since 2008, and with considerable acceleration since 2016 (the year of Brexit and the election of Donald Trump) we have entered a phase of transition like the one entered after 1971. Back then the transition was ushered in by a default on the promise, by the US monetary authorities, to convert dollars into gold, now there has been a default on the fraudulent promises of the US dominated financial system. Both defaults gave rise to a phase of sustained inflation, in the first case consumer price inflation, as the Keynesian paradigm in operation during the 70’s was based on the real economy, in our current case asset price inflation, as neoliberalism is based on the financial economy. The big difference is that while post-1971 American hegemony was still alive and well (only its economic hegemony had come to an end) and therefore its policy makers were able to engineer a new paradigm which would allow them to maintain control of the world economy by controlling its financial flows, nowadays American hegemony seems to have spent all its potential: economic, financial and increasingly also military and geopolitical.
As the USA and the small elite ruling the West are fast losing their hegemonic position, the situation is now much more complex than in the 70’s, because we are in the middle of a paradigm change which involves not only the necessity for an economic re-set, but also an hegemonic transition. A new economic order cannot be arranged, as it was done back then, in an underhanded way, by a single country that, imposing its will on others, slowly reformed and basically twisted the existing arrangements while formally maintaining, in large part, the same institutional framework. In the current situation there are many actors determined to influence the final outcome, and the institutional arrangements will have to be radically changed if not completely replaced. In other words, we cannot maintain the Bretton Woods institutions (IMF, World Bank, WTO, UN, EU etc. etc.) and twist their remits yet again: more substantial changes are needed. Therefore the turmoil that we are seeing on the world stage is nothing less than a big ‘renegotiation session’ of world economic and monetary arrangements. In parallel to this economic ‘negotiation’, we must not lose sight of the fact that a more ominous geopolitical ‘negotiation’ or ‘hybrid war’ is also taking place, increasingly resembling an enhanced cold war scenario. The media only report individual aspects and episodes of both ‘wars’ (mostly in a biased and misleading manner), but never hint at the bigger picture: a basic overhaul of the current international order is taking place bit by bit, with all the dangers that this situation involves. As a result, we will be lucky if this turmoil is eventually resolved without any catastrophic damage, but the very least damage we can expect is an assortment of proxy wars and destabilisations already under way, along with the fact that a proper economic recovery is not going to happen until this process is completed.
Summing up: transition = hybrid war – the new balance of power has not been decided yet; the hybrid war we are witnessing, both economic and geopolitical, will decide it. Hence we can expect more of this enhanced cold war for the foreseeable future: trade wars, proxy wars, breaking away from current institutional arrangements etc. – at the same time alternative structures/arrangements are being built. We must now try to understand what this turbulent phase of transition may have in store.
PART 1 – The Transition War Game – Players and Strategic Options
Establishing the players and their options– This ‘enhanced cold war’ scenario is by its very nature complex and confusing, and it is further complicated by the inevitable deceptions, ambiguities, and about turns that are part and parcel of these ‘war games’, and will no doubt happen more and more frequently before the dust finally settles. However, we can simplify what is happening, and thus hope to gain a basic understanding of it, by grouping the main players and defining the basic strategic options of the game. We have already defined the main geopolitical actors: creditor,or surplus countries,vs. debtor or deficit (or neoliberal) countries. These latter are further divided into ‘core’ or hegemonic vs. ‘periphery’ or weak countries. Now we need to define the social actors fighting for control within each country, who will be pulling them in one direction or another. One very effective way to visualise the situation is the famous elephant shaped graph created by economists Christoph Lakner and Branco Milanovic (2013), which shows the changes (increase or decrease) in income experienced by the world population during the neoliberal era (from 1988 to 2008), as a function of the initial (1988) income distribution. We have on the left side of the graph (the hump of the elephant) that part of the world population that started with low incomes, basically the masses of the third world countries – then in the middle part of the graph (the frontal part of the elephant) we have the middle income part of the world population, mainly the middle and working classes of the advanced countries – finally on the right hand side of the graph (the trunk of the elephant) we have the elites, the majority of which are the elites of the West.
In the words of Paul Mason (Post Capitalism p. 102-103): “Between 1988 and 2008 – as the chart shows – the real incomes of two thirds of the world’s people grew significantly. That’s what the hump in the left hand side of the graph proves. Now move to the right-hand side of the graph: the top 1 per cent also see their incomes rise, by 60 per cent. But for everybody in between the super rich and the developing world – that is, for the workers and lower-middle class of the West – there is a U-shaped hole indicating little or no real increase. That hole tells the story of the majority of people in america, Japan and Europe, they gained nothing from capitalism in the past twenty years. In fact, some of them lost out. That dip below zero is likely to include black America, poor white Britain and much of the workforce of southern Europe. Branko Milanovic, the economist who prepared these figures of the World Bank, called this ‘probably the profoundest reshuffle of people’s economic positions since the industrial revolution'”
From this picture we can visualise the main players and guess what their main objectives are going to be: on the left hand side, the rising back of the elephant represents the emerging countries about to set up an alternative system, what we have called the ‘Chinese Dream’ – or, for what concerns the smaller countries, eager to join it; on the U-shaped right hand side – especially at the bottom – are the impoverished working and middle classes of the Western countries, increasingly disgruntled and prone to upset the system by voting for whoever promises substantial change. They (the disgruntled, or ‘deplorables’) therefore constitute a factor of high instability and a very fertile hunting ground for whoever has the desire and the ability to win electoral contexts in the West. Winning over this disgruntled majority is now the key to gaining power in the West, and thus to shift the position of country after country and this way contribute to shaping the bigger war game. The people who aspire to shape the game are mainly to be found in the last part of the curve, the vertically rising tip of the trunk, which is the trickiest one. Obviously the people represented by the tip of the trunk, who have seen their fortunes rise dramatically under neoliberalism, would love to maintain the status quo, but they realise that their position is seriously endangered by the near collapse of the system (being increasingly pushed over the edge by both the emerging countries bidding for a more substantial international role and the disgruntled masses of the West demanding change). Hence, a part of this elite has come to the conclusion that it’s best to opt out of the neoliberal paradigm before it’s too late, and recycle themselves into a new world order which they could still contribute to shape in a substantial manner, while another part is engaged in a stubborn and reckless (as much as futile) defence of the status quo. Therefore the elite is split into two, one part wants to exit the neoliberal paradigm and the other wants to stick to the status quo. This split doesn’t necessarily follow income distribution, although we can imagine that the top 0.1 percent might be heavily biased towards maintaining the status quo. We cannot see the split from he graph, but we can gage it by reading in between the lines of the official news. To make things more interesting, the part of the elite that wants to exit neoliberalism can itself be subdivided into two subgroups, depending on whether they belong to a strong or a weak country but for the moment we will consider it as one.
Once defined the main players and their interests, it is not difficult to guess their strategies. The first part of the curve, the rising hump, represents the emerging countries and the option here is clear: to join the Chinese Dream (give and take some resistance in some countries due to past geopolitical alignments). The situation gets more complicated for what concerns the advanced countries, the declining front of the elephant (the masses) and the rising trunk (the elites). For these countries there are basically two options: either to cling to the status quo or to move on, exit the current paradigm, and accept a multi-polar world order. Therefore the basic alternatives for the West are: ‘Status Quo’ (or secular stagnation) vs ‘Exit’. Although the former represents a well defined and constrained scenario (given the state of bankruptcy and lack of further possibilities to expand) the latter, Exit, is much more difficult to define, and can vary considerably from country to country. However, some basic guidelines are the same for all concerned, and some others are similar for countries of similar geopolitical strength. Therefore, we could further split the Exit option into two sub options: one for the strong and one for the weak, but for the moment we will consider it as a single option. Let’s now examine these three alternatives:
1) Status Quo (or Secular Stagnation) – this means maintaining the neoliberal paradigm on life support for as long as possible (for Europe this involves maintaining the EU and the single currency) in order to preserve the dollar standard and, with the economic advantage that this arrangement affords (the ‘exorbitant privilege’ of issuing the main international reserve currencies), try to reverse the waning hegemonic position by means of hybrid – and possibly also proper – war. This is essentially a strategy aimed at biding time for the current monetary system while attempting to resolve the impasse with extra-economic means (despite the fact that Russia from time to time feels compelled to remind that a military solution would lead to mutually assured destruction). In economic terms this strategy means: containment of trade imbalances via austerity while trying to generate growth (perhaps with some technological breakthrough), at the same time reducing foreign dependency (with expedients such as fracking) and pushing general reforms designed to decrease the cost of doing business in the West (also aided by a massive influx of immigration to lower wages even more) so as to re-onshore some production. Meanwhile the accumulated debt is more or less ignored, hoping that inflation and growth will eventually reduce its burden. This is the preferred option for a still dominant part of the Western elite but totally unpalatable for the masses in the West, and not particularly appealing for the creditor countries either. Therefore it is likely to encounter increasing resistance as time goes by.
2) Exit (=Brexit, Trump, ‘populism’) – this means exiting neoliberalism and cutting economic and geopolitical losses while still on time (= negotiating a new world order from a still relatively strong position). This option is increasingly taking shape and gaining momentum as debtor countries, unable to generate enough growth with the previous option, give in to political pressure from below (and lack of cooperation from the surplus countries apart from the bare minimum) and start to pull out of the system, resorting to protectionism and inflation in order to restart the economy. This strategy is still rather undetermined at the moment as, besides empty declarations such as ‘Brexit means Brexit’ and the protectonist stance of President Trump, it is not quite clear how the ‘populist’ advocates of change plan to resolve a difficult economic situation. However, once made allowances for negotiating tactics and for the necessity to deceive the counterparts (and manipulate the masses), if we use economic necessity and the past record as the basis for our reasoning, we should be able to outline the likely course of action implied by this strategy, always keeping in mind that the hegemonic neoliberal countries will be acting rather differently from the non hegemonic ones (core vs periphery). I will endeavour to outline the basic elements of this strategy in the second part of this essay.
3) the Chinese Dream– this is the alternative trading and currency network being developed by a group of countries led by China. I have examined China’s projects at length in section 2 – the relevant issue for our purposes here is to establish what position the Western countries will take vis a vis this option. Joining the Chinese (or Asian) Dream ‘tout court’ is an option more suitable for the less influential countries (if they are allowed to do it by their more powerful neighbours); for the dominant ones it is more a question of threats, tactics and negotiations of various type in order to arrive at a new world order maintaining as much hegemony as possible (gobbling up their weaker neighbours is also part of this strategy). To sum up: this alternative network is for the larger emerging countries to build, and for the smaller but independent (= able to escape being captured by foreign interests) ones to join. It is also a beacon of hope for the Western countries, as the exit option would be much more viable if accompanied by strong cooperation with this emerging network – but before they can join in, they need to escape the current arrangements. This means that the second and third options (‘Exit’ and ‘Chinese Dream’) can be complementary, while the first one (Status quo) is decidedly antagonistic to both. Seen from the point of view of the West, the second and the third option can be summed up as one: Exiting Neoliberalism and variously positioning themselves in relation to the Chinese Dream.
Long term outcomes – As the long term austerity entailed by the first option is increasingly producing a negative sum game in economic terms, and therefore encountering ever more opposition, there can be little doubt that it is only a matter of time before the West and other countries dominated by it finally manage to relinquish the current economic order. If this move away from Neoliberalism and towards the Chinese Dream is going to eventually produce a general agreement resulting in a new unified world order (globalisation 2.0), or lead to separate blocks of countries (two or more), this is something that only time will tell. In the first case, the leading economic and military powers (the USA, China, Russia and their main allies) eventually will come to some kind of an agreement to share the management of a new international monetary system, based on a basket of currencies, cancelling a large part of the accumulated debts and negotiating some sort of a mechanism to reduce or otherwise deal with trade imbalances. This outcome is quite possible at some point but the time is not ripe yet. In the second case, whether we may end up with two or more rival blocks, what type of relations they will have with each other and what type of economic arrangements each of them will have – it is a completely open question. It will all depend on the outcome of the hybrid war that is taking place now. This is all we can speculate regarding the long terms prospects – for now we must stick to our main concern: the current phase of transition and the fight between its alternative options.
A fourth possibility: financial collapse: Before we analyse in detail the first two options (Status Quo vs Exit) fighting it out mainly in the West and in those parts of the world directly under its sphere of influence (while the more independent part of the world is quietly building up the Asian Dream), we need to quickly address another possibility, which many people fear and many analysts evoke both in the mainstream media and in the alternative blogosphere: that of another imminent financial collapse. If this happens, how would it affect the current ‘war game’ and how would it relate to the options outlined above? The brief answer is: this is not a very likely possibility, but if it does happen, it would end up with an accelerated and unplanned exit, basically an emergency exit – therefore this possibility is a sub option of ‘Exit’ – (if you are not interested you can skip directly to PART 2)
Financial collapse – continued: This ‘unplanned option’ or incident could happen as a result of three courses of action: attempting to revive neoliberalism, implementing ‘QE for the people’ policies, and by miscalculation in managing the status quo. In addition, if the surplus countries, exasperated, decided to pull the plug and dump their stakes in the Western financial system, this would also lead to a financial collapse. These are all theoretical possibilities. In practical terms, the only one that we need to fear is the possibility of a collapse triggered by a mismanagement of the ‘status quo’ option.
a) Collapse triggered by an attempt to revive the neoliberal paradigm– there is a theoretical possibility that the Western authorities decided to revive the neoliberal paradigm and the current American dominated globalisation by yet again promoting another debt based expansion of the world economy. This possibility is highly unlikely but we need to mention it before we can proceed with examining the more plausible ones.It is unlikely to happen because our policy makers are fully aware of the fact that starting all over again a new boom and bust cycle based on credit (and assuming that the surplus countries would still be willing to finance it), could only end up, sooner rather than later, with another major financial collapse, and this time it would almost certainly be the terminal one.
b) Collapse triggered by a wave of ‘QE for the people’– Many people are asking their governments to end austerity and to revive growth not with credit but with QE for the people. Unfortunately this option is similar to the other avenue (increasing debts) and, in a structural situation of insufficient national production, it would lead to disaster even quicker: it would lead to bigger trade deficits not financed by the surplus countries, but financed directly by creating money. As the US (just to name the biggest offender) has already $ 6 trillion of foreign debt, this is likely to result in a balance of payments crisis and the necessity to pay in hard currency (the Yuan at this point? Or gold?). QE for the people can be feasible only as part of a change of paradigm (or Exit) strategy which will be described later. Basically both starting another boom and bust cycle based on credit, as well as opting for a ‘QE for the people’ alternative without any structural changes in the economy would lead to another, this time terminal default, after which the countries involved would have to figure out how to re-onshore production and become self sufficient again.
c) Collapse triggered by mismanagement of the status quo– Apart from deliberate – if misguided – but unlikely policies, another financial collapse might occur by miscalculation. Our policy makers, in a desperate attempt to hold on to the current world order, are at the moment walking a very fine line (and they have been doing so for the past ten years) between creating more debt (and asset bubbles) in order to revive the economy, while at the same time chocking it with austerity in order to prevent another financial collapse. As this is an unprecedented experiment and they are, by their own admission, navigating in uncharted waters, things could indeed get out of hand. In addition to walking this fine line, our policy makers are also heavily involved in their own internal war against the ‘exit’ faction, and this adds another element of serious instability. Therefore the risk of another collapse cannot be dismissed and should not be overlooked.
d) Collapse due to the surplus countries pulling the plug– This is unlikely for the simple reason that the surplus countries have a lot of money invested in the global financial centres and don’t want to compromise the value of their assets. But there is also a deeper and more strategic reason: as they are in the process of building up an alternative network, the least thing they need is disruption. As they are building up a new order, they need order, not chaos. Their rival block, the West, is in an advanced state of decline and undoing itself by means of self inflicted austerity (as we will see), therefore from their point of view the best strategy is to simply let the current hegemonic arrangements unravel of their own accord, and take over when the time is ripe. But we cannot completely rule out that the ‘pulling the plug’ option may be triggered as a result of the hybrid war that is taking place. At some point they might find necessary or expedient to resort to this ‘nuclear’ option in the face of Western provocations. I don’t see any particular signs of this happening for the moment, but it cannot be ruled out.
Resulting scenarios: If another financial collapse should happen either by deliberate policy or, more likely, by mistake in the difficult process of managing the status quo (as well as the internal wars between ‘status quo’ and ‘exit’ factions), the Western governments no longer have the money to mend it with another bail out. This is how Paul Mason (in the book Post Capitalism) puts it:
‘Meanwhile, lacking any alternative model, the conditions for another crisis are being assembled. Real wages have fallen or remained stagnant in Japan, the southern Eurozone, the USA and the UK. The shadow banking system has been reassembled, and is now bigger than it was in 2008. The combined debts of banks, households, companies and states has risen to $57 trillion since the crisis and stands at nearly three times global GDP. If there is another financial frenzy followed by another collapse there can be no second bailout. With government debts at a post-war high and welfare systems in some countries crippled, there are no more bullets left in the clip – at least not of the kind fired in 2009-10. (p. 5)
In other words, the West has no more wealth to tap into in order to mend another financial collapse (by means of a bail out followed by austerity) without causing serious social unrest. Hence this event, by whichever cause triggered, would be equivalent to an accelerated and disorderly way towards the exit option, and therefore it would be a lot more damaging than a proper exit, especially for the weak nations and classes. To say the very least, it would be better to re-onshore some production before this event occurred as it can only end up with three possibilities, all implying default and the necessity to go back to paying one’s way in the world: a) bail in with fire sale of assets (this fate would most likely be reserved to the weak countries); b) bail out by inflating the currency followed by having to pay for future imports in a new hard currency or gold; 3) bail out operated by the surplus countries, basically by China, followed by the establishment of a new international monetary system.
a) bail in – along the lines of what happened in Cyprus in 2013, where the balance sheets of bankrupt banks were restored by using savers’ deposits above 100,000 euros. This sort of ‘remedy’ would cause enormous social unrest and cripple the economy even further, as it would destroy the trust in the banking systems of the countries involved, resulting in capital flights and plunging these economies into a deflationary spiral, ending up with widespread bankruptcies (both in the public and private sector) and fire sale of assets. Needless to say, if this happened to the USA it would spell the end of the dollar dominated international monetary system. However, normally bail-ins are imposed on less independent countries, for the purpose of asset stripping them and conveying the relative profits and capital flights to the financial system of the dominant powers, and this way help to sustain it for a while longer. This would not be a path that countries at the top of the financial order, such as the UK and USA, would choose or would be forced to embark upon. The eventual outcome of all defaults is that the debtor countries involved eventually need to reindustrialise and live within their own means (as the creditors are no longer willing to finance their trade deficits). However, bail-ins severely disable the economies of the defaulting countries, by destroying both their real assets (that are sold off to the creditors) and their financial assets, that end up leaving due to the unreliability of the banking system (produced by the very bail-ins), this way preventing the possibility of rebuilding the economy. This is the opposite of an ‘Exit’ option because the country involved never exits the state of dependency, as interest payments pile up and economic recovery is impossible (due to the severe loss of assets), thus the debt is never repaid. We can rule out this possibility for the UK, but it is a serious danger for many smaller and less independent countries like Greece if they are not able to disengage themselves as soon as possible from their current geopolitical ties. This could be the lot of many weak countries even as their partners choose the ‘Exit’ option and avoid a financial collapse. We will examine this possibility later.
b) Bail out– Countries at the top of the international financial hierarchy normally inflate their currencies in order to pay for their debts. They repay them in a devalued currency, which is equivalent to a partial default. This is the opposite of a bail in. It can only be done by countries at the top of the world financial hierarchy, that have debts denominated in their own currencies. This option is not available for individual eurozone countries, but it can be pursued by the European Central Bank on their behalf, although it is highly unlikely that the ECB would embark in this course of action. In alternative, individual eurozone countries could exit the single currency and re-denominate their debts in their own currencies. If they still have enough industrial production this course of action is feasible, otherwise they need to find allies who would agree to pay for their imports. The bail-out option has already been resorted to by the main deficit countries, in the aftermath of the 2008 collapse (bailing out their financial systems by creating money as government debt, and then reducing such debt with QE), therefore the countries in question won’t be able to do it again and still maintain the current international monetary arrangements (the dollar standard). So far they have been inflating their financial economy (asset price inflation) to keep on attracting foreign capitals while at the same time endeavouring to maintain the credibility of their currencies by cutting down on government spending (austerity). However, the next time that another major financial collapse occurred, they won’t be able to get away with the same trick, as they no longer have enough welfare state to cut and sell off (without serious social unrest) or much more leeway for keeping inflating already completely unrealistically valued assets (out of all proportion with the real economy). Technically speaking they can do it, as their obligations are denominated in their own currencies, but they wouldn’t get any more credit and it would spell the end of the dollar standard. They would have to work out an industrial plan, re-onshore production and live within their means. This is equivalent to embarking on the ‘Exit’ option, but without preparation and without a strategy, in a situation of emergency and disarray, therefore is it highly undesirable.
c) IMF bail-out – A third possibility, if another financial collapse should occur, would be to use the IMF in order to operate a bail out of the global (American dominated) financial system. If this happened, the help of China’s huge reserves would be needed, in order to back up the IMF’s special currency (at the moment only virtual, not used in actual transactions) called SDR or Special Drawing rights. This would also result in the end of the dollar standard, as China and its currency would take on an very important, if not predominant, role in a new international monetary system which would have to be negotiated. This would pave the way for a more formal re-organisation of international economic governance, possibly with a new Bretton Woods-style conference, to establish new explicit rules on exchange rates, trade imbalances etc. This option might be desirable for China and other surplus countries but not for the people in power in the West, and therefore we can expect that they will do their best to avoid it. In addition, it must be noted that at bottom this would be another version of the Exit option, because it would involve exiting neoliberalism and the necessity to go back to reindustrialisation, self sufficiency and living within one’s means.
In all three scenarios a new financial collapse would spell the end of the dollar standard, and therefore would realistically lead to an Exit from the current arrangements anyway. Hence we are back to the original list, we only really have two options: ‘status quo’ (=secular stagnation) and exit (variously combined with joining the Asian Dream). Given this, it is quite reasonable the position of those who think that it’s best to bite the bullet, cut the losses and head towards the exit direction as soon as possible, without crippling the economy any further with secular stagnation (or worse, with another collapse). We can conclude that the authorities in the West will do their best to avoid another financial collapse, as it is in nobody’s interest, but this possibility cannot be completely ruled out, as it could happen by mistake (or as a result of the internal war within the elite). Bar any incidents leading to an unplanned exit, the likely scenario that we will see in the West for the immediate future (5-10 years?) is a fierce battle between the two main options on the table: continuing with secular stagnation while trying to defeat the rival coalition (China and its allies) with extra economic means (enhanced cold war) vs. working out an industrial plan, giving up dreams of total hegemony (full spectrum dominance, in the parlance of the Neo-cons), and exiting neoliberalism. For what concerns the longer term (10-20 years and beyond) we will see the gradual taking shape of a new economic/political course for the future. What sort of positioning vis a vis the Asian Dream will be opted for is not possible to know for the moment – it will depend on the interplay of all countries’ strategies in the current ‘war game’.
PART 2 – Transition War Game – Describing the Strategic Options
Main issues at stake – Before we look at the two strategic options contending for dominance in the West, ‘Status Quo’ and ‘Exit’ (itself containing different variants for different countries, which could be grouped into two main sub options, ‘exit for the weak’ and ‘exit for the strong’) we need to clarify the most important economic issues that need to be resolved. The current state of affairs is that the American dominated monetary (and hegemonic) arrangements are crumbling down, leaving a good amount of debris, mainly debt and instability (political and geopolitical). As the current arrangement (also known as ‘neoliberal globalisation’) is no longer sustainable (this is an economic fact), and no longer supported by the majority of countries and of people within countries (this is a political fact), it needs to be abandoned and a new one needs to be worked out/negotiated – and the debris needs to be cleared to pave the way for a new settlement. The problems that need to be resolved all involve debt in some ways – as debt is the (unsustainable) basis on which the whole neoliberal architecture rested – so we can group them into three main issues using debt as the pivotal aspect. These issues are: a) what to do with the accumulated debts; b) establishing (setting up the rules of) a new course of action that won’t lead us again into debt; and c) sustaining the new course of action for the long-term. To make this reasoning less abstract, we can draw a parallel between debt and sin – something which is in the tradition of Christian countries, as many economists occasionally like to recall. Debt is the ‘original sin’ of neoliberalism, which has led to its downfall. We now need a new covenant and, considering that the current debts (at an average of 300% of GDP) are un-repayable, the new covenant has to include some ‘forgiveness of the sins’. Therefore we could say that the following needs to happen: a) forgiveness of the past sins b) redemption,that is, exiting the state of sin/avoiding further sins; c) salvation – achieving a permanent state of grace. Translated in economic terms: a) debt cancellation (total or partial – it will have to be seen); b) going back to a healthy economy (by re-nationalising it and snatching back its control from the financial markets). This requires changing many institutional arrangements, both national and international; and c) the most difficult part, re-industrialization, in order to enable national economies to become and remain self sufficient for the long term.
Important premise of debt forgiveness – Before we can explain the three stages, and especially the first one, we need to make an important clarification: only part of the enormous debts accumulated is real, the part owed, mostly to the surplus countries, in exchange for goods and services sold to us in excess of what we sold to them (basically our trade deficits). Obviously there is also a part of the ‘real’ debts that is owed within each country – cancelling this debt is an internal political matter. However, the main thing to consider (which tends to escape the radar of the current public debate) is that a big part of the debts (both public and private) is fictitious. It is money created by the financial system out of thin air. In a simplified manner we could say that we owe the real debt to foreign countries (nobody talks about this but it is the more problematic part of the debt!) and the fictitious one to the financial system (obviously the question in more complicated, as foreign money is conveyed to the deficit countries by the financial markets). In addition, another fact has to be considered: some of the loans (both public and private) that the deficit countries obtained from the financial markets were made from money deriving from domestic profits stashed away in safe havens. These debts are counted as foreign-owned for accounting purposes, but in reality they should be domestic, and should be much lower, as part of them should be converted into tax revenues. Therefore, to make things simple, we could say that the debts need to be forgiven not only because they are unsustainable, but also because a large part of them is not owed in the first place, as it originates from money creation or from tax avoidance.
Now we can move on to the three issues that need to be resolved. For what concerns issue a) achieving debt cancellation, there is a very neat and non-traumatic way to produce this result, and it is by growing GDP and wages, so that in proportion the debt burden is reduced. In turn, this is achieved by increasing government spending in the real economy to produce economic growth. Part of this growth is likely to be inflationary, but this is beneficial, as the aim is precisely to cancel the debt via inflation and currency devaluation, while part of the growth obviously needs to be real. Needless to say, this operation of restarting nominal growth, inflating the real economy, inflating wages and this way reducing the accumulated debts, although straightforward in technical terms, is rather contentious – we will analyse both how it works and the issues involved later.
For what concern the next issue, b) avoiding further debts and laying out the foundations of a healthy economy, this implies first and foremost substantial institutional changes, that is, changes in the governance of both the national and the international economy. At the national level what is needed is to put the state back in control of the economy, to put production back at the centre of the economy and to side step the financial markets – this is called financial repression. At the international level what would ideally be needed is the negotiation of a new international monetary system with a new international currency, new institutions, new rules aimed at achieving balanced trade and managing international debts in a fair manner. As the time is not ripe for such a major re-organisation of international economic governance, the least that can and has to be done is to abandon/transform the current institutions and forge new ones bit by bit, by means of bilateral agreements or regional agreements and by resorting to various forms of protectionism.
To sustain a new nationally centred and more balanced economy, with higher wages and lower trade deficits (issue c), sooner rather than later, policymakers will have to figure out how to increase and upgrade their countries’ industrial production, while for the longer term they will have to equip or re-equip their countries with the tools and knowledge (R&D, education, infrastructure, industrial policy etc.) necessary to maintain their industrial and productive bases constantly up to date and competitive.
This is in a nutshell what needs to happen. The ‘forgiveness’ part – or cancellation of the debt – is mainly a political/geopolitical issue, a question of getting away with it, of escaping being forced into bankruptcy and sale of assets. The ‘redemption’ part – or going back to a healthy economy- is mainly an institutional and political question, setting up a new economic paradigm both at the national and international level. With a simplification, we could say that it is mainly a question of economic software. The ‘salvation’ part – or reindustrialisation – on the other hand, is mainly a question of economic hardware.
In reality the three phases, although conceptually separate, are inextricably connected. The first phase, debt cancellation, also involves restarting the real economy, and therefore implies the beginning of the second phase, making institutional changes towards financial repression. All of this implies some sort of international or at least bilateral agreements, as well as reindustrialisation. Therefore a country that wants to embark on an exit strategy needs to start putting into place all the pieces of the puzzle at a very early stage. Needless to say, political and geopolitical constraints will influence the success of the operation just as much, if not more than strictly economic ones (such as lack of raw materials or lack of a good industrial base). In the end, economics determines what countries are technically able to do, politics what they may end up doing depending on their internal balance of power between classes and factions, and geopolitics what they are allowed to do by other countries. Now that we have clarified the basic issues at stake, we can take a look at the two alternative options fighting it out in the West and at how they plan to deal with these issues.
Status quo (or Secular Stagnation)
If the world were made up only of economic forces and voters, who are having to pay the price of austerity, didn’t exist, Secular Stagnation, the only way left to preserve the dollar standard for a while longer, could actually be feasible, just about. Roughly speaking, this is how it is meant to work: low or stagnant growth in the deficit countries to contain trade deficits, while immigration and ever lower salaries allow the West to onshore again part of its production, adding maybe fracking to reduce dependency on imports. At the same time a gradual rise of the Chinese RMB against the dollar, a gradual erosion of the debt by inflation could slowly rebalance the system while maintaining the dominance of the dollar for some time to come. The problem is that the amount of austerity needed to reach this balance is staggering over the long run. In the words of Paul Mason (Post capitalism p. 22 ):
‘Seven years of spending cuts in the UK or even the social catastrophe inflicted on Greece is not enough. Workers rights and decent wages stand in the way of maintaining the current arrangement and must go. This is the real austerity project: to drive down wages and living standards in the West for decades, until they meet those of the middle class in China and India on their way up. In 2014, the OECD released its projections for the world economy in the years between now and 2060. World growth will slow to 2.7 per cent, as the catch up effects in the developing world – growing population, urbanisation, education – will peter out and the developed economies will remain in a state of stagnation. The OECD report assumes that there will be a rapid rise in productivity due to information technology. If, as it is likely, information technology will not produce GDP growth, then there is a substantial risk that the meagre 3 percent average annual growth projected by the OECD over the next fifty years will be closer to 0.75. Semi-skilled jobs will become automated, leaving only high and low paid ones, global inequality will rise by 40 percent. By 2060 countries like Sweden will have the levels of inequality currently seen in the USA: think Gary, Indiana, in the suburbs of Stockholm’.
If we look at the three issues examined before, how does this option plan to resolve them? We need to start by considering the objective of this strategy: maintaining the current institutional arrangements, with the dollar at the centre of the international monetary system, and the ‘One percent’ at the top. Therefore no institutional re-arrangements are allowed, part b) is fixed. At this point how can we achieve part a), the cancellation of the debts? In the short run no cancellation is expected, but if we could eventually manage to get some real growth and/or inflation this might eventually occur, at least in part; in the meantime there can be some repayment of the debts by selling off assets. This grim treatment of being dispossessed starts with weaker social layers and weaker countries but, as the resources of these are exhausted, it would gradually work its way up. For what concerns part b), avoiding further debts, as no institutional changes are allowed (such as a new international monetary system or financial repression) – rebalancing trade would be achieved mainly with austerity (which leads to unemployment and wage reductions and this way it achieves a reduction of imports) while further lowering wages with immigration would help to reduce production costs and increase exports; for what concerns part c), reindustrialisation – some will happen as a result of lowering production costs via austerity and immigration. Eventually if wages continue to go down, it would be competitive again to set up some industry in the West – especially in some enclaves within the West which, due to prolonged austerity, might quickly become like the Special Economic Zones formerly set up in Third World countries, where wages and regulations would become a thing of the past. In addition, there could always be some hope that technological advances might increase productivity at some point, and this way facilitate the rebalancing of trade, but no major industrial policy is expected (as it requires a level of investment incompatible with austerity policies).
To sum up, pursuing this option would mean severe and prolonged stagnation in the West (with further deterioration of infrastructure, productive capacity, technological lead, education and skills, etc. etc.), a slowing pace of growth in emerging countries and the likely bankruptcy (and asset sell off) of many states. All in all it would imply a very slow and painful path of declining production and declining living standards until a new balance is found with the emerging economies on their way up, a veritable suicide. Short of finding some miraculous way to re-engineer a sort of growth based on technologies that create jobs rather than destroying them, this scenario is politically unsustainable.
As mentioned before, I don’t think that this is the real aim, to rebalance trade via prolonged stagnation, as this is nothing short of economic and political (as well as cultural) suicide. The strategic aim has to be to bide time, maintain the dominance of the dollar and Western finance and, with the abundant resources that the control of the international monetary system makes available, try to reverse the outcome of the hybrid war currently taking place. At the moment in the West we are deadlocked, with the two factions (Status quo Vs Exit) fighting it out between themselves. This divide cuts across party lines, making political action very difficult and the confusion of the public very great. It’s not difficult to see that with Brexit, the election of Donald Trump, and the general discontent blowing the wind in the sails of all sorts of populist parties (both left and right wing, but mainly right wing) in the European Union, the Exit option is gaining momentum, although the ‘Status Quo’ elite still holds considerable power and can certainly derail the exit option for a while longer. However, it is hard to see secular stagnation winning out, as it is against the interests of pretty much everybody except for the infamous ‘One percent’.
Exit (or the unwinding of the Neoliberal Paradigm)
As mentioned before, the Exit option is still rather undetermined, as its promoters are not very open about what they really have in mind. However, we should be able to draw its basic outlines by simply looking at where economic necessity is driving the system. There is a set of re-adjustments that are more or less inescapable, given the imbalances that neoliberalism has created, and therefore they will have to be part of the Exit option. As previously indicated, what needs to happen is a) reducing the debt burden by kick starting GDP growth, b) going back to the fundamentals of a healthy economy by putting back production at the centre of it and rebalancing world trade as the way to avoid falling again into debt and then c) eventually we need reindustrialisation for all of this to work out – and we will deal with this aspect in the next chapters. Therefore here we will be concerned with the first part (kick starting economic growth with consequent inflation and debt cancellation) and the second part, which consists mainly of institutional changes (financial repression and the creation of a new international monetary system or some substitute). Let’s start from the first issue.
a) Retiring the debts by restarting nominal growth –What needs to happen for what concerns the deficit countries is perfectly logical: these economies have stalled due to excessively high debts, grown out of proportion with the stagnant wages out of which they presumably would have to be repaid – therefore the most painless way to deal with these issues is to restart these economies by increasing government spending, which would lead to higher employment, GDP growth and wage growth and this way reduce the debt burden. The first thing that needs to be done in order torestart growth in the real economy is boosting government spending. This will have to go hand in hand with the institutional changes – re-regulating and winding down the financial sector as well as bilateral agreements and protectionism – which constitute part b). Restarting growth in all likelihood (depending on the economic structure of the country in question) will begin with a phase of mostly nominal (inflationary) growth, kick stated by a wave of government deficit spending into the real economy. In this scenario employment would grow, and with it also wages and GDP (at least nominally), resulting in a reduction of income inequalities (as wages rise and financial profits shrink) and of the debt burden in real terms (as a proportion of wages). The accumulated debt would be gradually eroded over time by maintaining long term interest rates below inflation. This is the exact opposite of austerity and it can only work together with protectionism and restrictions on capital movements in order to avoid increased trade deficits and capital flights – this also ties in with the other aspect, re-regulating and downsizing the financial economy.
An important issue is what sort of government spending should be done. This depends on the country in question, but ideally the type of initiatives that would lead to upgrading its industry and its economic structure, so as to be able to increase its levels of production and decrease trade deficits as soon as possible. However, this type of expenditures tends to produce their effects generally in the longer term. In the short term government spending would be mainly on safety nets and social services. In other words, this is the opposite of the budget cuts that are now the general trend in the West. These expenditures would lead to more employment in the public sector, rising salaries, and better prospects for the real economy, thus favouring the restarting of private investments and rising employment in the private sector as well.
The main obstacle to this ‘austerity in reverse’ operation is that the deficit countries have high levels of government debt, therefore, according to mainstream theory, the last thing they should do is to increase government spending. However, given that the only way to restart the real economy is by spending money into it and given that, in presence of low expectations (due to low wages and high debts), private investors are not going to gamble their money to produce goods that don’t have a market, the only agent that can put the economic cycle back in motion is the government. This wave of government spending need not increase public debt, as it could also be financed by positive money creation. The main question is neither the effects on government debt (governments being the issuers of their currencies – with the exception of the eurozone – they can always manage their debts – obviously this is also an internal political issue, as some of the debt is domestic), nor the other mainstream pet scare, runaway inflation: as there are everywhere in the deficit countries a good amount of unemployed resources and a tendency to deflation, no run-runaway inflation is likely. The real problem would instead arise with respect to trade deficits, foreign debts and the reaction of the financial markets. In a sense these countries are similar to developing countries, they cannot simply create money and restart their economies because they no longer have an up-to-date industrial structure and, for this reason, they are not economically self-sufficient, they import more than they export and therefore they are dependent on the financial markets and cannot afford to displease them. Having dismantled a good chunk of their industrial base, if they increase employment and wages in the real economy (as a result of increased government spending) this would immediately lead to increasing imports and trade deficits (as imports increase with GDP growth but exports don’t). At the same time, the consequent devaluation of their currencies, if they embark on this course of action, would give foreign creditors a haircut. Therefore these countries would be in a position of displeasing foreign creditors while still very dependent on them. It is obvious that this would not work. A country that wants to go down this path needs to take a serious look at its industrial structure and see what it could produce at home (import substitution), how it could upgrade its industrial capacity, how it could increase its exports, and who would provide credit before any major changes to its economic structure can be implemented. A very thorny question, but there is an even thornier one. Even assuming that, for geopolitical reasons, a regional power would be willing to give credit to the unfortunate county (maybe because it falls very nicely along the routes of the BRI), the question to ask is: will this country be allowed to default (in full or in part) on its foreign debts and move on to a better life, happily doing business with the opposing block?
This is a very tricky question and it will depend a lot on the political independence of the country involved, on its resources, and on its ability to play its cards well (= strategy) in the new geopolitical environment. As previously mentioned, there is a good chance that the weaker countries will fall prey to the stronger ones, and be forced into a situation of deflationary (as opposed to inflationary) default, with consequent selling off of assets at bargain prices and basically be turned into debt colonies. The factors at play will be economic strength (what sort of an industrial base and industrial potential, or other potential for increasing exports, the country still has), financial strength (a country with low industrial strength could compensate with finance, if it can still manage to remain attractive to foreign investors even in the new economic environment less favourable to financial returns), but most of all geopolitical strength, that is, the ability to project its weight on the world stage, to fight its covert wars, to make deals and at the very least to escape being cannibalised by its stronger partners. This sort of dynamic is now playing out on the world stage before our very eyes, but most people are unable to detect it due to the thick layer of disinformation produced by the media. Although it is impossible at this stage to predict what the outcome will be, we can still make some educated guesses (more on this later).
Now we need to explore how restarting the real economy could actually work in real life. Putting aside its controversial consequences in terms of debt cancellation (especially for what concerns foreign debts), and assuming that a hypothetical country is lucky enough to be able to implement an ‘austerity in reverse’ operation (as opposed to being captured by some foreign power and being forced into deflation and selling off its assets), we need to answer the question: how would this operation work? We don’t need to stretch our imagination too much because there is an important historical precedent: the restarting of the peace economy, along with the cancellation of enormous war debts, in the years following WWII. Many analysts point to this example when discussing how to deal with the accumulated debts – my main source for the following section is Mark Blyth (Professor of International Political Economy at Brown University – USA) in a lecture given at the Watson Institute in September 2016 and available on Youtube with the title: Plenary 7 – Short Term Policies versus Long Term Returns – Lessons from History.
Post war government spending to restart nominal growth and erode the accumulated debts– As mentioned in previous parts of this blog, after WWII a wave of government spending was activated in order to restart the peace economy and create near full employment. This wave of spending was initiated by the leading country of the Western block, the US, with suburbanisation and the rise of consumerism at home, and the Marshall plan abroad. Back in the 50s and 60s this activated a dynamic of employment growth, wage growth and consequent inflation, and this is precisely what is needed for the deficit countries: inflationary growth allowing interest rates to rise but, and this is the trick, less than inflation. The huge debts resulting from World War II were thus gradually eroded in the post war period, by means of financial repression: interest rates were held below inflation, by means of restrictions on capital movements combined with the requirement for banks to hold the public debts of their own countries at the going interest rate – this was effectively a tax on financial assets. The effect was to shrink the government debts of all the countries involved from an average of 90 percent of GDP in 1945, to a historic low of 25 percent in 1973. In the USA between 1945 and 1973 long term real interest rates were on average -1.6%. There is a famous study by economists Carmen Reinhart and Belen Sbrancia documenting this (The Liquidation of Government Debt – Cambridge, MA, 2011). Something similar could be done at the present time as well, but on a lower gear, as the possibilities for real economic growth are now much reduced compared to the post war years (although this could be changed by joining the Chinese projects). We could have, for instance, average GDP growth at 3%, of which 2% inflationary growth and 1% real. We could hold long term average interest rates at 1%, which would result in an erosion of the debts of 1% a year. This would kill purely financial profits (and would entail a reform of the banking sector, re-directing it to serving the real economy), but this is part of the policy change that needs to happen. Investors could still make money if we could produce growth, but only by investing in the real economy, as real interest rates on safe financial assets – such as government bonds – would have to be negative in order to retire the accumulated debts. In the initial years there could be higher spikes of inflation, to accelerate the cancellation of the debt.
Back in the 1950’s the growth of the economy, which had to be re-converted and re-started after WWII, was achieved with the Marshall plan and with money from US trade surpluses re-invested both in the growing domestic market and in the growing consumer economies of Europe and Japan. Now we need to think of what could be the equivalent sources of funding. As we have seen, there is plenty of money in the Western financial system lying idle for lack of profitable investment opportunities and kept in the government bonds of the ‘safer’ countries (or in real assets). It is in large part foreign money, parked here in our financial markets for safekeeping. This money comes, in large part, from the trade surpluses of China, Germany, Japan and the oil producing countries (but it includes also the profits of transnational corporations made in western countries but kept in safe havens and re-invested in the financial markets). This excess of liquidity lying idle keeps interest rates low on a structural basis, therefore western governments could take advantage of this situation, issue more government debt, and just start spending into the real economy, rather than doing QE for the financial markets as they are doing now. This would increase trade deficits, of course, and therefore it needs to be accompanied by an industrial plan. If, at the same time, the countries with trade surpluses, following the example of the US after WWII, started their own spending and investment plans, and recycled their own surpluses in the real economy, both by increasing the standards of living of their own populations and by investing in infrastructure and economic growth at home and abroad, this would be of great help to the deficit countries. As only China at the moment is taking the lead in this direction, the main geopolitical struggle of the present time is over the money lying idle in the Western financial system. Who and how should use this excess liquidity? Can the Exit faction snatch this money from the grips of the Status Quo faction and use it to restart and inflate the real economy (rather than leave it in the financial markets trying to hold on to a hopelessly lost hegemonic position)? Or shall we simply rely on joining the BRI in order to restart our economies? For our purposes here, what matters is that in both cases this excess liquidity means that interest rates on the government bonds of ‘safe’ countries will tend to remain low even in presence of increased government spending, therefore the stronger countries at least, should be able to re-start their economies by simply being bold and spending on deficit. The others will have to either increase their trade with the Chinese-led block, or seek loans at favourable conditions presumably from the same block, or a combination of these measures.
To sum up: we have lots of unused savings alongside with lots of un-repayable debts. Growth cannot be re-engineered by the private sector, due to lack of spending capacity in the real economy and therefore negative expectations on the part of private economic agents. Hence, the only economic agents that can restart economic growth are governments. Our situation is similar to that of the Great Depression (or to the already mentioned aftermath of WWII). Basically governments need to revive aggregate demand. This is not a right or left wing issue, but a basic economic necessity, of course depending on the political sensibility and constituency of the governments in power there will be preferred choices as to where to spend scarce money but, as a general ruIe, it should not be a problem finding a political agreement on spending money in the real economy. It is true that Western governments have high debts and, in theory, they have maxed out their ability to spend on deficit, but the presence of a saving glut (resulting from two out of three parts of the world economy – Asia and Europe under German imposed austerity – running trade surpluses at the moment) allows the governments of the stronger countries to be bold. In alternative, should this option be blocked by the faction that wants to stick to austerity, there is the possibility of trying to make trade deals with the part of the world economy that, led by China, is determined to develop and grow. As the suffering due to austerity/secular stagnation is growing, the balance of power within each country is also radically changing. The ‘populist’ politicians who promise to implement these ‘unconventional’ policies are likely to win election after election and what was, up until recently, simply unthinkable, may soon become again, maybe slowly or maybe even fast, the new order of the day.
In this first phase of the transition (the ‘forgiveness’ part) the main concern is to restart the real economy and retire the debt, therefore economic policy needs to be concerned mainly with increasing aggregate demand (leaving the problem of increasing industrial production and exports for later). What needs to be done is to put money in the hands of ordinary people who will spend it, and this way restart the economy – this is the direction in which all governments (regardless of whether they are left or right wing) will have to go. The main question is where they can find the money. This will depend on the country. The geopolitically strong, with developed financial markets and desirable investment assets can take advantage of the ‘saving glut’, so maybe they can even get away with lowering taxes for the rich and increase social spending at the same time, or they could threaten tariffs and get some concessions from their trading partners. For the less geopolitically and financially strong the main avenue would be to figure out what they could sell to the rival block, for its infrastructure projects. For the even more beleaguered countries such as Greece, the main necessity is to find allies who could give protection and favourable loans while the country works on improving its economic base. In all three cases the general direction is clear, to boost aggregate demand (austerity in reverse), and what specifically needs to be done, or where the money can come from will depend on the economic structure of each country, as well as its geopolitical strength.
These are all the main issues related to the first part of the transition, restarting the economy and reducing the debts. As mentioned before, this operation is going to cause, for your average de-industrialised western country, increased trade deficits, currency devaluation and capital flights. Therefore these policies can only be implemented along with measures aimed at re-nationalising the economy, limiting capital movements and rebuilding national industries also with the aid of protectionist measures. This constitutes the second part (‘redemption’), consisting in a series of institutional measures necessary to set a healthier course for the future: financial repression, international trade agreements and a new international system of governance.
b1) Resetting and shrinking the financial sector – financial repression: regaining control of the national economy and putting production back at its centre means that its financial counterpart has to: a) be put again to the service of the real economy (rather than taking on a life of its own), b) it has to shrink (to get back into proportion with the real economy) and c) it has to be fettered into national borders, to allow governments to take back control of the levers of economic management without being held to ransom by the so called ‘financial markets’ (in reality a cabal controlled by the ‘One percent’). What should happen is the following: as government spending increases, the real economy is revived and interest rates should start rising (from the current low or even negative levels), but their growth should lag behind inflation. Long term rates for safe financial assets should remain lower than inflation for a long time, with the eventual aim, once the debt is retired, to maintain them at roughly the same rate as inflation, therefore roughly equal to zero in real terms, and to obtain positive rates of return only for investments in the real economy (and only within the limits of real economic growth). The logic behind this is that only people who invest and take risks in the real economy should stand to gain rewards. Those who store their money in safe, liquid assets (such as government bonds) should simply maintain the value of their savings by receiving interest rates roughly equal to the rate of inflation. This is how the real economy is restarted, by taking away any incentive for purely financial speculation. So gradually the whole structure of interest rates would have to adjust to reflect real risk and real economic growth. This is how Paul Mason in his book Post Capitalism (p. 26) describes what needs to happen in the transition phase: ‘During the next decade central banks withdraw from QEfor the financial markets in an orderly way. They refrain from creating money to write off their own government debts (they will create money for real economic activities instead). The private market for government bonds, suppressed for a decade, revives (= interest rates on government bonds go up and they can be sold again to the general public – presumably domestic savers now earning higher wages – rather than to a small cartel of big transnational banks, euphemistically called the ‘financial markets’). In addition, governments agree to suppress financial mania for all time: they pledge to raise interest rates in response to all further bubbles; they remove for ever the implicit guarantee of bank bail outs (= they restore the separation between retail and investment banking).’ The result of this would be that all other markets – for credit, for shares, for derivatives – would then correct, to reflect the increased risk of financial capitalism (= financial operators could still gamble but at their own peril). Once the incentives for the financial economy are greatly reduced, capital would be reallocated to productive investment and away from speculative finance. Governments basically have to re-establish a normal environment, in which financial complexity shrinks and investors can hope to make money only (or mainly) by betting on the real economy.
Going past the transition phase, and looking at the long-term arrangements, a wave of legislation should be put in place to re-regulate the financial sector. This legislation would produce what economists call financial repression (as opposed to financial liberalisation) and it is the regime that was in place in the 30 odd years after WWII. (This is the only financial regime compatible with a Keynesian paradigm.) In the longer term the aim is to be able to have orderly interest rates controllable by policy makers so that they can promote the national economy and their chosen priorities within it. The financial repression of the post war period consisted of the following measures: restrictions of cross border capital movements, strict limits on bank creation of credit (by requiring high reserves of more than 20%), caps or ceilings on interest rates, creation and maintenance of a captive domestic market by requiring banks and pension funds to hold the debt of their own governments, separation of retail and investment banking, with national banks (both public and private) financing production as their main activity, as well as financing their government deficits. This financial architecture paved the way for a very national, controlled capitalism in which governments, by retaining the ultimate control of financial flows, were able shape economic policy. At present it is unlikely that our governments would go quite that far. Especially the countries that enjoy an advantage within the financial markets, such as the USA and the UK, are unlikely to re-regulate the financial sector all the way, as they are best positioned to take advantage of the ‘saving glut’ existing in the world economy, and that way get yet another free ride. Nevertheless, past excesses will no longer be possible and, especially countries that don’t enjoy particular financial advantages, will have to re-regulate substantially in order to protect their national economies.
b2) dealing with trade imbalances and resetting the international monetary system – The first thing that has to be clarified, in order to understand the need for readjusting trade imbalances and resetting the whole governance of the global economy, is that a market economy does not self-regulate. There is no invisible hand that adjusts prices in such a way as to clear the market where demand and supply meet. This is what the mainstream (or ‘neoclassical’) theory affirms, but it is not borne out by the facts. Although the media, academia and politics keep on paying lip service to this theory, in practical terms it was abandoned long ago, initially with the New Deal in the USA, and later by extending this sort of mixed economy, with strong government intervention, to the whole capitalist block. Therefore, just as within each country it is the government (and not the markets) that ultimately achieves a balance by recycling money from richer areas to poorer areas and from richer classes to poorer ones (and at the same time by working to promote economic growth) by means of monetary and fiscal policy, so at the international level the major powers need to work out a way to rebalance trade as well as to grow the world economy. Hence the need for international governance of the world economy. To illustrate this point, let’s consider the latest two global governance paradigms. In the Bretton Woods system this balance was achieved by the USA recycling its trade surplus money and acting as importer of last resort, with its reserve currency that could be created when necessary, both to pay the USA import bill and to expand the world economy (as capitalism needs growth). In the following paradigm, the neoliberal one, it was still the USA managing the level and distribution of global demand by attracting other countries’ surpluses to its financial centres and recycling them around the world. At present, we are confronted with the fact that this recycling mechanism has broken down, as the financial system run by the USA is clearly bankrupt, and Asian countries, now the main engine of the world economy, are no longer willing to finance their Western trading partners and are in the process of building up alternative solutions. This brings us back to the beginning of this essay. After 2008 trade imbalances have been reduced and so have the exports of the surplus countries, therefore a partial rebalancing has indeed happened, but at the price of widespread austerity measures, with consequent stagnation of the world economy. This means that if we keep the current neoliberal free-trade arrangements, imbalances will increase again as soon as expansive economic policies are implemented. Ideally we should attack the problem of imbalances at its roots, if we want to enable debtor countries to grow their GDP again without fear of incurring in unsustainable trade deficits.
What needs to happen is a rebalancing of the world economic structure. To put it in simple terms, more production has to take place in the West and more consumption in the East (within Europe more production in Southern Europe and more consumption in Germany). The most straightforward way to pursue such an objective is through a major re-setof global economic governance. Ideally, there should be a new Bretton Woods-style conference in which new rules for the world economy would be set, transition mechanisms would be established allowing for debt cancellation and provisions would be put in place to help the weaker economies upgrade their industrial structures – so as to promote balanced trade for the long run. A new international currency would also have to be established or, more realistically, a mix of the strongest currencies could act as international reserves, in proportion to the weight of their respective economies. International finance would have to be re-regulated and downsized (implying, among other things, a thorough reform of the role and remit of the IMF). Exchange rate fluctuations would have to be re-regulated as well, ideally avoiding fixed exchange rates along the lines of the Bretton Woods monetary system (as this arrangement was too rigid and therefore unsustainable), but also avoiding currency wars. Finally, in order to keep balances of payments balanced, assuming that even once all countries have upgraded their industrial structure there will always be more efficient and less efficient ones, some mechanism would have to be put in place to discourage trade surpluses. One way of doing this would be by taxing surpluses and using the money thus obtained to help deficit countries become more efficient or to simply subsidize them (as it happens within each country with weaker regions). Another, more realistic solution would be to allow surplus countries to recycle their money by investing it to increase the size of the world economy (also by means of a reformed World Development Bank). The benchmark of this hypothetical new Bretton Woods-style agreement would be the arrangement suggested by Keynes himself back in 1944, with the creation of a new international currency, the Bancor, and an automated recycling mechanism which would work by penalising the surplus countries (with a tax on their surpluses) and by using the money thus collected to help the deficit countries to improve their ability to compete. This is what would ideally have to happen to make the system work smoothly and in a democratic way. Obviously this is not what we expect to happen in real life, so we need to allow for deviations from this ideal form of governance. In real life the surplus countries will want to keep control of their surpluses and recycle them in such a way as to increase their influence around the world, while at the same time taking the responsibility for growing the system, as capitalism can only work with growth. More realistically, therefore, the new rules will be decided by the main powers, but a good amount of international cooperation and solidarity in any case would be needed, in order to make the system work smoothly.
If and when a major agreement is reached by the main powers, maybe a new formal system will be established. For the moment, however, we are still entangled in the old arrangements, with a hybrid war still raging between old hegemonic powers and rising ones while at the same time, within most Western – and Western dominated – countries the two elites fight to impose their chosen options, Status Quo vs. Exit. Within this turmoil, the new arrangements will have to emerge bit by bit, as a result mainly of bilateral agreements, or regional agreements, as country after country starts to move away from the old order and to build up new relations, as well as relying increasingly on its own resources, in absence of a general framework able to sustain balanced growth for the world economy. Here we are not concerned with the final outcome, which is not predictable. What we are concerned with is the phase of transition: how the reorganisation of governance arrangements and the rebalancing of trade is likely to progress and take shape.
Interim arrangements: economic necessity dictating trade rebalancing – What we can see at play at the moment is a game ofchess involving both geopolitics and national politics, with economics representing a major constraint for all the players involved, conditioning what countries are able to do and what sorts of alliances they are likely to seek. In order to gage the general direction in which the world equilibrium (both economic and geopolitical) is likely to evolve, the best approximation we can achieve is by looking at economics as the realm of necessity and politics/geopolitics as the realm of strategy. In economic terms what needs to happen is that the deficit countries need to re-onshore some industry and go back towards what should be the fundamentals of a healthy economy, while in geopolitical terms what we can expect to see is that the stronger countries will want to keep on ‘punching above their weight’ by keeping as much power and influence as possible, if necessary at the expense of their weaker allies (in addition to their continued subjugation of the Third World). The main economic necessity, rebalancing trade, can be achieved by a combination of three main policy instruments (apart from austerity measures): a) by letting exchange rates fluctuate; b) by re-onshoring some industry with protectionist measures, and c) by means of bilateral agreements and deals. The media call ‘trade wars’ this reshuffling and rebalancing of international production and commerce, and they are indeed part of the more general hybrid war taking place. They are ‘wars’ to the extent that some players are trying to seek advantageous positions with questionable means, but their deeper logic is the necessity to rebalance trade and to pay one’s way in the world. They can be conducted in more or less aggressive ways, by using also extra economic forms of influence, and are normally justified with whatever propaganda is deemed suitable, but the ultimate aim is to move towards more sustainable long-term arrangements. Most obviously what comes to mind is the case of Trump’s ‘trade wars’ against China and Germany which, once stripped of the rhetoric, are a simple manifestation of the fact that, as the USA cannot carry on creating unserviceable debt (or toxic assets) in order to pay for its imports, and cannot carry on for much longer with austerity measures, as its infrastructure and social fabric are falling apart (and, in all likelihood, cannot win militarily either), it will have to re-onshore some production and rebalance its trade, especially with its two most important creditors. The ultimate aim of these ‘trade wars’ is to reach a new economic balance. Eventually, in order to maintain international trade closer to a balanced position, surplus countries will have to revalue their currencies, increase their salaries and government spending so as to rely more on internal demand and less on exports (or if they still want to rely on exports they will need to expand the system and recycle their surpluses as investments, as China is trying to do); while deficit countries will have to devalue their currencies (and at least partially abandon reserve status) and find a way to substitute imports or increase exports. The stronger ones will try to hold on to their reserve status and use their financial markets to balance their national accounts, as mentioned earlier. However, it is unavoidable that their reserve position will be substantially reduced during the course of the coming decades. The gradual abandoning of the dollar for international trade and reserve purposes has started already, the first step being that various countries are making agreements to settle their mutual trade with their own currencies rather than with dollars. This process started with an agreement made by China and Russia in 2014, and has continued between China and other countries – most recently (October 2018) a similar agreement (a bilateral currency swap agreement worth $30 billion) has been worked out between China and Japan. As a consequence of the reshuffling of production, trade and monetary arrangements, the old institutional architecture will also have to be abandoned. Already TTIP and TPP have been dismissed, but also NAFTA and similar regional treaties will be either abandoned or heavily modified, and this process is likely to escalate all the way to the EU and the WTO. This is dictated by economic necessity.
Interim arrangements – the role of geopolitics – Now we have to introduce politics and geopolitics. We can expect that the strong countries (with the US in chief, but also countries such as the UK and France) will keep on trying to derail the alternative trading block being built by China by means of destabilisation (as it has been done in the Middle East and North Africa), of discredit and demonisation leading to economic sanctions (as it is happening with Russia and Iran) and also by means of covert actions to take control of key states along the BRI routes (as it was done in the Ukraine) and so on – basically all the tricks in the book of hybrid wars will be exploited, and new ones will no doubt be invented. But these countries will also increasingly make agreements with China, Russia and other emerging countries and will trade with them, as it is the only way forward for their economies. The mix of the measures that will be adopted will depend also on their internal wars, with the Status quo elite pushing for some types of geopolitical alignments and the Exit one for others. What is less obvious, but already visible, is that they will be conducting various types of ‘covert’ economic/political war towards their own weaker allies to keep them in their sphere of influence (and away form the Chinese-led block) as well as to pillage their resources, much needed for economic survival. We can expect that the ‘Status Quo’ elite will tend to gobble up and cannibalise the weaker allies by imposing deflationary defaults (buying up their assets and attracting their capital flights as mentioned before) while both elites will try to tie them up to unequal trade agreements (such as ‘inducing’ them to replace Russian gas with American shale gas or the gas coming from American allies in the Middle East – or to buy American military equipment or other lower grade products, all the way to the infamous chlorinated chicken meat and so on). At the same time the ‘Exit’ elite, if they want to win the fight against the ‘Status Quo’ elite, and if they want to build a viable economy for their reduced sphere of influence, will have to give these weaker countries some leeway to rebuild their economies and become viable again. And this means that they will have to allow them to trade with the Chinese-led block. All the more so because these weaker allies are themselves turning into decisive battlefields in which the two elites are fighting to impose their respective strategic options.
Seen from the point of view of the weaker countries, this situations offers a narrow passage between the appetites of the stronger ones (in which both ‘Status Quo’ and ‘Exit’ elites, in different ways, want to gobble up and enslave them) and the necessity, on the part of the ‘Exit’ elite, to rely on allied ‘populist’ governments in order to defeat the ‘Status Quo’ elite as well as to re-build a smaller but also viable sphere of influence with which to navigate the next multi-polar phase of world history. Within this narrow passage the ‘weak’ countries will have to try and manage to reach out for that part of the world that is promoting economic growth (the ‘Chinese Dream’ block) and with bilateral or regional agreements work out their way to ‘salvation’ as economically and geopolitically viable states.
Seen from the point of view of the weaker classes across the board in Western countries, the necessity to rebalance trade, fight the ‘Status Quo’ elite, and re-set the economy towards a healthier path, offers a golden opportunity for them to push for a renewed Keynesian style economic paradigm in all formerly neoliberal (or neomercantilist, such as Germany) countries. Again, the viability of this solution is greatly enhanced by the presence of a trading block pursuing expansive and developmental strategies. These economic strategies are the equivalent of the Marshall plan and consumerist expansion pursued by American policy makers to build a thriving capitalist block after WWII.
From the point of view of the Eastern block, it is a question of fending off the attacks of the Western countries, consolidating their control in their sphere of influence (and especially along the BRI trade routes) and continuing to work on their projects for economic expansion via infrastructural integration and development of neighbouring areas. The rest will come, as everybody who wants ‘salvation’ sooner or later will have to knock on their doors. It seems to me that there can be little doubt that ultimately the geopolitical and economic winds are blowing on their sails.
The end result will depend on the criss-crossing and playing out of different strategies as the relative countries and factions battle it out for control, all within the constraint represented by the necessity to rebuild a more balanced type of economy.
Summing up the main interim strategies – These are the main policy options available to the ‘Exit’ elite and the deficit countries (where populist parties are increasingly gaining strength), in their endeavours to equip themselves for the new multi-polar order:
- Rebuilding the economy by using various combinations of protectionism, industrial policy and doing business with the rival block – this applies to all
- Making the most of resources, advantages (such as geographical position) and old time alliances that can turn out to be very valuable in the new environment. This option also applies to all, but the resources, advantages and alliances are different for different countries, therefore each country will be going in a different direction depending on its own special situation
- Imposing disadvantageous agreements/alliances to weaker countries (this option only applies to the stronger ones). The obverse side for weaker countries is to use cunning and alternative alliances in order to escape these traps (or to reduce their effects). In other words, they will have to work harder on the second point, leveraging on advantageous situations, and building up relationships with emerging countries firmly embarked on a pattern of economic growth.
- Holding on to reserve status and using their financial markets to attract the excess capital existing around the world in order to get yet another free ride.This only applies to the countries whose currencies are used as international reserves and which have well developed financial markets. The obverse side of this strategy, from the point of view of the weaker countries would be: increasing capital controls and financial protectionism (= creating their own money and recycling internally their own savings) as well as working harder on reindustrialisation in order to escape the clutches of international finance
The error of composition – These are the options on the table, but how all of this will translate into real life is hard to predict. While these strategies, if considered on an individual basis, may make sense for the agents adopting them, it is quite obvious that, if we envision the aggregate effect, to a large extent they tend to work at cross purposes. The main problem is that, as the hegemonic countries are still vying to retain as much power as possible within the Western block, and to hinder the rival block at the same time, their exit strategy risks to produce a zero or even negative sum game. For the moment, for as long as the Status Quo elite is still in power and austerity policies are still the norm, the American-led ‘Trumpist’ exit strategy that is leading the way so far, has an important role to play, especially for the purpose of starting to dismantle the old order: pushing for the dissolution of existing institutions that stand in the way of change (first and foremost the European Union); promoting the process of putting the states back in control of their economies; starting to consider how to bring about nominal growth; starting to think about reindustrialisation; starting to work out bilateral trade deals in order to rebalance international trade. However, past this initial stage in which the first moves in the ‘exit’ direction are made and once we enter the stage when things need to actually be done in earnest, then the contradictions will start to show and to pose serious strains. To make a long story short, a model based on conserving financial and hegemonic privileges, on cannibalisation of weaker allies (or at the very least on imposing disadvantageous deals) and on derailment of the alternative block – the only one actively promoting growth – would very soon reach a dead end. Either the country aspiring to lead this block (presumably the USA) would be able to come up with a growth plan, so as to avoid a zero (or even negative) sum game scenario, or very strong centrifugal forces would start to enter in action immediately. In other words, the hegemonic country would be able to hold its ‘allies’ under control (and away from the Chinese-led block, possibly even with an extreme ‘Iron Curtain’-style separation) only if it were able to offer an economic arrangement that involved at least a moderate amount of economic growth. The problem is that sustainable (= debt free) growth requires a full blown and diversified industrial structure (and high expenditures in technological development), with its corollary of empowering the lower classes, a rather unpalatable option for the elites. In addition, industry based growth requires time, and a sort of national unity (to finance welfare provisions, redress internal imbalances and keep production costs low) and international cooperation (to avoid trade imbalances) which doesn’t exist in the West, especially not at the international level. Thirty odd years of neoliberalism and ten of post-2008 crisis managed with total disregard for the ‘weak’, have destroyed all solidarity, especially in the Eurozone. The USA is no longer in a position to produce the sort of unifying leadership needed for the purpose, as it is suffering internally from the same weaknesses and divisions that are plaguing the whole Western block. Therefore it is likely that Trump’s exit strategy, suitable for the first phase of the transition – consisting in fighting the Status Quo elite and starting to dismantle the old order – will prove to be inadequate (if not counterproductive) for the second phase, that of rebuilding a new order and promoting real economic growth. At this stage, if we want avoid more stagnation and suffering, the lead will have to be taken by other countries, and they will have to be very bold in order to break away from a by then dysfunctional alliance. Machiavelli said that fortune rewards the brave, and it will indeed take quite a lot of courage to displease such a well armed (also in terms of ability to wage covert wars) ally and flock to the rival block. Perhaps dire necessity will help to gather the courage, resourcefulness and cunning necessary for the task. As more than one country will be in the same situation, the fact of acting at the same time (if not quite in alliance) will be of great help. Given these premises, who would be the likely path breakers? It will have to be countries that have little financial hegemony to protect and have, on the contrary, a functioning industrial base. Germany and Japan (which is already active tying up economic links with its neighbours) come to mind, but also a re-unified Korea, and Italy as well, being a country with an industrial ‘vocation’, and with a ‘populist’ (pro-Exit) government already in power. Maybe also some Eastern European countries (mainly the satellites of German industry) could at some point take the plunge (they are already part of a cooperation network with China, the 16+1). If this happens in combination with some large Middle Eastern or Central Asian country making the same move, then the gates could finally open up to Chinese-led globalisation 2.0: based on real economic growth, managed with a post-Keynesian economic paradigm, pulling out of poverty many third world countries and featuring a raft of new technologies.
Final considerations – Will this happen? And when? We have no way of knowing, because we don’t know what obstacles this apparently logical solution faces in the real world. We may need to confront the fact that in the end the crumbling down of the current system of power may turn out to be no less painful and disruptive than other similar occurrences in history, such as the fall of the Soviet Union and its communist block, to name just the most recent one. Back then the mistake that those countries made was to put themselves in the hands of the loving and tender care of the neoliberal establishment of the West. The results were dire and many of those countries still have to recover. Therefore we must avoid putting ourselves in the hands of anyone in particular, but instead abide by the rules of what we know is the correct management of a capitalist economy. We know that the capitalist system is able to adapt and transform (we will see this in more detail in the next chapters) and that it can be made to work (at least passably) for the majority, but this requires strong political intervention. We have a few things helping us in this difficult task of reining in capitalism: a) we can rely on past experiences of managing and transforming the capitalist system (such as the New Deal, the Bretton Woods arrangements etc.); b) we have a major power block intent on following precisely this pattern, and re-organising the world economy along similar lines; and c) we have accumulated a whole body of theory and practical knowledge over the years (even the debacle of the single currency in Europe has provided another great source of experience confirming consolidated knowledge and theory). Therefore, from the point of view of economic policy, we have all the instruments needed to build up a new economic paradigm conducive to progress, rather than to disaster.
Going forward – We must now continue to follow this body of knowledge, and explore the conditions for long-term viability of a capitalism based on production and the ‘real economy’. We need to analyse how economic growth based on re-industrialisation can be promoted in the 21stcentury, and how this would work at a global level past the stage of infrastructure- and development-led growth. This, in our religious parallel, is the third issue facing the Exit strategy: how to achieve a permanent state of grace (or salvation) via industrial and technology-led growth. Of course, here we are talking about ‘salvation’ within capitalism. The real salvation obviously lies outside capitalism, and we will get there eventually, but for now we must continue exploring how our current system actually works, before we can start to understand how we can leave it behind for something better.