Global Deflation and Global War: Greenspan and Bush:
Notes on the Deteriorating Global Econony Because of
George Bush's Foreign Policy- In Two Parts

Part 1. Global War and Bush
Part 2. Greenspan and Global Deflation

January 18, 2003

R L Norman
Jmkeynes@Secularstagnation.com
________________________________________________________________________


"Geopolitical risks, such as the threat of war with Iraq, tensions over North Korea and terrorism, have added to the list of business concerns," said Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, in a speech on Tuesday.

As Washington decides whether to invade Iraq, uncertainty about a war is already weighing on the economy.

Adding to the uncertainty that is discouraging big companies from starting to invest again, Mr. Barbera [chief economist of ITG/Hoenig, an investment firm] said, are the huge differences between the best- and worst-case outlooks in the event of war.

Moreover, businesses can afford to take a wait-and-see attitude right now, Mr. Barbera added, because the economy is not exactly bursting with profitable opportunities.

Daniel Altman War, 'Uncertainty Weighs on Economy', The New York Times, Web Site,
January 18, 2003.
________________________________________________________________________

Introduction

Part 1. Global War and Bush
1. George Bush's Legacy? : Pan-Arabism and No Alliances
2. American Military: Unbearable Stress and Unnecessary Risks
3. Has Bush Drifted into Megalomania?
4. The Republican Party: Source of the Disaster and The Jeffords Solution
5. Movement Activity and a Democratic Senate

Part 2. Greenspan and Global Deflation
1. Inflation or Deflation
2. Why Inject Money into the Banking System?
3. Deflation and High-Powered Money from 1929 to 1934: Possible Lessons for 2003
4. Greenspan, Deflation and Open Market Operations
5. Monetary Velocity and Deflation
6. Presidential Economics in 2004
7. Will it Work: Can Inflating the Money Supply Restart Creative Destruction In
2003 or is Secular Stagnation At Work Again
8. Would it Have Worked in 1930: Could Inflating the Money Supply Have
Restarted Creative Destruction ?
9. Would it Have Worked in 1930: No, Keynes was Correct
10. 1930s Model: Innovation and Stagnation, Not Innovation and Job Creation
11. Gold and Inflation
12. External Considerations: PRC and Hard Currency Holdings
13. Internal versus External $ U. S.

Conclusions: Greenspan and Bush

Introduction:
Deciding whether inflation or deflation is most likely over the next two to four years is the primary economic criteria for investing today. Trying to get a handle on American foreign policy is the most important political variable; for whatever policies created by Alan Greenspan to deal with incipient deflation, if George Bush's chaotic, incoherent foreign policies continue, sheer disaster may wreck the entire global economy. This is a global problem, which must either be faced by the United Nations or by the American Congress in the upcoming session. If war in Iraq deteriorates immediately into a war of civilizations, as Samuel P. Huntington described in a 1996 book; Western civilization may suffer consequences of almost Biblical proportions, while Islamic civilization may suffer even more.

At this time America has an economic czar with almost fifty years of experience, Alan Greenspan, who is trying in the last years of his life, to try to guide the country and the globe through the first deflationary trends since 1941. At the same time, American foreign policy is being 'guided' by a neophyte, whose utter incompetence is threatening America's global military position, wrecking alliances accumulated since World War ll, in a foolhardy expedition against a billion Muslims, to try to 'modernize' them through raw military force.

Following are the two parts to this Article:


Part 1. Global War and Bush
Part 2. Greenspan and Global Deflation

Global Deflation and Global War: Greenspan and Bush
January 18, 2003

Part 1. Global War and Bush


R L Norman
Jmkeynes@Secularstagnation.com

Introduction

Part 1. Global War and Bush
1. George Bush's Legacy? : Pan-Arabism and No Alliances
2. American Military: Unbearable Stress and Unnecessary Risks
3. Has Bush Drifted into Megalomania?
4. The Republican Party: Source of the Disaster and The Jeffords Solution
5. Movement Activity and a Democratic Senate


1. George Bush's Legacy? : Pan-Arabism and No U. S. Alliances

George Bush's policies have basically driven off most of our allies around the world, leaving him recently to call for an 'alliance of the willing'. Even he has recognized that NONE of the regional alliances of which the United States is a member, is willing at this time to lend political support, much less soldiers and equipment.

At the same time that Mr. Bush has basically destroyed the multi-lateral alliances which all American presidents have nurtured and coaxed along since 1940, he has so angered the Arab-Muslim world, that the 1950s dream of Egyptian leader Gamal Nasser of a Pan-Arab coalition, which transcended religious, ethnic and cultural lines; is in sight. Bush has performed a task in less than 24 months, which had eluded Arab leaders for most of the 20th century, a Muslim movement capable of transcending the long-term religious and the new secular, more modern-oriented sections of Islam. Saddam's dream of becoming the new Salad in may yet show fruition, but he may owe more to Bush's incompetence than to his own competence.

2. American Military: Unbearable Stress and Unnecessary Risks

Moreover, Bush's incoherent policies have placed almost unbearable stresses on the only 'partner', the U. S. military, which has to go along with Bush no matter what. While it appears that the military was angry with Bill Clinton for sending them to so many small foreign engagements with so damned little financial support; Bush in 2003 makes Clinton of 1998 seem like the height of strategic practicality.

At this point Bush has managed to put the military in real danger of facing massive casualties in at least two theatres, Iraq and Korea, while leaving our country at risk of truly massive domestic attacks from Qeada. He has received seemingly reasonable advice from the intelligence services, as well as the military brass and seemingly he has ignored both. He is floating in a dream world, where by the U. S. military acting basically alone, can not simply 'rebuild' a single nation like Bosnia, but 'rebuild' the entire Islamic world of over one billion people, in an arc of territory stretching from the Western coast of Africa to China and Indonesia.

3. Has Bush Drifted into Megalomania?

Megalomania is defined as 'a mania for great or grandiose performance'. When applied to a politician, the definition becomes more of a leader who has lost his grip on political reality and begins to apply military force in ways inconsistent with the actual capacities of his military. Adolph Hitler's unwillingness to permit the army of Filed Marshall von Paulus to retire from Stalingrad in 1943 and his sending of a force into the Ardennes in winter of 1944 against the Allies in France, were both examples of a political leader who was not able to even remotely gauge his actual military capacity against the opposition forces. Saddam himself could well be seen as a political leader incapable of gauging military force with political objectives. No, this is not a statement that Bush is another Hitler, nor even that Saddam is, only that something is seriously amiss in Bush's attempt to apply an American military force of less than five million in a way that has the distinct possibility of confronting one billion people in dozens of countries, even as Bush has shattered the alliances which might have been used in the effort.

The question is whether Bush has drifted into a state of megalomania and is actually no longer able to formulate foreign policy compatible with the survival of the country. In such a dangerous situation, something has to be done almost immediately to try to get control over policy with regards to Iraq, to begin to rebuild our foreign alliances and to relieve part of the burden the of American military.

4. The Republican Party: Source of the Disaster and The Jeffords Solution

It was from the Republican Party that this disastrous president arose and it is up to the Republican Party to do something to try to salvage the situation, and maybe help the party itself to survive. Probably the simplest solution would be for 2 or 3 current Republican senators to shift their affiliation to Independent, thereby giving control of the Senate back to the Democrats. Jim Jeffords had the courage to realize the George Bush was not capable of exercising the leadership required for a president and who shifted to Independent last year, allowing the Democrats to regain control of the Senate. Today, the political risks are far greater for the country than anything which Mr. Jeffords saw, the very survival of the United States in a modern global economy are the stakes. Nero's supposed playing of a fiddle while Rome burned, looks like a symphony, compared with the idiotic policies of George W. Bush.

This shift by even one or two Republican senators would immediately allow the Democratic senate to combine with many other Republican senators, to work with the military in slowing down the rising tide towards war in Iraq, while leaving enough pressure on Saddam to prevent him from doing much against our already over-extended forces in the Gulf. It would also begin to refocus the mission upon Qeada, where the worst danger remains.

5. Movement Activity and a Democratic Senate

If the Republican Party is either unable or unwilling to try to put a muzzle on this man for the remaining two years of this presidency; large-scale, nation-wide movement activity may be necessary, to embolden the Democrats alone to seriously confront Bush's policies and possibly to set up alternative links to the command and control system of the military. Somewhere in the ranks of the Democratic senators, there are people with which the military command could deal and begin to slowly unwind this disastrous mess, which George Bush has created. It does not seem likely that the country can survive in tact with another 24 months of unfettered Bush presidency.

Global Deflation and Global War: Greenspan and Bush
January 18, 2003


Part 2 Greenspan and Global Deflation

R L Norman
Jmkeynes@Secularstagnation.com

Part 2. Greenspan and Global Deflation
1. Inflation or Deflation
2. Why Inject Money into the Banking System?
3. Deflation and High-Powered Money from 1929 to 1934: Possible Lessons for 2003
4. Greenspan, Deflation and Open Market Operations
5. Monetary Velocity and Deflation
6. Presidential Economics in 2004
7. Will it Work: Can Inflating the Money Supply Restart Creative Destruction In
2003 or is Secular Stagnation At Work Again
8. Would it Have Worked in 1930: Could Inflating the Money Supply Have
Restarted Creative Destruction ?
9. Would it Have Worked in 1930: No, Keynes was Correct
10. 1930s Model: Innovation and Stagnation, Not Innovation and Job Creation
11. Gold and Inflation
12. External Considerations: PRC and Hard Currency Holdings
13. Internal versus External $ U. S.

Conclusions: Greenspan and Bush


1. Inflation or Deflation

From many views, deflation seems to be the biggest threat to the American economy and unless things improve markedly within the next six months, the Federal Reserve is likely to begin Open Market Operations (OMOs) to begin directly placing raw cash or 'high-powered money' into the vaults of banks around the nation. A 'marked improvement' would denote a large increase in business investment, leading to good increases in jobs. A 'marked improvement' at this time would almost been a miracle

There seems little doubt that the Federal Reserve has begun serious planning to deal with incipient deflation and is likely to continue in this mode, probably increasing the 'high-powered money' in the U. S. from 50% to 100% over the next 6 to 8 quarters. In simple terms, this means that the existing 'high-powered money' base of about $275 billion would increase to about $400 billion by 1st quarter 2004 and to about $500 billion by 1st quarter January 2005. The beginning of this 8 quarter time table could lag a few quarters more, but the Feds now seems almost obsessively focused upon deflation as the major problem in the global economy.

2. Why Inject Money into the Banking System?

The short answer that many economists seem to believe that the Federal Reserve did not inject enough money, fast enough; into the American banking system in 1930 and 1931 to 'break the back' of the economic deflation starting in those two years. Thus a logical conclusion of this belief, is that whatever needs to be done monetarily to try to resolve the supposedly rising deflation, must be done quite quickly.

3. Deflation and High-Powered Money from 1929 to 1934: Possible Lessons for 2003

In very rough numbers, from a 1975 book by Peter Temin, the 1929 GDP/GNP fell from about $104 billion to about $79 billion in 1934, or about 20 percent deflation in dollar-denominated terms. The precise or even approximate volume of goods and services may or may not have fallen by this same percentage and I have not seen such volume numbers. At the same time, 'high-powered money' rose from about $7 billion in 1929 to about $15 billion in 1934, roughly doubling in four years. So if roughly doubling the 'high-powered money' in four years allowed a 20 deflation, then it seems logical in 2003 to try to more rapidly increase the 'high-powered money' supply; perhaps doubling it in two years, instead of four years. These are approximate numbers and are based upon a database of exactly one series, from 1929 to 1934; as far as I know. Whether or not a two year doubling of the 'high-powered money' would stop or even slow an incipient 2003 deflation in the United States is largely unknown. What is clearly known, is that if deflation is beginning in the United States, counter measures have to begin almost immediately, in 'real-time' and continue for an extended period of time; again perhaps 8 quarters.

Possibly there is no actual incipient deflation, despite the large number of economic markers suggesting so. But the very possibility that it might be coming, is sufficient to put the fear of G-d into anyone remotely familiar with the period 1929 to 1934. Severe inflation wreck's economies sometimes, but jobs often survive along with aggregate demand, after a fashion. Deflation may be a 'black hole' from which whole civilizations may simply be ground into dust.

While hyperinflation severely damaged the German economy in 1923 to 1925, the existing social democratic Weimar government survived. Democracy was not able to survive the 1930 to 1932 deflation and died with the appointment of Adolf Hitler in 1933. A different path led to the fall of a somewhat democratic government in Japan in the 1920s, but the end result was similar, a war-infused nationalism and the beginnings of World War.

A 1984 book by Gilbert Ziebura discussed the 1920s American foreign policy. The general argument of the book was that the global system, which developed out of World War l, depended upon the United States acting as a financial 'hinge' between Southeast Asia and Europe, what Ziebura called the Washington System and the Versailles System respectively. [Gilbert Ziebura, World Economy and World Politics, 1924-1931: From Reconstruction to Collapse. New York: Berg & St. Martin's Press, 1990. [originally published as Weltwirtschaft und Weltpolitik 1924 bis 1931. Zwischen Rekonstruktion und Zusammenbruch, Frankfurt am Main: Suhrkamp Verlag, 1984, translated by Bruce Little.]

4. Greenspan, Deflation and Open Market Operations

Thus Greenspan and anyone likely to assume his position, should the unlikely and unfortunate occur prematurely; is probably going to run this two-year 'high-powered money' doubling, in the reasonable hope that deflation may be beaten; if hit hard, heavy and fast. If deflation is already here, then the worst that may happen from this course of action is that it might not work within two years. But then, that could mean that more stimulus probably needs to be injected into the banking system, not less. And the ongoing injection of 'high-powered money' into the banking system would then continue, perhaps going to $750 billion in a second 8 quarters series. And so long as this injection of 'high-powered money' into the banking system does not trend into hyper-inflation and the jobless rate stays above 10 percent, some level of OMO needs to continue, even if the money has to be 'loaned' to banks, which no longer have negotiable securities for the Fed to 'buy' in exchange for the money being injected.

5. Monetary Velocity, Deflation and 2003-2004 'High-Powered Money'

Another key variable in this thinking is the 'velocity' of money, a term developed in the 1930s by British economist John Maynard Keynes. Velocity is the number of times in which the currency 'turns over', 'circulates' or 'recycles' in a year. This means that the Federal Reserve need not have a separate piece of currency in circulation for each transaction. Velocity tends to speed up during booms and slow down during recessions and is a good measure of how well the economy is functioning.

Keynes believed that money injected directly into the working class was most important as stimulus, because of the margin propensity of the working class to spend; about 94 percent of all additional income. Thus most money directed at the working class would be spent and not saved. Keynes was in favor of the central government distributing large amounts of borrowed money to the working class, which would spend the money immediately and hopefully would then be respent multiple times during the year, encouraging business to invest in more jobs. This was Keynes's way of using velocity.

Velocity in Keynes's mind was an indicator (or a 'dependant' variable), showing the effective buying power of the working class. Trying to increase monetary velocity by adding 'high-powered money' to the vaults of the banking system, is not generally how Keynes might have tried to relieve or prevent a Depression. In Keynes's mind, simply adding cash to the banking system, in the absence of the 'animal spirits' required for additional investment by the private sector, would have been like 'pushing on a string'. If very low interest rates would not encourage investors to bring new innovations on-line, then inflation from more 'high-powered money' would not likely either. For Keynes, increased 'aggregate demand' tended to increase velocity and not the other way around.

Current Federal Reserve thinking therefore must be that more personal consumption can be encouraged from inflation, as people holding money may be more willing to spend it immediately, rather than loose buying power by holding on to the money . And this may well be true for a while, but if adding to the money supply with 'high-powered money' does not in some way increase either wage levels or the number of jobs in the economy, this initial burst of buying will not last. As working people spend at least part of their meager savings, consumption might increase marginally, but as their savings falls ever lower, they are unlikely to be willing to spend all of the savings.

Estimating 'high-powered money' needs in 2003 and 2004 is slightly differently when thinking from a velocity standpoint, since velocity would be being used as an 'independant' variable in trying to predict or project 'high-powered money needs.

. A simple definition of velocity is to divide the GDP or GNP by the 'high-powered money (HM)' in the system, (GNP / HM). No doubt there are more accurate and sophisticated ways of seeing velocity, but this is a good rule of thumb. A very crude analysis of Peter Temin's 1975 numbers, would say that velocity was about 15 in 1929 ($104 / $7) and was down to about 9 ( $80 / $ 9) in 1934. The idea that the monetary velocity fell by almost half, even as the 'high-powered money' was rising by 30 % (from $7 billion to $9 billion), is frightening. At a minimum, the 2003-2004 Fed policy needs to keep the existing velocity close to 35 ( $10 trillion / $275 billion ). Thus if the velocity seemed to be falling to 30, at a minimum, 'high-powered money' might need to be $335 billion. A more disastrous fifty percent falling of velocity towards 20 in 2004 as seems to have occurred between 1929 and 1934; would imply a 'high-powered money' base of $500 billion. These are extraordinary numbers to consider.

Despite the simple definition used in this paper, the actual relationship between falling velocity and deflation may be trickier than has been described here and may not be linear, thus a one percent fall in velocity may not lead to or project a one percent increase in deflation. Thus trying to use velocity as a prime indicator for 'high-powered money', may lead to inaccurate projections. Presently I have little data for arguing either way.


6. Presidential Economics in 2004

It might be noted that this Federal Reserve chairman is not likely to want to see this Republican president run with 10 % unemployment in 2004 and a rapidly deflating economy might well create that much unemployment for the next presidential race. After 1992, Greenspan was seemingly accused of not trying to revive the 1990 U. S. economy in time for George W. H. Bush to retain the presidency in 1992. This charge has always been faulty, ignoring the amount by which Greenspan lowered the Fed's interest rates from 1989 to 1992, from about 10% to about 3 %, an historically unprecedented decrease at the time. The actual problem, was that the private banking system simply held their high 1990 interest rates high, and simply kept the rising 'spread' between their cost of money (i.e., the banks cost of money) and what they were charging companies and consumers. This increasing interest rate 'spread' was simply applied to the bottom lines of the banks and the economy basically stagnated through out the last 8 quarters of GWH Bush's administration. Suffice it to say, Greenspan would not want a similar charge thrown at him or his immediate successor in 2005.

7. Will it Work:
Can Inflating the Money Supply Restart Creative Destruction In 2003
or is Secular Stagnation At Work Again ?

Greenspan's two-word definition of economics might be 'creative destruction', a term whose origins traces through Joseph A. Schumpeter in the 1930s and back to Nikolai Kondratieff in the 1920s. Basically the term means that capitalism is capable of developing, deploying and 'creating' labor-requiring innovations faster than capitalism's tendency towards job 'destruction' through increasing efficiency on the road to faster profits. This is a delicate process, which requires a strong and competent central banker, capable of correctly reading the myriad economic series and correctly increasing or decreasing the interest rates and the money supply. The term is more fully defined in several articles on www.Southernbanking.Com.

If the Fed is going to inject this much raw cash into the banking system, what is the likely result to the existing value base of people and companies. In short, can it work and will it work. The short reply is that it could work, but that it may not. A first consideration is the reaction of the People's Republic of China (PRC), which controls at least $250 billion in hard currency. While this is among the world's largest central bank reserves, it was pointed out to me on January 17, 2003, that China's private banks are in poor shape, perhaps as serious problems as in Japan. PRC will be considered in a separate paragraph below.

8. Would it Have Worked in 1930:
Could Inflating the Money Supply Have Restarted Creative Destruction ?

What is most at issue is whether or not the currently likely-possibly prescribed 2 year doubling of 'high-powered money', would have actually succeeded in the 1930 to 1934 period. I believe that it would not have, again for reasons explained at length in 4 papers written between 1996 and 2000, on www.Southernbanking.Com. The theoretical question devolves around the accuracy of Milton and Rose Friedman's general belief that poor monetary policy may have either 'caused' the 1930s Depression or at a minimum deepened its level of joblessness. Peter Temin's 1975 book attempted to statistically test this idea. The available data, was poor, in that the series was annual and not monthly or even quarterly and the likely worst effects of poor monetary policy would have been felt within 8 quarters of the Crash of 1929, thus only giving 2 points in time to run a regression.

As it was, Temin seemed to have used data from the whole 1930s decade and the result was not to accept the Friedmans's theories of poor monetary policy as a major causative factor in the Depression. Given all the weaknesses of the data, Temin seemed to have trouble coming to a conclusion; but the data seemed to have been better fitted with a traditional leftist theory, 'over-production' or 'under-consumption', an 'archaic' theory in Temin's estimation. Temin was no friend of left-wing 'archaic' theories, but his book seemed to be more supportive of this 'archaic' theory than that of the Friedmans. Temin later quoted in a Wall Street Journal article, which was more supportive of the Friedmans, and he may well have published other academic articles after the 1975 book, which were more supportive as well.

9. Would it Have Worked in 1930:
No, Keynes was Correct
Still it is possible that Temin's results were actually consistent with an 'over-productionist' view of political-economy and that monetary policy could not have resolved the 1930s problem. John Maynard Keynes's ideas of secular stagnation and the 'liquidity trap' would suggest that monetary policy alone cannot resolve certain levels or types of crisis in capitalism. Better monetary policy might have delayed the effects of stagnation, but would not necessarily have encouraged investors to invest in more production in an already over-producing manufacturing system. Cheaper money would not necessarily have encouraged the jobless to borrow more to consume, in the absence of a likely or at least a possible job in the foreseeable future. In the 1930s, jobs were hard to foresee for many people, and what those with jobs often saw in the future, was being laid off. It was not a time when even very good monetary policy might have resolved the crisis, even in 1930 or 1931.

10. 1930s Model: Innovation and Stagnation, Not Innovation and Job Creation

The major issue was that a new application of an older, labor-needing innovation, previously used largely as a 'consumer' item; became used on the assembly lines in the early 1920s. Small electric motors spaced widely along the long assembly lines of manufacturing plants, driving efficiency up about 50 percent between 1922 and 1927. This efficiency was at first seen as bottom line profits, driving stock prices in 1928 and 1929. It soon manifested itself as massive over-production, and in the early 1930s the entire private sector became addicted to increasing efficiency each year, within a declining GNP, resulting in declining job each year, which fed into the next year's declines. Profits were maintained for a while in the monopoly sector in this fashion, but at the expense of increasing unemployment in the United States, nearing 25 percent at the worst of the Depression. Over efficiency had created a model of private investment where innovations were increasingly made to cut labor costs from an existing labor base, not create new products and jobs. Business was in a 'liquidity trap', and neither lower interest rates nor more money available from the banks was going to encourage the private sector to increase borrowing for new production.

The way that Keynes saw to break the cycle, was for the central government to borrow money and distribute it in some fashion to the jobless masses, knowing that they would spend almost every dime, which they could obtain, because they needed it. They were poorly shod, had poor medical treatment and were often semi-hungry. And simply giving the private sector a lot of tax 'giveaways' in the 1930s was not going to encourage the 'animal spirits' to invest in jobs again. Too many factories were already empty. There was no 'need' to build more empty factories.

11. Gold and Inflation

Seemingly the 'gold bugs' are forever pushing gold as a source of investment or at least as ' hedge' against 'fiat' currency fluctuations. Is gold a good bet in this evolving economic environment. Probably the answer is a qualified maybe, to a qualified yes, but only as a way of preventing a fast inflating national currency from hurting the value of a given persons or companies holdings. Very few sources of value are likely to gain value over the next ten years, and simply holding current 2003 value, albeit lower than value in 2000, may seem as a major victory for anyone's portfolio in 2010. Gold has often been a small percentage of many portfolios, often less than 5 %. These gold holdings are frequently not the actual gold, but stock in one of more gold producing companies. But over the five years, a 10 % gold position might not be unreasonable.

Gold might follow the inflation of the dollar, and with a possible increase in U. S. 'hoigh-powered money' from 50% to 100% between 2002 and 2004.

12. External Considerations: PRC and Hard Currency Holdings

A major wild card in all of the above is what will the PRC do with its had currency holdings in its national bank, perhaps $250 billion or more. The PRC has been running huge export surpluses for several years and has 'banked' much of this money in the form of hard currency reserves. I am not aware of what has occurred with Hong Kong's hard currency reserves, about $75 billion in 2001. Hong Kong's currency $HK has been held by a 'peg' of about $7 HK for each $ US in its reserves. This 'currency board' system hurts Hong Kong when the $US is strong, but would help Hong Kong greatly if the $ US was to inflate. I do not know if PRC counts the Hong Kong reserves in its reserves at this time, or what degree of control PRC exercises in any event. At this time, the PRC currency (the yuan or remimbe) is not convertible, while the $HK remains so.

How the PRC decided to deal with a large increase in $ US 'hoigh-powered money' or raw printed cash, is probably the biggest question mark over the next five years. The PRC is split two directions over the issue of the relative strength of the $ US. PRC needs perhaps $100 to $150 billion in net exports to the U. S. for several more years, and thus needs a strong dollar, which discourages U. S. exports back into China. However should the rest of the world begin to dump dollars, if China held back and did not dump at least some of its dollars, China could lose a lot of value on the retained dollars.

13. Internal versus External $ U. S.

Another major issue is what happens to the about $400 billion in 'high-powered money' not in the U. S., but in the global economy. This external U. S. currency is often two-thirds of all U. S. dollar 'high-powered money'. One way of looking at this money, is a $400 billion loan by the rest of the world to the United States, interest free. Another way of seeing this money, is that the $ US is the single currency most often negotiable around the globe and that there has to be a global reserve currency and that at this time, only the U. S. has the capacity to support a global currency.

Still, reserve currencies have been known to fall as well as rise. For many years in the 1800s and early 1900s, the British pound sterling was the primary world currency. Some economists place a major cause of the 1930s Depression on the idea that the pound had fallen too far by 1930, while the dollar had not become strong enough politically to pick up the role of the pound at the time of the 1929 crash.

Conclusions: Greenspan and Bush

For different reasons, the leaderships of both Greenspan and Bush are heading into directions unlikely to be sustainable. For Greenspan, the belief based upon the continued existence of labor-based long waves, that Open Market Operations can redirect this deflating economy is possibly incorrect. This is because true, labor-based long waves ended in the Great Depression and only a pseudo-long wave based in massive Keynesian debt from World War ll kept the capitalist system afloat from about 1946 until about 1966. The economy stagnated until Ronald Reagan then started a new debt-based long wave, unfortunately giving the value of the debt to the very rich.

Greenspan took the helm of the Federal Reserve in 1987, just as Reagan's mountain of debt began crashing the economy and it was Greenspan who stabilized the crashing banking system between 1987 and 1989. In 1989, he began trying to restart the economy and lowered the Federal Reserve rate from about 10 percent to about 3 percent. Greenspan gradually brought the economy back, but not quite soon enough to save George H. W. Bush's 1992 reelection campaign. As the economy finally began moving in late 1992, the new president, Bill Clinton, basically deferred much of his economic policy towards Greenspan throughout much of his eight years.

If Mr. Greenspan is mistaken in his leadership in trying to defeat deflation, he at least is fighting with a full arsenal of economic theory and will certainly look in different directions if his prescriptions seem to be failing. And if it seems to be necessary to largely repudiate Friedmanite monetarism to save the economy, it will be done and Greenspan will move in another direction. Greenspan is probably the only real hope for moving the economy forward through the deflation.

Bush is simply ignorant of most 20th century history, the scion of a wealthy influential Texas oil family. He has no serious analysis of how to lead the country and may well wish that he had never left the Texas governorship. The country desperately needs for George Bush to rethink his lack of policies and/or just resign. Alternatively, the Republicans can try to get control over foreign policy, the Democrats can make the attempt and/or large nation-wide protests can significantly impair Bush's ability to drag the U. S. military off-mission into a quagmire in Iraq. There are no easy answers to the situation the United States finds itself in 2003, but there had better be some answers before George Bush's foreign policy forecloses whatever possibilities Mr. Greenspan has to start moving the global economy through the deflation.

Monetary Velocity and Commerce over the Internet
July 6, 1999


[ These notes were written in 1999, well before the Internet boom had reached it heights of madness. The problem of monetary velocity in an Internet economy is a major issue. This short article only begins to bring up these problems, which are now moving from the theoretical to the real world even now.

RLN
January 16, 2003]


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Monetary Velocity and Commerce over the Internet
July 6, 1999

One of the main jobs of the central bank is to keep up with the number of times the printed currency base turns over during a year, approximately the ‘velocity’ of the currency. Velocity in the American economy could be very roughly calculated by this formula:

V=GDP/C

Where V = velocity of money
GDP = gross domestic product
C = currency base.

1998 V = $8 trillion / $ 200 billion or 40.

(Although about $600 billion is in circulation, about $ 400 billion remains outside U. S. borders.)

British economist, John Maynard Keynes developed the idea of velocity, as justification for deficit spending by the federal government, as a way of relieving the Depression. He believed that each dollar of federal spending would encourage several additional dollars of personal spending and shortly, additional private investment. Keynes’ ‘virtuous circle’ of economic growth would have completed a full loop after private investment had created enough new jobs that federal deficits could stop and new taxes were sufficient to pay down the old debt. Perhaps it has been left to Bill Clinton to finish Keynes’s job. And as a matter of fact, under Clinton’s administration, addition federal debt was basically stopped. The present president in his obsessive desire to give the rich elite as much as possible, is in the process of returning the American economy back to Reagan-era deficits, in the $200- $300 billion range. RLN January 16, 2003]

There may well exist a mathematical relationship between interest rates, monetary velocity and economic growth, something like the relationship between mass, light and energy as hypothesized by Einstein, E=MC2; at least for certain ranges of growth.:

G=VxIz

Where G = economic growth rate
V = velocity of money
I = interest rates
x = ?
z = ?
I won’t pretend to know what the superscript values for either velocity or interest rates might be.

At certain low rates of growth, even fairly low interest rates and relatively high monetary increases by the central bank will not necessarily revive growth [see Peter Temin’s charts on 1930s, 1975]. Keynes had a term for this problem, the ‘liquidity trap’. It was seeking a solution to this real world problem of an economy ‘stuck’ in deflation, even with high monetary [hot money]increases and low interest rates which compelled Keynes to suggest the use of fiscal stimulus in the first place.

For his efforts in attempting to save the capitalism from its own contradictions during the 1930s, Keynes endured a great deal of personal attack. Roosevelt had the same fate in the United States. Both men were accused of being ‘traitors to their class’. The idea that men of such lofty, patrician backgrounds were simply out to bring on Marx’s revolution boggles the mind. Certainly Keynes’ primary goal was to preserve the British Empire. As has been noted by a certain small religious group which has suffered a history of unreasonable prejudice; if you want to make someone your enemy, try doing them a favor or more commonly, no good deed goes unpunished.

It is potentially a major problem in trying to determine velocity, as commerce begins to move onto the Internet. Two problems are likely to occur. First, currency can move much faster over an electronic medium than over a hand-operated, labor-driven banking system. Theoretically, velocity should increase. However, once increasing numbers of people begin loosing their jobs due to Internet efficiency, velocity could begin to slow. This was part of the problem in America during the 1930s, as efficiencies on the assembly lines continued and unemployment remained high.

Thus the head central banker in the United States is facing a very difficult problem as commerce begins to rapidly move onto the Internet, especially business to business transactions. As paper checks start becoming e-checks, Greenspan may be forced to consider the idea of e-money, of ‘issuing’ e-cash from the Federal Reserve. This new specie would exist only in cyberspace and would consist of a single Internet packet with a unique serial number. How to store this e-cash for any length of time is also a problem and e-cash might have a different velocity from paper cash, compounding the problem of calculating currency needs.

No one has yet been able to develop a systematic explanation for how Alan Greenspan has been managing the money supply during the 1990s. In fact one Wall Street Journal writer, Cynthia Rossett, ran an oped last year [1998] where she asked exactly this question. How Greenspan will manage the money supply as the Internet begins to become a more significant factor, is an open question.

The End of Conventional Monetarism: Theory
on the Road to Inflation

R L Norman,
accounts@Southernbanking.com

As Alan Greenspan has finally reached about true zero in
interest rates, the last card left in his deck is the Open Market Operations...

More later

RN

Notes to:

Bertell Ollman, Politics Dept., New York University,
from:

R L Norman,
accounts@Southernbanking.com


January 14, 2003

These notes were to Ollman, one of the few academics who was willing to give me the
time of day, after my purging from the Socialist Scholars Conference. Two items are of
some possible interest today. First , the concept of monetary 'velocity' during a deflation
has recently become en vogue and there are two paragraphs near the bottom about
that matter. Secondly, Economist Paul Krugman of the New York Times has recently been
using the analogy of the 'Black Hole' in describing the current deflation. What Krugman has not
provided is the 'mechanism' which might drive the deflationary economy into the 'Black Hole'.

I have provided an answer, and that answer is 'excessive efficiency' in a period in which innovations
are no longer providing new jobs. In such an economy, the process of 'creative destruction' begins to
split apart, in that job 'destruction' becomes the paramount iinvestment criteria in the eyes of the
investment class, as profits can be derived only from lowering labor costs faster than the currency is
deflating. Job 'Creation' basically ceases. This model is explained further on the Southernbanking.com
Web site.

R L N


________________________________________________________________________________________________

November 22, 1999

Two or three questions were raised on Friday which bear consideration.

Political Options During a Web-Based Falling Rate of Profit Crisis

I believe that the political choices which have existed during major crises in America prior to about 1990 between a one party state , either left or right oriented; or social collapse still exist. An actual falling rate crisis prior to about 1990, would have created political splits similar to those which existed during the 1930s and could have easily led to the failure of democratic government in America. After 1990, a third or fourth political alternative began evolving, roughly in tandem with the expansion of the Internet. This alternative would be a new version of the input-output model, which drove the economy during World War II.

Franklin Roosevelt had treaded water from 1932 until 1939, when some military spending began seeping into the economy. Then in 1941, a foreign attack upon Pearl Harbor naval base in Hawaii created sufficient internal political cohesion to overcome the very deep class divisions, which threatened civil war. The onset of full-scale war after December 7, 1941 finished kick-starting the economy. America finally pulled out of the Depression as the economy became focused upon massive levels of war .

1940s War Economy: Input-Output Model

A system of federal planning gradually evolved during the first years of war, rationing most civilian consumption and turning the rest into war production. This ‘input-output model’ resembled a giant spreadsheet like Lotus or Excel, with the rows representing ‘inputs’ and the columns representing ‘outputs’. The federal government directed the war and asserted some control over the private sector. However, the private sector provided most of the manufacturing capacity- albeit often under cost-plus contracts, which essentially guaranteed good profits. High tax rates prevented this system from accumulating too much wealth in the owning class. Two crucial elements allowed the economy to revive under the input-output model’:

1. attack by Japanese at Pearl Harbor
2. existence of a new economic theory of large federal debts

The external attack gave Roosevelt the political power to overcome the strong isolationist sentiments at home. He then used the economic power of John Maynard Keynes’s theory to create a planning mechanism, capable of applying America’s huge industrial capacity towards war production. The end of war removed the political logic for continuing federal direction of the economy as far as the owning class was concerned and in any case, Harry S. Truman was no Franklin Roosevelt in terms of political competence. And in a way that Keynes could never have imagined, the mountain of American debt created to fight the war, became an ongoing stimulus for economic growth until the middle 1960s.

Although even Keynes could not have planned such a success, it was the very length of the post-war expansion, which allowed conservative economists to revise the history of the Depression years. By the early 1960s, Milton Friedman had largely won the economic ‘spin’ battle as to the causes of the Depression and the slowing global economy of the late 1960s was not simply seen as the logical continuation of ‘stagnation’, as Keynes had defined the 1930s. Different ad hoc terms popped up. The simultaneous occurrence of stagnation and inflation was described as ‘stagflation’. MIT Economist Lester Thurow had a book out entitled, The Zero Sum Society/Economy. The idea that the 1930s was slowly returning back into Depression seemingly was not seriously considered; so great had been the influence of conservative economic thinking from places like the Chicago School. Still what Federal Reserve chairman, Alan Greenspan, may have learned theoretically from the post-war expansion was probably more from long waves and Schumpeter than from Friedman.



Reagan, 1981-1987; Greenspan, 1987-1992: Fiscal and Monetary Policy after the 1970s

After a decade of economic problems during the 1970s, Ronald Reagan injected another huge surge of debt-funded military spending into the economy during the early 1980s. This debt-surge was grossly maldistributed and the market collapsed in October 1987. The Greenspan, immediately poured enough cash into the monetary system to prevent an economic meltdown, but the economy stayed flat into 1989. Greenspan then began feeding interest rate decreases into the economy and over about two years, lowering the interest rate level at which banks borrow their money by almost 7 points, an unprecedented decrease for such a short length of time. The banks did not begin lowering their rates as soon as Greenspan began lowering the banks’s rates in 1989, thus the stimulative effect on the ‘real’ economy of the rate cuts, almost $ 700 billion over two years, was delayed until late 1992. By this time George Bush had lost the presidential election. Bush’s sometimes stated belief that Greenspan cost him the election is probably not correct. Chairman Greenspan did his part starting around summer of 1989 by lowering rates at the Fed level, but the banks simply treated this as ‘found money’ for several quarters, and absorbed the rapidly dropping Fed rates into their profit margin. If anyone cost Bush the election, it was the banks.

No similarity with Kondratieff…

<b>Web-Based Deflation and the Falling Rate of Profit Crisis?

Does a Web-driven deflation model automatically feed into a falling rate of profit crisis? Not necessarily, a mental trip back to high school algebra and slope lines is useful here. In the abstract, the physical volume of aggregate production could remain roughly constant, with the $ valuation of GDP dropping parallel with the decreasing labor costs. If the dropping GDP $ valuation graph or slope line remained approximately parallel to the dropping aggregate labor cost graph line; at least in theory, the rate of profit could be maintained for a while, assuming that labor was willing to see wages drop in this fashion.

However, if aggregate prices did not drop along approximately the same slope line; that is to say if due to the quasi-monopolistic nature of modern capitalism, prices in some sectors remained ‘sticky’, the normal gap between aggregate pricing and aggregate buying power, could become even greater. Again, in the abstract, profits could actually rise temporarily, going in the exact opposite direction from that predicted by falling rate theory. However, this situation is not likely to occur for any length of time because of the extreme pressures the Web places upon prices. I am aware of no commodity which has risen as a result of its contact with the Web, while a great many have lost value. More likely, there will be a ‘race to the bottom’ between falling wages and employment levels, and falling prices. Ultimately, profits must suffer in such circumstances.

Volatility in Monetary Velocity: Inflation during a Deflation Spiral ?

As absurd as it might seem at first glance, inflation could occur temporarily during part of a prolonged deflation, at least in theory. If the money supply did not fall along approximately the same slope line as aggregate pricing and aggregate labor, inflation could result. This problem is extremely tricky because there is no easy way to establish statistical probabilities for the money supply in these circumstances, thus no easy way to establish a slope line estimate and true upper and lower bands of risk around that line. Theoretically the upper side of the trend line would represent inflation potential while the lower side of the trend line would represent deflation potential. ‘Normal’ calculations of money are made more difficult during this time because certain aspects of the Web may decrease monetary velocity while other aspects may increase that velocity. These variations may appear and disappear rapidly and simultaneously, much as wave activity is described in quantum physics.

Too Rapid Efficiency Increases: Failed Monetary Policy and Collapsed Creative Destruction

The problem is compounded in that ‘creative destruction’ as Greenspan practices it, has a hard time dealing with too rapid efficiency increases. Greenspan’s model depends upon the ‘true’ GDP growth rate being the combination of two items, the percent rise in employment and the percent rise in efficiency. (See Barrons 1999 article) Thus a range of GDP growth of between one and three percent seems to work for Greenspan. Greenspan seems to try to calculate monetary velocity in such a way as to keep price ‘stability’ within this GDP growth range of one to three percent. I question whether or not his model can deal with efficiency increases above four percent. Efficiency increases of five to eight per cent are probably well beyond the practical capacity of conventional monetary policy to cope. This brings up the obvious question, as to how long the stock market valuation can grow at rates of ten to twenty percent annually, while the underlying economy simply plugs along at three percent.


Monetary Velocity during the Great Depression: Creative Destruction vs. Falling Rate of Profit?

One way of viewing the Depression is that the process of ‘creative destruction’ became more ‘destructive’ than ‘creative’; that is, job destruction became far too rapid for the innovative, creative side of capitalism to overcome. In such a situation, the very term ‘creative destruction’ became self-contradictory, oxymoronic. Possibly, even probably Alan Greenspan would accept such an explanation- at least in general terms. A major question in this regard is to what degree monetary policy from the 1929 crash forward either precipitated or contributed to the 1930s deflation and Depression. Another way of describing the problem, is whether a failed monetary policy, either before of after October 1929, altered ‘creative destruction’ and largely caused the 1929 collapse and the Great Depression. Seemingly for Greenspan, this is the crucial financial and economic question of the century.

In this respect, ‘creative destruction’ can be seen the mainstream response to Marx’s falling rate of profit model. Since Marx first applied this theory to modern capitalism in relation to the labor theory of value,

Leftists have been waiting since Marx’s death in 1883 for the final economic collapse and the ‘Great Tribulation’ leading to the creation of the new work-free utopia. Yet as the decades piled on since 1883, the capitalist system has been able to overcome problem after problem, seemingly confounding Marx greatest economic idea, the falling rate of profit crisis theory. Leftists and others have a legitimate beef with Marxism on this issue, for if the falling rate.. why has not the economy already collapsed?

In truth, capitalism had never really escaped from the falling rate problem. A series of labor-based innovations simply pushed the problem forward each time the economic crisis seemed about to fatally collapse the system. The 1929 crisis was not resolved in this fashion however. The overproduction had been too great and the new innovations too few to permit a private sector solution. Only a massive global war was able to destroy enough productive capacity and enough workers, to rebalance production and consumption- and then only temporarily.


Web as Efficiency Machine vs Monetary Policy and Creative Destruction

But what if an innovation alone was capable of creating GDP efficiency beyond four percent and the GDP failed to rise in tandem with the increase in efficiency? If the GDP were to grow less rapidly than the increase in production efficiency, then the clear implication is that employment could decrease at least by the arithmetic difference between GDP growth and efficiency. Decreased employment implies decreased buying power and decreased aggregate demand. If such a situation were to persist for several months or a few years, the decreased aggregate demand would cause a rise in unsold inventory- what leftists refer to as ‘over-production. Increased over-production would shortly lead to decreased employment. This is one way of looking at the American economy from about 1922 until about 1934. [see disaccumulation and America as a Developing Nation, 1968 , 1980s]

The Web is such an efficiency machine.

Monetary policy can keep creative destruction alive as a process for defeating Marx’s falling rate of profit model- but only in practical range of about one to three percent efficiency. Theoretically the range should or at least could be higher, but the practical aspect of trying to calculate monetary velocity 12 months ahead in such circumstances makes it unlikely. In my opinion, this equation between employment, efficiency and GDP increases becomes unbalanced when efficiency rises beyond four percent.



Either the Fed chairman must personally assimilate large amounts of data and make decisions based upon his theoretical knowledge and intuition, or he must try to run and modify older, more proven statistical algorithms on newly created dummy economic databases. Either he must make educated guesses or he must try to construct realistic data and statistical algorithms out of little or nothing. Neither alternative is palatable.

The only other roughly comparable economic event was the 1930s deflation and a host of other variables cloud the spotty, remaining data. The economic data from the 1930s is often annual; not weekly, monthly or even quarterly. This makes statistical analysis of the Depression difficult. One such analysis was run by Peter Temin in an early 1970s book. His findings tentatively rejected Milton Friedman’s view of monetary causes of the Depression. A Wall Street Journal front page article of the last year found Temin more favorable to Friedman’s view.


This creates a real problem for the Fed chairman

Labor-Dominant vs. Knowledge-Dominant Products: The Web & a Falling Rate of Profit Crisis

In trying to understand how the Web might trend the economy towards a falling rate of profit crisis, it is useful to compare how different the development, production and distribution of labor-dominant products are from knowledge-dominant products. The dichotomy between labor-dominant and knowledge-dominant products is obviously not distinct; but for theoretical purposes these differences will be magnified, as German sociologist Max Weber might have applied the term ‘ideal type’.

The key labor cost in a knowledge product like software is in the initial writing of that product. Once the knowledge product has been created and refined, the normal costs associated with mass-producing addition units is very low. This reality combined with an effective monopoly on the desktop is the Microsoft Model. Once Bill Gates’s staff has written a new piece of software, the costs of reproduction approach zero. Selling knowledge products through conventional retail ‘brick and mortar’ stores usually requires the physical reproduction, packaging, transportation and retail display of that product, usually on CD-Roms. Many or all of these costs are decreased or eliminated in Web-based retailing. A great deal of thinking, planning and physical work are often involved in developing a prototype for physical commodities such as an automobile or a shirt. The marginal costs of reproducing more such labor-based commodities may and should drop with the increasing size of the production run, but these costs seldom if ever approach zero.

The ultimate lowering of costs occur when a knowledge product has been written for free and placed upon a public server for free, mass access. Two products stand out today in that model. Linux is an outstanding server and desktop operating system. It was written in the early 1990s by Linus Torvalds and put onto the Web for free access. Other writers created a Web-server operating system known as Apache. The combination of Linux and Apache provide competition for Microsoft’s Windows and Windows NT Server.


Global Cultural Data Warehouse and Transnational Consciousness

Perhaps the most serious problem from the Web is that the geographic boundaries which have separated competing and often conflicted cultures are about to melt away. While direct military confrontation over the Web may not be around the corner, it may be closer than most Americans would care to realize. During the bombing of Serbia, rumors floated about that the Serbs had tried to enter the Pentagon’s computers, presumably with little success. Still, the Web is very young in its existence and even the most secure computer systems seem breechable [see NYT Sunday Magazine]. However, this short term trend should begin to fade with the creation of a global data warehouse for culture. Earlier in the 1990s, a book was written on the ‘celestial jukebox’, a proposed massive compilation of cultural material [see NYT article]. I have been told that Star Trek had a show with a similar theme.

Given the very rapid increase in the amount of data that can be stored on a single hand-size disk drive and the increase in computer chip speed, it is only a question of time before each nation begins to assemble its national cultural heritage onto Web sites. All these cultural Web sites will probably be ‘backed-up’ by a single computer some where mutually agreeable, perhaps in Geneva or New York City at a United Nations location. Ultimately, all this cultural data will either be assembled into a massive global data warehouse; or the individual national, cultural databases will be ‘linked’ and indexed in such a fashion, that for most purposes, the intellectual patrimony of mankind will be seen by viewers as one whole, long document. Once researchers begin to trace and compare the various histories and myths, I believe that humanity may begin to see more of its common origins and that the historic reasons which have led to conflict may lessen. Simultaneous translation of any cultural document into any other language will permit anyone to view the writings of the rest of the globe. Needless to add, instrumental music requires no translation

At the point when a child may as easily listen to an ancient Indian verse as a Hayden symphony or when the child may as easily read a current Chinese short story as see the Simpsons; I believe that a qualitative shift will have begun in the development of global consciousness. This global consciousness will not be from economic or political compulsion, but from the innate ability of all human beings to have empathy for another, when given the chance. The very creation of this global cultural data warehouse may well be the most revolutionary act in the history of the species.

Thus at the beginning of the Web, it may well be used in coercive military and political ways, but over time, it should allow the flowering of a very different type of human being. I do not contend that all differences will disappear or even that all recalcitrant, chauvinism- like that on graphic display in former Yugoslavia or any Sunday afternoon by players in the National Football League; only that once the whole world can easily see such blatant exhibitions, that ultimately a new form of shame will evolve. This form of shame should lead to less chauvinistic violence or at least lead to an easier ability for transnational forces to intervene and restore a degree of civil society in places like Rwanda or Kosova.

Global Academic Data Warehouse

Probably before the global cultural warehouse is constructed, a smaller global academic warehouse will be built. As a generation of students begin learning…

One of the problems in advanced study, is the amount of time spent simply trying to locate documents. No single location, save the Library of Congress, even claims to possess all the books in America- much less the rest of the globe. A generation of students raised from within a global, academic warehouse would have enormous advantages of all previous generations. One of the first things which I suspect would occur, is that each student would be able to handle a broader academic area and that the number of ‘specializations’ per field would begin to decrease. In fact, the number of separate fields traditional to academia for the last 100 years might also begin to drop, resulting in a fewer number of academics required to cover the existing knowledge.


Score Card on the 1960s Movements and Civil Society: Who Will Lead the Transition to Postcapitalism?
1. fe
2. ra
3. ed
4. ga

U. S. Exports in Global Trade with a Deflating Dollar: Asian & European Protectionism

The physical volume of production has an abstract monetary value, based upon the theory of value applied to that volume of production. The Web tends to lower the proportion of human labor involved in the development, production and distribution of all products, but especially knowledge-dominant products


The trend is a downward ‘race’ towards a zero $-valued American GDP.

The big problem for international trade, is that a Web-driven deflation in the United States could lower the relative value of the dollar and the $ costs of U.S. export goods, destabilizing other currencies and trade patterns. This could be especially true for services. However, since in the abstract, the lowering of labor costs should increase profits, this would tend to strengthen the U. S. $.


Economic Event Horizon

The concept of massive ‘black holes’…

What drives the black holes are incredible gravitational forces. What will drive the economic version of the black hole is efficiency.


It is a serious question as to whether rapid, Web-based efficiency increases are more likely to lead to inflation or deflation. The Federal Reserve believes that inflation-free economic growth can be had only from a combination of productivity increases and labor force additions. Thus a year with a 2 percent productivity rise and a 1 percent labor force increase should yield about a 3 percent non-inflationary GDP growth for that year. Any higher rise in GDP is likely to be inflationary, at least from this perspective. This model betrays traces of the labor theory of value, in that non-inflationary growth is seen as a linear function of two facets of the labor force, its size and its efficiency.

Will the Federal Reserve be able to stop the trend towards deflation in the United States
through the direct purchase of bonds held by member banks?

A new article on Secular Stagnation coming in early December, with references from Peter Temin's
1974-1975 book on the Great Depression.

Otherwise have a great Thanksgiving Day

R L Norman

Notes on Inflation and Deflation in a Marxian Falling Rate of Profit Crisis

In 2002, we face that worst of economic nightmares, the falling rate of profit crisis, but due to the 125 years of Long Wave activity since Marx, the theoretical waters of political economy are very muddy. Mainstream economists either ignore or reject both the radical versions of Long Wave theory and completely ignore the falling rate theory. Yet even skilled leftist practioners of the falling rate theory seem unable to apply the theory correctly to the present crisis. This is largely because most left economists have yet to focus the falling rate theory through the Long Wave theory. The following paragraphs were notes to Bertell Ollman of New York University Politics Department, from November 22, 1999.


Web-Based Deflation and the Falling Rate of Profit Crisis?

Does a Web-driven deflation model automatically feed into a falling rate of profit crisis? Not necessarily, a mental trip back to high school algebra and slope lines is useful here. In the abstract, the physical volume of aggregate production could remain roughly constant, with the $ valuation of GDP dropping parallel with the decreasing labor costs. If the dropping GDP $ valuation graph or slope line remained approximately parallel to the dropping aggregate labor cost graph line; at least in theory, the rate of profit could be maintained for a while, assuming that labor was willing to see wages drop in this fashion.

However, if aggregate prices did not drop along approximately the same slope line; that is to say if due to the quasi-monopolistic nature of modern capitalism, prices in some sectors remained ‘sticky’, the normal gap between aggregate pricing and aggregate buying power, could become even greater. Again, in the abstract, profits could actually rise temporarily, going in the exact opposite direction from that predicted by falling rate theory. However, this situation is not likely to occur for any length of time because of the extreme pressures the Web places upon prices. I am aware of no commodity which has risen as a result of its contact with the Web, while a great many have lost value. More likely, there will be a ‘race to the bottom’ between falling wages and employment levels, and falling prices. Ultimately, profits must suffer in such circumstances.

Volatility in Monetary Velocity: Inflation during a Deflation Spiral ?

As absurd as it might seem at first glance, inflation could occur temporarily during part of a prolonged deflation, at least in theory. If the money supply did not fall along approximately the same slope line as aggregate pricing and aggregate labor, inflation could result. This problem is extremely tricky because there is no easy way to establish statistical probabilities for the money supply in these circumstances, thus no easy way to establish a slope line estimate and true upper and lower bands of risk around that line. Theoretically the upper side of the trend line would represent inflation potential while the lower side of the trend line would represent deflation potential. ‘Normal’ calculations of money are made more difficult during this time because certain aspects of the Web may decrease monetary velocity while other aspects may increase that velocity. These variations may appear and disappear rapidly and simultaneously, much as wave activity is described in quantum physics.

Too Rapid Efficiency Increases: Failed Monetary Policy and Collapsed Creative Destruction

The problem is compounded in that ‘creative destruction’ as Greenspan practices it, has a hard time dealing with too rapid efficiency increases. Greenspan’s model depends upon the ‘true’ GDP growth rate being the combination of two items, the percent rise in employment and the percent rise in efficiency. (See Barrons 1999 article) Thus a range of GDP growth of between one and three percent seems to work for Greenspan. Greenspan seems to try to calculate monetary velocity in such a way as to keep price ‘stability’ within this GDP growth range of one to three percent. I question whether or not his model can deal with efficiency increases above four percent. Efficiency increases of five to eight per cent are probably well beyond the practical capacity of conventional monetary policy to cope. This brings up the obvious question, as to how long the stock market valuation can grow at rates of ten to twenty percent annually, while the underlying economy simply plugs along at three percent.


Monetary Velocity during the Great Depression: Creative Destruction vs. Falling Rate of Profit?

One way of viewing the Depression is that the process of ‘creative destruction’ became more ‘destructive’ than ‘creative’; that is, job destruction became far too rapid for the innovative, creative side of capitalism to overcome. In such a situation, the very term ‘creative destruction’ became self-contradictory, oxymoronic. Possibly, even probably Alan Greenspan would accept such an explanation- at least in general terms. A major question in this regard is to what degree monetary policy from the 1929 crash forward either precipitated or contributed to the 1930s deflation and Depression. Another way of describing the problem, is whether a failed monetary policy, either before of after October 1929, altered ‘creative destruction’ and largely caused the 1929 collapse and the Great Depression. Seemingly for Greenspan, this is the crucial financial and economic question of the century.

In this respect, ‘creative destruction’ can be seen the mainstream response to Marx’s falling rate of profit model. Since Marx first applied this falling rate theory to modern capitalism in relation to the labor theory of value, there has been controversy over its validity. Some economists seem to try to focus almost all of Marx's theory through this concept. Samir Amin might come to mind here. Yet, like other utopians awaiting the return of the messiah de jour, the theoretical leftists awaiting the falling rate crisis have remained disappointed. These leftists have been waiting since Marx’s death in 1883 for the final economic collapse and the ‘Great Tribulation’ leading to the creation of the new work-free utopia. Yet as the decades piled on since 1883, the capitalist system has been able to overcome problem after problem, seemingly confounding Marx greatest economic idea, the falling rate of profit crisis theory. Leftists and others have a legitimate beef with Marxism on this issue, for if the falling rate theory is basically correct, why has the capitalist system not already collapsed?

In truth, capitalism had never really escaped from the falling rate problem. A series of labor-based innovations, i.e, Long Waves, have simply pushed the falling rate problem forward in time about 20 years, each time the falling rate tendency seemed about to fatally collapse the capitalist system. The 1929 crisis was not resolved in this Long Wave fashion however. The overproduction had been too great and the new labor-based innovations too few to permit a private sector solution. Only a massive global war, financed with massive American federal debt, was able to destroy enough productive capacity and enough workers, to rebalance production and consumption- and then only temporarily through the early 1960s. Left Long Wave economist Ernest Mandel was one of the few writers in the 1960s to interpret the 1960s stagnation as a function of Long Wave activity.

Long Waves, Stagnation and the first ‘Falling Rate of Profit Crisis’:
Alan Greenspan at the Mountain Top: Economic Moses ??

Despite sporadic criticism of Fed Chairman Alan Greenspan, most business people and mainstream economists give him credit for one of the longest boom eras in modern capitalist history. I believe that this credit does not go far enough, in that it does not truly understand the almost mountainous problems which Greenspan has faced since 1987 and worse yet, the final challenge of his career; how to permanently deal with the end of 200 years of Long Wave capitalist growth and the arrival of the first ‘Falling Rate of Profit Crisis’. More will be said shortly about these two problems, but what the present crisis appears to be, is a bout of ‘Secular Stagnation’ as defined by John Maynard Keynes. It is the ‘appearance’ of stagnation which is now occurring almost daily in the business news, which the business columnists such as Louis Uchitelle of The New York Times and Gregg Ip and David Wessel of The Wall Street Journal may shortly proclaim. The problem will be, that the normal solution to stagnation of federal deficits, may not work this time, as it has twice since 1940, once for Franklin Roosevelt between 1940 and 1945 and next for Ronald Reagan between 1981 and 1987. Yet if the actual problem is the arrival of Marx's 'Falling Rate of Profit Crisis', Greenspan may have less sucess over the next 36 months in dealing with the economy than he has had in the two major crisis, the 1987 market crash and the late 1990s Asian meltdown.

Stagnation was Keynes’s term for the lack of job creation in the 1930s which began after the Great Crash of 1929, a shocking blow to an almost decade-long market rise. During the entire 1930s, job creation remained far below the needs of the available work force and this underemployment level was not resolved in the advanced industrial countries until after war-time spending began, thus partially confirming an old Leninist theory, that of imperialism.

Keynes’s ideas of using federal debt to buy war material (actually material of any variety), was used by the Americans to refloat the economy and by about 1943, morning was truly in America. The stock market took a while longer to return to mid-1929 levels, but the working class was in clover by 1943. So powerful were Keynes’s ideas while he was alive, that the U.S. government ran up the debt-to-GDP ratio from about 30% in 1940 to almost 150 % in 1945, the end of war. Yet after war ended, the U S economy suffered only a mild recession, resuming good growth off and on until the mid-1960s, when the economy again faltered. This faltering was attributed at the time to the ‘guns and butter’ policy of Pres. Lyndon B. Johnson, which implied that the ‘Great Society’ social spending could continue even as the Vietnam War escalated.

However, it is just as possible that the primary problem was that the mid-1960s simply marked the end of the almost 20-year stimulis which the 1940 to 1945 federal debt explosion had provided to the American economy. This 20-year period of good growth corresponded with a ‘Long Wave’ upswing, as defined by the Russian economist Nicholai Kondratieff around 1925. And the most prominent exponent of left-wing Long Wave theory, Ernest Mandel, claimed as such. For the Trotskyite, the 20-year growth phase after World War ll corresponded to the ‘normal’ 20-year upswing cycle of a Kondratieff Long Wave. In fact, such a Long Wave probably had not occurred, certainly not of the type of labor-based innovation long wave cycle as defined by Kondratieff. More accurately the 20 years of good growth were almost certainly the result of the huge amount of debt which had been purchased by the American working class during World War ll, being ‘recycled’ back into personal consumption after the war ended and the soldiers had returned home to establish families and join the peacetime economy.

Partially because of Keynes’ tragic death around 1946 and because the post-1945 economy did not require much more of a Kenyesian debt-boost, an alternative explanation of the causes of the Great Depression became popularized by hardline monetarist Milton Friedman. Friedman and his wife Rose, basically revised the actual causes of the Great Depression from that of an almost insurmountable crisis of advanced capitalism, into a more academically ‘managable’ problem associated with some incorrect Federal Reserve actions during the period after the 1929 market crash. This simple explanation does not do justice to Friedman’s full theory and subsequent revisions, but as a one-sentence statement, is fairly close.

Friedman’s views over the years have tended to substitute traditional Keynesian ‘pump-priming’ deficit spending by the Congress during recessions, into interest rate decreases by the Fed instead during downturns. In the abstract, $100 billion dollars in stimulis provided by Congressional deficit spending should be roughly equal to a one point decrease in the Fed rate, which again in the abstract is supposed to worth about $100 billion in stimulis. Thus $100 billion in stimulis to the economy during a downturn should have approximately the same effect, regardless of whether the Fed injected the money into the U S banks, or the Congress appropriates $100 billion in deficit spending.

While seemingly theoretically correct, in the real world, there are often very different results. Thus between 1990 and 1992,Greenspan himself lowered the Fed rate from about 10 % to almost 3%, a drop of almost 7 full points, worth almost $700 billion in stimulis to the economy. However, since this $700 billion was channeled into the economy through the banking system, its ‘normal’ lag time of between 6 and 12 months, was delayed almost one year longer, until the last quarter of 1992, just in time to help the new President Bill Clinton, but about 3 months too late to help the first George Bush get reelected. In 1990 the banks were continuing to suffer from the after shocks of the October 1987 market crash, and after Greenspan began lowering the banks’ cost of money, the banks simply failed to lower their ‘prime rate’ as fast as the Fed was lowering its rate. This additional spread between the dropping Fed rate and the stable prime rate, was simply treated as ‘found money’ by the banking system for about 6 quarters, long enough to restore a good level of profitability to the banks and long enough to dash Bush’s reelection prospects in 1992.

So, the banks are not always the best way to restore an economy in trouble, even for a Republican president. Congressional deficit spending usually works better, since usually the reason that an economy is in trouble, is that it is producing more than can be consumed by the working and middle class and as the government steps in, this surplus can often be reduced sufficiently and sufficiently rapidly, that the economy can resume growing. Thus the speed at which the Congress can act, compared with the often six to twelve months required for Fed actions, known as ‘open market operations’ or OMOs here; make Congressional action often superior to Fed actions in stimulating a sinking economy.

Yet whatever the comparative effects during relatively ‘normal’ downturns, during severe crashes, there is no way for the Federal Reserve to revive the economy on its own, for one simple reason. It is not possible for the Fed to drop its rate below zero percent. Thus while the Fed, can easily run out of room to further stimulate the economy, once it has dropped its own rate below about 2 %- where it is now by the way; in theory Congress could appropriate deficits for years, as occurred both during Ronald Reagan’s years during the 1980s, as well as during Franklin Roosevelt’s war-time years, of 1940 to 1945. And the Congress continued to run large deficits during the entire time when Greenspan was lowering the Fed rate from 1990 to 1992. Thus even the combined affects of both a rapidly falling Fed rate and a rapidly increasing federal deficit from 1990 to 1992, were not enough to get the American economy going until fourth quarter 1992. Again, this was too little and too late for then President George H. W. Bush.

Apparently Bush's financial advisors blamed Greenspan for the 1992 failed reelection. This was then and remains a basically flawed view of Greenspan's actions in directing the Fed between 1987 and 1992. If any entity is financially culpapable for Bush's 1992 loss, then it might well be the American banks, whose delayed lowering of loan rates may have been the major cause of the 1990-1992 stagnation. The idea that a Republican-appointed chief of the Federal Reserve might deliberately sink the reelection chances of the source of that chief's power, is ridiculous. President Carter had that problem with his 1978 appointment of Paul Volker as chief of the Fed, but Greenspan broke his back for Bush, honor among capitalists and all that.

It is true that some monetarists, including Paul Krugman of the New York Times are attempting to overcome this 'no below zero interest rate' limitation, by trying to ‘force-feed’ consumption into a deflating economy, by creating a low-level inflation, through normal open market operations. This is being tried in Japan presently, but seems to be having minimal effects. In a recent year, it seems that the Bank of Japan created a 30% increase in Japanese yen value, but scarcely moved the GDP upwards. Still this policy may have prevented the Japanese economy from crashing far lower. It is hard to be sure whether this policy of trying to restart private consumption in a deflating economy will actually work. Again, Japan is a test case for the theory. If deflation contiues in the American economy, we may get to see another test of this theory.

Yet as Alan Greenspan begins to consider his very successful 15 years as the Fed Chairman, his biggest challenge may be looming. For if the underlying structural problem in the American economy is the final ending of Long Waves or their post-Keynesian surrogates, Debt Long Waves, then stagnation may not be the real problem. If the real problem is a combination of the end of Long Wave action and the arrival of Karl Marx’s long-delayed ‘Falling Rate of Profit Crisis’, then economic solutions geared for ‘stagnation’ and deflation, as those being used in Japan, may well fail. I’m pulling for Greenspan personally, but theoretically, I fear that he will fail in this final confrontation with the Falling Rate of Profit Crisis.

Transition from Long Wave Capitalism to 'PostCapitalism'


One thing which seems to be missing in Long Wave discussion boards is just how short a time the Long Waves have existed- basically since the time of Adam Smith around 1776. While there may have been other cycles in pre-Smithian history, it is the special-unusual event defined by Smith and David Ricardo- Europe's labor theory of value- later redefined by Karl Marx; which ultimately defines the Kondratieff-type of long wave. Thus for only about 200 years of perhaps 250,00 years of human existence, has there been the modern system of production, which can be defined as the Long Waves of Labor-Based Innovation or capitalism.

Part of the reason for this confusion, is that some otherwise perfectly fine and insightful writers, like Immanuel Wallerstein, have attempted to extend backwards into history the economic understandings we have of society today, and have tended to try to create a model of history which tends to revise what has actually occurred, in light of present experience. In this Wallerstein , among others, seems to follow in the foots steps of German sociologist Max Weber. Now Weber had/has a great deal to contribute to our understandings of both current and previous history, but his conflation of the Smithian capitalism with various economic systems from pre-Smithian history has basically clouded the most important aspects of Marx's theory ( see From Max Weber, C Wright Mills I believe- the intro chapter). Weber has done us no favor in doing this.

So the Long Waves have only been with us a short time, and may be about to end. This does not mean that civilization needs to end. The transition from feudalism in Europe was not a happy occasion and it did not procede easily. In the 20th century, capitalism almost succeeded in destroying itself due to relatively minor inconsistencies between production and consumption, based upon an incomplete understanding of how the Long Waves actually worked. The possible collapse of Long Wave capitalism could be far worse, but some version of civil society has to procede. The dictators of the world cannot be the ultimate solution to this crisis. Asiatic despotism, as Marx defined it and as it seems to be evolving in the Peoples Republic of China, cannot be the solution either.

Peter Drucker's incomplete concept of 'Postcapitalism' is one useful place to start.

Reply to William Tamblyn on Long Wave and Inflation:

Still writing from the road.

Debt may play a role in the Long Waves, but debt by investors is created for the purpose of creating labor-based jobs- which then yield profits, from the 'exploitation' of the base of workers- which are paid in aggregate less than the full value of their total production. Profits for the investors has usually implied a growing GDP, what is sometimes referred to as 'accumulation' in left-wing political economy (PE). However, if a situation arises where investors are no longer able to extract profits from new innovations in a growing GDP, then profits may begin to be extracted from increasing efficiency faster than the rate of GDP growth; i.e., laying off workers faster than prices are dropping andd/or faster than the GDP is declining.

This is for me, the definition of 'secular stagnation' as created by John Maynard Keynes (JMK) in the early 1930s. JMK's solution to the 1930s crisis was to create extra buying power or demand through forcing aditional buying power into the working class through debt created by the central government- NOT through the central bank. Greenspan has thus far attempted to apply JMK's 'counter cyclical' idea- but through using the central bank as the means of keeping employment up.

We have been facing a 1930s crisis for several quarters, and despite everything against him, Greenspan has kept the economy afloat thus far. The problem is that once the usual central banks methods have run out of steam, the last card left to play will likely be the 'inflation' card', but that is why we will face inflation, from the final inability of traditional open market operations to reflate the economy.

Inflation will however be considerably better than deflation as the crisis continues- if Greenspan and/or his successors can get a weak inflation started. Low deflation (in a range of even 20 percent) tends to crack governments, while relatively similar inflation levels tend to create more harried consumers, but without necessarily destroying a society. Thus far, the test case (Japan) has not seen much inflation, despite what I believe to have been a 30 % increase in yen 'hot money' reserves (raw cash) created by the Bank of Japan last year.

The current crisis is beyond all convention PE. It in fact represents the collision of the 4 primary types of PE:

1. Long Waves:

People who put their faith into Long Wave regression or economic models, believing that some tweaking of the curves to account for this or that variation- such people are missing the big picture, the general collapse of the labor-based, innovation investing model of the prior Long Waves from the 1800s onward.
(see www.SouthernBanking.Com )

2. Marx's falling rate of profit crisis:

Those old line Marxists who simply see another (or the first) falling rate crisis, are missing the history which has thus far permitted the economy to avoid previous 'close calls' with a falling rate crisis.

3. Traditional PE from Adam Smith, David Ricardo and Alfred Marshall:

Those with traditional PE beliefs (especially 'Supply Siders) are almost completely in the dark, since there is clearly a vast oversupply of almost every commodity in the global system.

4. Keynesian counter-cyclicality:

Lastly Keynesian counter-cyclical pump priming has not yet worked in Japan, but has so far kept the PRC's (Peoples Republic of China) evolving transitional economy okay.

I'll say again, the current crisis is beyond all convention PE. A hybrid theory has to be created in order to have a chance of seeing the actual depth of the present crisis.

Reply to William Tamblyn on Long Wave and Inflation:

Still writing from the road.

Debt may play a role in the Long Waves, but debt by investors is created for the purpose of creating labor-based jobs- which then yield profits, from the 'exploitation' of the base of workers- which are paid in aggregate less than the full value of their total production. Profits for the investors has usually implied a growing GDP, what is sometimes referred to as 'accumulation' in left-wing political economy (PE). However, if a situation arises where investors are no longer able to extract profits from new innovations in a growing GDP, then profits may begin to be extracted from increasing efficiency faster than the rate of GDP growth; i.e., laying off workers faster than prices are dropping andd/or faster than the GDP is declining.

This is for me, the definition of 'secular stagnation' as created by John Maynard Keynes JMK) in the early 1930s. JMK's solution to the 1930s crisis was to create extra demand through forcing aditional buying power into the working class through debt created by the central government- NOT through the central bank. Greenspan has thus far attempted to apply JMK's 'counter cyclical' idea- but through using the central bank as the means of keeping employment up.

We have been facing a 1930s crisis for several quarters, and despite everything against him, Greenspan has kept the economy afloat thus far. The problem is that once the usual central banks methods have run out of steam, the last card left to play will likely be the 'inflation' card', but that is why we will face inflation, from the final inability of traditional open market operations to reflate the economy.

Inflation will however be a considerably sight better than deflation- if Greenspan and/or his successors can get a weak inflation started. Thus far, the test case (Japan) has not seen much inflation, despite what I believe to have been a 30 % increase in yen 'hot money' (raw cash) created by the BOJ last year.

The current crisis is beyond all convention PE. It in fact represents the collision of the 4 primary types of PE:

1. Long Waves:

People who put their faith into Long Wave regression models, believing that some tweaking of the curves to account for this or that variation- such people are missing the big picture, the general collapse of the labor-based, innovation investing model of the prior Long Waves.

2. Marx's falling rate of profit:

Those old line Marxists who simply see another (or the first) falling rate crisis, are missing the history which has thus far permitted the economy to avoid previous 'close calls' wiht a falling rate crisis.

3. Traditional PE from Smith, Ricardo and Marshall:

Those with traditional PE beliefs (esp 'Supply Siders) are almost completely in the dark, since there is clearly a vast oversupply of almost every commodity in the global system.

4. Keynesian counter-cyclicality:

Lastly Keynesian counter-cyclical pump priming has not yet worked in Japan, but has so far kept the PRC's evolving transitional economy okay.


I'll say again, the current crisis is beyond all convention PE. A hybrid theory has to be created in order to have a chance of seeing the actual depth of the crisis which we are in right now.



Regards,
RLN

General Notes on the State of the Economy: War Fever and Secular Stagnation

The version of the long wave theory I'm working with goes back to the development of the theory when Leon Trotsky and Nicholai Kondratieff were arguing just after the Soviet Revolution, over why the long waves existed. Basically Kondratieff seems to have believed that there was some mechanism internal to capital which seem to have made the ups and downs. Trotsky did not believe in such an internal stablizing mechanism.

The conventional long waves based upon labor-increasing innovations ended during WW1 and that debt-funded war in WW2 functioned as a surrogate for a 4th 'true' long wave upswing of about 20 years. By the way, left economist Ernest Mandel, who recently died, was one of the first economists to see problems in the 1960s and to relate these problems to long wave activity.

The international capitalist economy maybe facing an idea first broached by Marx, the idea of a 'falling rate of profit crisis' , in which the rates of profit fall so low, that normal notions of capitalism simply melt away. Marx's ideas were developing during the fall of the first long wave and colored his interpretations. Leon Levy of www.Levy.org may well believe in such theories, although not my interpretation.

See www.Southernbanking.com

Smith, Marx, Kondratieff and Keynes June 6, 1998

Or

http://www.southerndomains.com/SouthernBanks/p2.htm


However, his idea that at the end of capitalism, i.e., possibly after the labor-based long waves had occurred, might lead into a falling rate crisis; this idea of Marx's bears thinking about.

And there was no such falling rate crisis during the 1930s, at least in the monopoly sector, but rather the monopoly sector simply adjusted its profit levels each year by lowering its fixed labor costs. However, as all the large companies used the same strategy, the effect was to lower aggregate nation-wide buying power or 'aggregate demand'. As there was less buying power, executives continued the process, which ultimately was not stopped until war-time spending got started after 1941. This process of lowering labor costs in a declining GDP was defined as 'secular stagnation' by British economist John Maynard Keynes.

http://www.southerndomains.com/SouthernBanks/p5.htm

The capitalist system is NOW in the type of collapse which Marx described as the falling rate crisis, while monopoly businesses are trying to begin lowering their labor costs and keep their labor costs dropping faster than the declining prices they may charge. A recent pollof executives reflected this idea, in that many executives were nervous about the general economy, but more upbeat about their own companies.

The 'kicker' in the deck is that the Internet is being used by consumers to drive the price of commodities (i.e., autos, etc) lower faster than the companies can lower their labor costs. Also, the Internet is capable of decimating the labor markets for much of the service sector and of driving down the market value of the surviving workers in the service sector.

During the Great Depression, the working class was hit much harder that the white collar class. This time I believe that the reverse will be true and that the top end of the service sector will face very harsh and rapid cuts in employment. And since the top end of the service sector is paid a lot of money, the loss of this buying power will hit the economy much harder and much faster.

As to the general market fluctuations, presently the war fever is driving investment down towards zero. I do not believe that war is likely, that Saddam will likely continue to give just enough to keep the Europeans off balance while doing so little that Bush remains angry, but leaving Bush unable to develop a true war consensus.

After all, if the CIA is not clear about the immediate danger to the US and if the military brass is nervous about engagement, it does not take a genius to see that a go-slow policy is in order. Nonetheless, Bush's tough rhetoric is depriving the markets of what little 'animal spirits' remains.

It is to put it mildly, the market is an almost total dice game, with volatility continuing regardless of what Bush actually does, but with a slow grinding downward of the western profit-centered, labor-based model. Ironically, it is quite possible to develop a massive input-output model over the Internet, which would substitute a new monetary value for 'purchasing' commodities for the present monetary system which requires direct labor-force participation.

This type of innovation (the Web), will never be stabilized in a purely profit-centered model and will be used over the next 3-4 years to drive labor from the market- increasing the stagnation levels. In such an environment, a 4000 Dow looks more likely than even a 9000 Dow in December 2003. Ten year 'long term' federal bonds which are able to pay even 4% will look good this time next year. And TIPS federal bonds which will pay an inflation premium might also be a consideration. As to why inflation might return in this 4-5 year process, more will be said later)

Chart 1 Web Deflation Model 2000-2010 :
http://www.southerndomains.com/SouthernBanks/p1.htm#Chart1

I'd appreciate any comments which you or others see in these notes-