A political crisis occurs when the governing assumptions (which are often implicit and unstated) can no longer account for – in intellectual terms – a series of anomalies, and – in practical terms – predict and control actors and events.
1: Richard Fernandez and the Crisis of the Imperial Paradigm.
Section A: The ABC of Economic Anomalies.
2: The American Dream is Dead.
3: Bankers, Bubbles and Betrayal.
4: Crisis of Manageralism, Conventional Wisdom and Corruption and the City.
6: Experts and the Crisis of Elite Consensus.
7: The Fed.
8: Golden Age Gone for Good.
9: High Unemployment.
10: I Answer No.
(Section B: America’s Faulty Assumptions.
Section C: Two Theories of Economics.
Will Feature Next Time.)
A state is a complex adaptive system. A state is a predator. The predator state operates according to a paradigm.
A Paradigm consists of an interlocking set of assumptions and theories that regulate thinking and guide state behaviour concerning security, economics and information. Political paradigms are packaged and sold as political formulas – a story about the state’s legitimacy – by the Ruling Elite to Ruled.
Anomalies are facts that theories cannot account for; persistent and disruptive anomalies overturn the paradigm’s theories; systemic anomalies overturn the paradigm’s basic assumptions and in so doing threaten the legitimacy of the political formula.
If a state’s political formula is now longer seen as legitimate, the Ruling Elite – the temporary occupiers of the state – are doomed.
Part D examines economics. Here, we observe the ABC of economic anomalies; next time, we examine the faulty assumptions and two theories of economics.
1: Richard Fernadez and the Crisis of Imperial Paradigm
In America, the third element of the crisis –after the economic and security aspects –was in clear view. In the United States, it was evident as nowhere else that the disparate economic and security crises of the world were intertwined. And the thing that held them together was something called the Narrative.
The Narrative was the third and political element, the binder that combined economics and security into legitimacy.
But because the economic and security subsystems were being neglected the Narrative was increasingly all that was keeping things going. It was as if a three legged stool were on the verge of collapse, but that its condition was being concealed by tilting it so that it was precariously balanced on one leg.
The three legs of the stool were no longer fulfilling their design function, which was to express the underlying and actual physical arrangements in an abstract way. The names were still being used for supports which had since given way. This was dangerous because the real task of any functioning information system is to represent reality so events in the ‘real world’ can be simulated and managed conveniently.
The financial system for example simulates value; the international security order represents peace; and the political system stands for a mandate. While these are sync all is well. Information problems occur when the virtual and the real parts of the universe no longer correspond as when instruments no longer read correctly. In that case the readout of the instruments is a fiction and it ceases to be a valid information.
The crisis in America was that for reasons of convenience, the political class had tried to fix the mounting problems by rigging the readouts rather than using it to repair breakdowns.
The result was a sham where the spin was increasingly substituted for facts to make up the ‘Narrative’. In the media capitals of the West, the emphasis is increasingly on spin, rather than exposition; on the techniques of deceit rather than discovery. An entire industry had been created to coin euphemisms, invent cover stories and concoct mazes to obfuscate obfuscate the facts, not to solve problems, but to cover them up.
This created a debasement in the Narrative –akin to wildly inflating money –which gradually threatened to undermine rather than enhance legitimacy. As long as the deceit went undetected thing went on. But the danger the bubble would burst was ever-present.
The problem was that years of unquestioned credibility made it too easy to lie and the political elites succumbed to the temptation. The ease with which assurances were accepted, the facility with which information could be manipulated eventually perverted the American political system.
Over the decades, the awareness of the short-term interchangeability of information and fact had grown so strong it intoxicated the political class and seduced them into using it to ‘fix’ knotty problems. The very success of post-war America provided cover for the deceivers. Even when things were no longer working well, they found that as long as the illusion of normalcy could be maintained problems could be hidden. They abused the Narrative to postpone the effects of misgovernance, or hide malfeasance –proverbially “kicking the can down the road” –until well clear of office or accountability.
This has led to a political regime based on information corruption.
War of the Words: Understanding the crisis of the early 21st century in terms of information corruption in the financial, security and political spheres. By Richard R. Fernandez.
The phrase “American dream” was invented during the Great Depression. It comes from a popular 1931 book by the historian James Truslow Adams, who defined it as “that dream of a land in which life should be better and richer and fuller for everyone.”
In the decades that followed, the dream became a reality. Thanks to rapid, widely shared economic growth, nearly all children grew up to achieve the most basic definition of a better life — earning more money and enjoying higher living standards than their parents had.
These days, people are arguably more worried about the American dream than at any point since the Depression. But there has been no real measure of it, despite all of the data available. No one has known how many Americans are more affluent than their parents were — and how the number has changed.
Even as their world came apart, the bankers clung to denial. By August 2007, the flagship hedge fund of Wall Street’s most prestigious firm was tanking fast – and what explanation came from the man at Goldman Sachs? “We were seeing things that were 25-standard deviation moves, several days in a row.” The bank was getting hit by events that were only meant to happen once every 100,000 years – and they were happening every day of the week. Given a choice between blaming their models or reality, Goldman’s bosses held the world at fault.
You know the rest because, a decade later, you and I are still paying for it. How the banks died, the world economy collapsed and most of us got poorer. How the financiers, mainstream economists and regulators were so detached from reality that they swore blind that such a catastrophe was impossible – even while it was under way.
Their reputation has never recovered. And as an economics journalist, I look across at politics and see the same process at work. Brexit, Donald Trump, Jeremy Corbyn: time after time, the political class has completely failed to understand the world they were governing, policing and analysing. Allow me to be blunt: our political crisis is also a crisis for our political class. And it is one from which I doubt they can recover.
In the aftermath of the financial crisis of 2007–2009, analysts and prognosticators have constantly argued over the next big bubble. Will it be in auto loans, in equities, government bonds, or even in housing again? However, the biggest risk facing financial markets may be the financial asset duration bubble. Since 2009, large institutions including central banks, sovereign wealth funds, pension funds, and insurance companies have acquired longer-dated assets to achieve needed returns on yield. Years of monetary policy stimulus from the world’s major central banks has suppressed interest rates worldwide to all-time lows. While this may be viewed as a stimulating policy for borrowers, it creates serious issues for financial institutions with required levels of investment returns and with future liabilities.
In an exclusive interview with Breitbart News, American tech worker Mike Emmons detailed the untold story of his personal experience with the office of then-Senator Hillary Clinton and revealed how she abandoned American workers in favor of fulfilling the desires of corporate donors and foreign special interests.
A Hillary Clinton administration “would not be government of, or for, the people, but would, instead, be government against the people,” Emmons warned.
Emmons, who was one of the nation’s first whistleblowers to expose the displacement of American workers by foreign nationals brought in on guest worker visas, is one of thousands of American workers to have lost his job as a result of the cheap labor practices of the India-based outsourcing firm, Tata Consultancy Services (TCS)–a Clinton Foundation donor whose anti-American worker business model has been “enabled” and endorsed by Hillary Clinton.
Emmons said that his interactions with Clinton in 2003 opened his eyes to the cynical and corrupt pay-for-play tactics of a career politician, guided and consumed by her desire for self-advancement and personal enrichment.
The story of citizens like Mike Emmons and his colleagues has become an all-too-familiar one: American tech workers are gathered together for a meeting with their executives—in this case, by Siemens in Lake Mary, Florida, in 2002. The unsuspecting workers are then informed that, despite their stellar performance record and years of service to the company, they’re all being fired and replaced by predominantly foreign-born Indian workers. However, before they are to be officially let go, they’ll be forced to train their foreign replacements. If they refuse, the American workers will not receive their severance. Companies like Siemens, Disney, Southern California Edison, Xerox, Northeast Utilities, and countless others are able to do this through forming contracts with India-based outsourcing firms like Tata that import thousands of foreign workers into the country on L-1 and H-1B visas and use them to supplant American workers who had been working there previously.
Workers tell me that they feel physically sick as they’re forced to train their replacements,” said attorney Sara Blackwell, who runs an organization that represents high-skilled American workers replaced by low-wage foreign workers. “They go home and vomit; they cry every single night; they go into counseling; they’re admitted to hospitals; there are divorces; we’ve seen two suicides as a result of these cheap labor practices.”
This business model, Blackwell said, “has single-handedly destroyed American families by the thousands.”
In describing the transition from bourgeois capitalism to managerialism, Burnham outlined nine fundamental challenges leading to capitalism’s failure. Capitalist society’s inability to resolve these structural problems heralded, for Burnham, the inevitable collapse of the old order. And nearly all of them—the sole exception being a decline in agricultural productivity—apply to the current economic and political conditions.
(1) The inability to reduce mass unemployment: although headline U.S. unemployment figures are low, labor participation rates are also at their lowest levels in decades. Broader measures of unemployment that account for labor force participation remain unusually high (from the U6 at 9% to independent estimations at 20+%) almost a decade after the financial crisis. Significant portions of the population have essentially been excluded from the labor force and have no realistic prospects for rejoining it. Furthermore, the few rapidly growing employment sectors are in the low-value service economy and are generally of lower quality than the jobs that have been lost. To quote Burnham, a social organization has broken down precisely when “it cannot any longer provide its members with socially useful functions even according to its own ideas of what is socially useful.”
(2) Economic cycles are no longer trending higher: boom-bust cycles are economic inevitabilities, but when cycles overall trend downward, as the post–financial crisis recovery would suggest, it is a sign that the society “can no longer handle its own resources.” Perhaps an even greater problem of this type at present, however, is the fact that median real wages have barely risen in decades. Neither a capitalistic nor a managerial elite can maintain its popular legitimacy if it cannot provide for increasing consumption.
(3) “The volume of public and private debt has reached a point where it cannot be managed much longer,” at least not by any ordinary means. Explanation of this point today seems unnecessary, but it is worth adding that even if capitalism’s moral or economic frameworks concerning debt no longer apply in managerial society, the system’s increasing dependence on borrowing is indicative of deeper imbalances.
(4) Instability and manipulation of foreign exchange: many of the world’s major economies are effectively engaged in an undeclared currency war against each other. In addition, an economy as large as China’s operating under a pegged currency regime is a unique development in recent times that causes further strain on the global system.
(5) Excess uninvested cash: the “mass unemployment of private money is scarcely less indicative of the death of capitalism than the mass unemployment of human beings. Both show the inability of the capitalist institutions any longer to organize human activities.” The same is true for managerial institutions. The inability of corporate or financial investors to find productive uses for increasing cash hoards—especially in light of unusually low interest rates—signals profound and systemic economic dysfunction.
(6) Failure of advanced nations’ policies toward developing economies: in recent decades, the managerial model for economic development has been “globalization,” or the offshoring of labor-intensive industries to geographies with lower wages and employment costs. This model is now breaking down and not only because of political resistance in Western nations. The so-called low-hanging fruit has already been harvested. Emerging countries are increasingly competing with each other for low-wage manufacturing and many are facing the “middle income trap.” Globalization of this type is unlikely to generate accelerating growth in the manner it once did in either advanced or developing economies.
Meanwhile, developed and emerging nations are no longer converging politically. The failure of “democracy promotion,” both of the hard and soft varieties, is part of a broader failure of managerial foreign policy that both indicates and itself creates a deeper destabilization of the system.
(7) The inability to exploit technological advances: this failure applies not only to hypotheses concerning a slowdown in innovation but also to the likelihood that fully exploiting available technological advances would not positively “disrupt” but rather destabilize society. For Burnham, the fact that capitalism would be unable to implement new technologies without significantly increasing unemployment was a further indication that a new social organization had become necessary. Today the situation is similar. The introduction of self-driving vehicles alone will add meaningfully to unemployment rolls, and automation will continue to erode blue-collar jobs and is beginning to replace high-paying, white-collar professions as well. All of the happy talk about education and innovation offers little of substance concerning the unemployment of an increasingly larger mass of society that is being rendered economically superfluous. Such “technological unemployment” shows, in Burnham’s words, “that capitalism and its rulers can no longer use their own resources. And the point is that, if they won’t, someone else will.”
(8) In place of the 1930s agricultural depression that Burnham described, consider the systemic challenge to managerial society posed by the collapse of the universities. They face two crises. The first is the frequent abandonment of genuine academic inquiry in favor of rigid ideology and mindless political correctness, which progressively degrades the quality of the elite. Moral fanaticism and paranoia are not inherently signs of imminent societal decline, however. The more significant crisis threatening the system is the explosion of student loan debt, a clear indication that the universities are creating more would-be managers than are useful, or at least too many of low quality. Since the main purpose of the universities today is to credential the managerial elite, such failures signal that managerial institutions can no longer organize their human resources.
(9) Ideological impotence: “no one who has watched the world during the past twenty years can doubt the ever-increasing impotence of the bourgeois ideologies,” wrote Burnham, “The words begin to have a hollow sound in the most sympathetic capitalist ears.” This is as true of managerialist ideologies now as it was of capitalism then, as anyone who has listened to Mitt Romney or Hillary Clinton speak can attest.
“On the one hand, the scientific pretensions of these ideologies have been exploded.” They are increasingly seen to represent not universal laws of nature but “at best just temporary expressions of the interests and ideals of a particular class of men at a particular historical time.” Significant portions of social science research and even some of the basic principles of economics are now being questioned within their disciplines and beyond. As the power of academic economics in particular has risen, both its precepts and its most prominent figures have failed to comprehend the most important economic phenomena of recent years. This supposed science is increasingly revealed to be little more than the quantitative expression of global consumerism and managerial ideology.
Perhaps even the managers themselves have begun to lose confidence in their own ideologies. The economic, foreign policy, and technological optimism of previous decades is gone. Preserving the status quo has become the sole aspiration—and primarily for the purpose of preserving the class privilege of the current elite, which, even if not admitted, is becoming obvious to voters. The managerial class seems increasingly willing even to abandon democratic formalities. Once the elite itself loses faith in its ideologies and begins to see its class interests as essentially exploitative, it cannot survive.
Conventional wisdom — as reported in many major newspapers and media — tells us the U.S. economy is “recovering.” Well-meaning economists, academics and government officials use the term “recovery” when discussing the economy, implying that growth is getting stronger. The study finds there is no recovery. Since 2007, U.S. GDP per capita growth has been 1%. The Great Recession may be over, but America is dangerously running on empty.
Think of our country as a company, America Inc., which has more than 100 million full-time employees, with about $18 trillion in sales and $20 trillion of debt. The most serious problem facing it is no growth. In addition, America Inc. has three soaring expenses threatening to bankrupt the company and its shareholder-citizens: healthcare, housing and education. As this report notes, in 1980, these three sectors accounted for 25% of total national spending — today, they account for more than 36%. They also account for most of the total measured inflation over this period. And without inflation in these sectors, real annual productivity — defined as GDP per capita growth — would have been an estimated 3.9% instead of 1.7%.
The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.
The CRA’s premise sounds unassailable: helping the poor buy and keep homes will stabilize and rebuild city neighborhoods. As enforced today, though, the law portends just the opposite, threatening to undermine the efforts of the upwardly mobile poor by saddling them with neighbors more than usually likely to depress property values by not maintaining their homes adequately or by losing them to foreclosure. The CRA’s logic also helps to ensure that inner-city neighborhoods stay poor by discouraging the kinds of investment that might make them better off.
The Act, which Jimmy Carter signed in 1977, grew out of the complaint that urban banks were “redlining” inner-city neighborhoods, refusing to lend to their residents while using their deposits to finance suburban expansion. CRA decreed that banks have “an affirmative obligation” to meet the credit needs of the communities in which they are chartered, and that federal banking regulators should assess how well they do that when considering their requests to merge or to open branches. Implicit in the bill’s rationale was a belief that CRA was needed to counter racial discrimination in lending, an assumption that later seemed to gain support from a widely publicized 1990 Federal Reserve Bank of Boston finding that blacks and Hispanics suffered higher mortgage-denial rates than whites, even at similar income levels.
Writing in Bureaucracy in 1944, Mises described the problem that arises when a sizable portion of the population receives its livelihood from the state:
The bureaucrat is not only a government employee. He is, under a democratic constitution, at the same time a voter and as such a part of the sovereign, his employer. He is in a peculiar position: he is both employer and employee. And his pecuniary interest as employee towers above his interest as employer, as he gets much more from the public funds than he contributes to them.
This double relationship becomes more important as the people on the government’s payroll increase. The bureaucrat as voter is more eager to get a raise than to keep the budget balanced. His main concern is to swell the payroll.
On Tuesday 16 September 2008, early in the afternoon, a self-effacing professor with a neatly clipped beard sat with the president in the Roosevelt Room of the White House. Flanked by a square-shouldered banker who had recently run Goldman Sachs, the professor was there to tell the elected leader of the world’s most powerful country how to rescue its economy. Following the bankruptcy of one of the nation’s storied investment banks, a global insurance company was now on the brink, but drawing on a lifetime of scholarly research, the professor had resolved to commit $85bn of public funds to stabilising it.
The call to empower experts, and to keep politics to a minimum, failed to trigger a clear shift in how Washington did business. But it did crystallise the assumptions of the late 1990s and early 2000s – a time when sharp criticisms of gridlock and lobbying were broadly accepted, and technocratic work-arounds to political paralysis were frequently proposed, even if seldom adopted.
And so, by the turn of the 21st century, a new elite consensus had emerged: democracy had to be managed. The will of the people had its place, but that place had to be defined, and not in an expansive fashion. After all, Bill Clinton and Tony Blair, the two most successful political leaders of the time, had proclaimed their allegiance to a “third way”, which proposed that the grand ideological disputes of the cold war had come to an end. If the clashes of abstractions – communism, socialism, capitalism and so on –were finished, all that remained were practical questions, which were less subjects of political choice and more objects of expert analysis. Indeed, at some tacit, unarticulated level, a dark question lurked in educated minds. If all the isms were wasms, if history was over, what good were politicians?
7: The Fed
First, we should never tire of repeating the simple truth that, yes indeed, the dollar has lost 90% of its purchasing power to monetary inflation since the Fed was created. This is not a complicated argument, and it especially rings true with older people who remember how much they paid for homes, cars, appliances, and the like many decades ago. It is also easy to depict visually, as the St. Louis Fed chart above shows. And it requires no conspiratorial bent to accept: one prominent hedge fund manager from a firm you would recognize told us he has a printout of this chart taped next to his monitor as a constant reminder that the only returns that matter to his investors are returns net of inflation.
Second, we should consistently remind people that inflation is a tax– and a regressive tax at that. Defenders of the Fed frequently respond to the point above by reminding us that people don’t just stuff money in mattresses, but rather earn interest via simple bank deposits or returns via investments. Never mind that these same Fed defenders routinely support near-zero, zero, or even negative interest rates when it comes to FOMC policy decisions. But the salient point is this: the difference between the interest rate one earns on a simple money market or savings account and the real inflation rate is effectively a tax. Whether you believe government inflation statistics or alternate statistics as compiled by Shadowstats.com, you are losing money by holding it in an account that pays interest at a rate below inflation. The loss is the “Fed tax.”
The shift came at the end of 1973. The quarter-century before then, starting around 1948, saw the most remarkable period of economic growth in human history. In the Golden Age between the end of the Second World War and 1973, people in what was then known as the ‘industrialised world’ – Western Europe, North America, and Japan – saw their living standards improve year after year. They looked forward to even greater prosperity for their children. Culturally, the first half of the Golden Age was a time of conformity, dominated by hard work to recover from the disaster of the war. The second half of the age was culturally very different, marked by protest and artistic and political experimentation.
In a recent study two unintended consequences of monetary expansion are examined with respect to their indirect effects on unemployment: (1) the redistribution of incomes and wealth, and (2) economic fluctuations.
Monetary expansion causes a redistribution of incomes and wealth. Yet, this redistribution occurs from bottom to top, which is why the gap between rich and poor is becoming wider. The newly created money in the modern financial system is not distributed evenly to all market participants, but it is given to certain market participants in the form of credit. Granting credit, however, is an inherently discriminatory enterprise. Credit is extended to market participants who are expected to have a low credit default risk — hence, to those who enjoy relatively high and stable streams of income, who are relatively wealthy and already possess assets that can be used as collateral, or who are relatively well connected, especially politically. People who are relatively well-off thus receive a disproportionately high share of the newly created money and get to spend it first on the markets for goods, assets, and investments. People who are rather bad-off receive a disproportionately small share of the newly created money and see prices for consumer goods and assets increase before their incomes catch up. Hence, the rich tend to benefit at the expense of the poor.
Expansionary monetary policies also cause other problems. They may trigger economic fluctuations. Initially a boom with rising prices and employment that which is compatible with the short-run Phillips curve is set in motion. Yet, this inflationary boom is unsustainable when nominal investment decisions are not in line with real economic savings as the Austrian theory of the business cycle explains. It will eventually turn into an economic recession, a bust, or a crisis. Over the past couple of decades we have regularly encountered economic crises. The loose monetary policy has certainly been one of the most important causal factors.
Now, even if economic crises come along with higher unemployment, we cannot from that deduce a necessary connection to long-run unemployment. Even the worst economic crisis will end at some point and unemployment will go back to its equilibrium level. Nor does a rising gap between rich and poor have a necessary effect on long-run unemployment. The pure economic theory that can explain these unintended consequences of monetary expansion is not enough.
Political Institutions Change in Response to Inflation
However, it is obvious that economic crises and a rising gap between rich and poor are seen as problems by politicians and the general public. Particularly in a political system that is driven by egalitarian ideals social injustice and economic mischief during crises have to be fought. The unintended consequences of monetary inflation thus undoubtedly set incentives for further political interventions into the economy. They are accelerants of politics, so to speak, and are conducive to the extension of welfare payments, tax increases, and more intrusive regulations into the market place.
Among other things interventions into the labor markets are induced. Minimum wage legislation and job protection laws are cases in point. These well-intended measures have of course multiple effects, but when it comes to the general level of employment they can only be harmful. Increasing the responsibilities and obligations of employers toward their employees lowers their incentives to hire people. On the other hand, increased welfare spending, especially unemployment benefits, may prevent people from actively seeking employment. These measures will thus increase unemployment.
10: I Answer No
Ask yourself: Are you better off than you were a decade ago? Is the United States better off? Is the world safer? Is this country on the right track? I am among the nearly two-thirds of Americans who answer no.
We’re in the seventh year of the slowest economic recovery since 1949. The proportion of working-age adults who are employed is the lowest in decades. Young African Americans face an unemployment rate of over 20 percent. The national debt has almost doubled; an American baby born today already owes more than $60,000. We’ve lost our Standard & Poor’s AAA credit rating. Cities and states face debt and pension crises of their own. Meanwhile, business profits and durable goods orders are down, productivity is sluggish and 2 percent growth is the new normal. Economic inequality has increased; incomes are down; prices are up...
This is not bad luck. It results directly from policies of the Obama administration that Clinton wants to continue. The problem is not implementation, but deep inadequacies in her progressive worldview. It’s a worldview I encounter up close on campus, a worldview that intrigues intellectuals with its promise of rationality and tempts them with the possibility of power.
Progressives try to counter corporate economic power by centralizing political power in executive-branch agencies. They try to cure centralization with more centralization. But this leads to elitism and regulatory capture. When corporations, well-funded nonprofits or well-connected donors team up with government agencies, the rest of us lose. The federal government is the ultimate monopoly. The administrative state is largely unaccountable; you can’t vote the regulators out of office.
Progressivism sacrifices the future for the present, and the present for special interests and personal gain. That is why economies stall and birth rates collapse in countries where progressive policies hold sway.