The following is a translation of an article by Dr. Artur P. Schmidt, a well-known economist and economic journalist in Switzerland. Schmidt is also a keynote-speaker, who speaks regularly about new media, technology, future trends and knowledge creation.
Recently, he warned that Switzerland faces potential bankruptcy if it does not act to stem losses by its banks and in Swiss Francs in Eastern Europe.
Now he turns to the United States. While I do not agree with everything he writes (I see Glass-Steagall as less important than lack of regulatory oversight), the general tone and overall analysis is spot on regarding interest rates, bailouts and savings. He also has some interesting words to say about how the inflationary policy in Washington is making other nations pay for debts incurred in America.
I should warn you that this analysis at the end of this missive is ‘leftist’ in tone — quite a bit more than what you have seen me write. However, given the huge disparity in income that has built up over the last 35 years in the United States, Schmidt’s analysis does have merit. For my take on similar issues of wealth distribution, see my post, “A populist interpretation of the latest Boom-Bust cycle.”
The real culprits
The U.S. president’s speech on the State of the Nation on Tuesday, February 24th, 2009 was brilliant. He understands how to commemorate big performances with his rhetoric and to captivate his audience. However, with all his magic, one must conclude that, when it comes to economic issues, the long-term thinking he has spoken of goes missing. Even if the current economic program provides short to medium term stimulus, it solves none of the problems in the global crisis. It is too easy to identify Wall Street alone as the culprit of the current crisis. The main responsibility rests with the Federal Reserve, which for more than 13 years allowed the money supply to grow faster than the growth of gross domestic product (GDP). The central bank acted with gross negligence in lowering interest rates ever deeper in order to solve crises and created one bubble after another. The U.S. Congress, which allowed Fannie Mae and Freddy Mac unregulated guarantees and state monopolies, contributed significantly to the fact that the entire U.S. economy was transformed into a giant Ponzi scheme. Obviously, it is not acceptable that bankers exploited this system radically for their benefit, but the culprits of the crisis were sitting in central banks and governments of this world.
Clinton’s big mistake
One of the disastrous decisions was made by Bill Clinton and Al Gore, when, in 1999, they repealed the Glass Steagall Act, which provided for a separation between investment banks and commercial banks. This made possible the immense leverage in financial products in recent years and, thus, the bubble in U.S. housing markets. In order to remain competitive internationally, investment banks took ever greater risks, which ultimately led to their complete collapse in the autumn of 2008. The fact that Obama has not checked Federal Reserve Chairman Bernanke’s ever-widening money printing machinations now will prove a fatal mistake, as, ultimately, the entire American middle class will be expropriated by this inflationary policy. Obama fails to recognize that previous policy has not improved the credit crunch. Had he, he would not agree to bank bailouts, but rather make that money directly available to companies. Only through such an credit airlift can the real economy be prevented from collapsing. If there is enough credit for the economy, interest rates could also be increased, because if the U.S. is lacking something, then it is a higher savings rate. This cannot be realised through low interest rates and gifting taxpayers’ money to banks, because the wrong incentives and signals are being set.
Exogenous downturn factors
While it may make sense from an economic point of view to reduce the current budget deficit of 10% of GDP to 3% by 2013. However, such a policy does not work in recession, but only in a periods of a booming economy. In America, the economy is not booming, but debt creation is. And through an inflation policy, this will be partly funded by the rest of the world. If Bernanke has his way, one will soon buy up even government bonds, in order to keep interest rates low. But wait: Why then is the yield on the 10-year and 30-year government bonds currently climbing significantly? Shouldn’t the market tolerate Bernanke’s milk maid’s bill? Obama would be wise to recognize that the two main forces which will accelerate the economic downturn in the U.S. are exogenous factors:
- First, demographic factors clearly show that the departure of the baby boomer generation from the working world will lead to a clear weakening of U.S. growth economy in the next two decade. and,
- Second, foreign investors will be increasingly less prepared to lend to the U.S. at low interest rates if Helicopter Bernanke is allowed to act further.
Erhard Legacy: Real wages must rise again!
But where can the money come from then for the restructuring which is needed in America? It can only come from those who for decades have robbed it from the lower and middle classes, namely the American upper class. If a country’s income disparity has become so large as it has in the United States, economic leverage must be applied for it to be reduced again. Even the Great Depression of the 30s had its starting point in an incredible shift of wealth to a few. Recent surveys reveal that some 300,000 Americans together earn as much income as that obtained by 150 million Americans in the lower income stratum. Per person, breadwinners in the top group earned 440 times the salary of an average person in the lower income class. As a result, these figures have almost doubled since the year 1980. It certainly has nothing to do with socialism, if one recovers the money stolen from the middle class from the so-called elites through higher taxes. The alleged economic hostility of such a measure can be immediately refuted as it is the accumulation of capital in ever fewer hands which first made the global economic crisis possible. If Obama wants to prove successful in fighting perhaps the greatest economic depression in history, then he must start here. The key to the success of his economic policies will be rising real wages in lower income groups and the middle class. Meanwhile, in the U.S. only every other job has a salary, which is sufficient to maintain a family budget. The result is a double or triple jobs often with significant social consequences for single mothers, fathers and their children. There was no place in neo-liberalism for Ludwig Erhard’s reminder that the needs of a social market economy, only to be met if “real wages increase.”
Reversing wealth disparity
If Obama is to be measured later by whether his economic policy was successful, then he must reverse wealth disparity and force the 10% of the U.S. population which controls two-thirds of the assets into solidarity through higher taxes. Had Roosevelt set out on this in the 30s, the New Deal would have been much more successful. Obama now has the chance to show the world that America has not only finally overcome segregation with his presidency, but also the income division, which has led to one of the most unjust economies the world has ever seen. It is a disgrace for the U.S. that at least 1 / 5 of the population, i.e., approximately 60 million Americans live below the poverty line, while the rich celebrated uproarious parties for decades. Ever since Milton Friedman, the “Solidarity Economy” doctrine became valued with top managers without paying enough mind to solidarity, equality and justice. “Yes we can” means that Obama breaks through this doctrine and recognizes the true causes of the current crisis, not just treats its symptoms.
Related sources Ludwig Erhard – Wikipedia
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Originally published at Credit Writedowns and reproduced here with the author’s permission.