BELIZE CITY: Tuesday, March 10th – If it was not so serious, it is laughable to see the antics grown people go to lie or escape reality. Take the case of Strauss-Kahn, the head of the International Monetary Fund (IMF), who today said in Paris, “This recession can last a long time, unless the policies we’re expecting are put in place, in which case 2010 can be a year of return to growth.”
This is not a recession, nor a depression. It is as Ambrose Evans-Pritchard wrote in the Feb 28th Telegraph, “It is a cataclysmic structural breakdown.”
The global economic/financial system is breaking apart in freefall, and if current policies of bailouts, stimulus, are not stopped soon, we will end in a complete destruction of civilization and in a couple of years see the human population reduced to some one or two billion people instead of the current six-point-eight billion human beings. It may sound drastic, but it is true.
Last week, the New York Times reported on a leaked 21-page confidential report titled “A.I.G.: Is the Risk Systemic?” which confirmed that the underlying problem was not just bad paper (toxic assets) related to home mortgages, but the unraveling of trillions of dollars of collateralized debt obligations (CDO) which are insured by credit default swaps (CDS) transactions – the derivatives bubble. According to the report, A.I.G. has written over 375 million policies with a net value of US $ 19 trillion. This is more than Germany, France and England’s current GDP combined. Who is going to bail that out?
This is the reason why another US $ 30 billion was given last week by the US Government to A.I.G. But on March 8th, The Wall Street Journal published a leak where it was revealed that all the US $ 180 billion in US taxpayers money given to A.I.G. was “paid-out” to “counterparties” of its CDS, led by Hank Paulson’s Goldman Sachs and the hedge funds.
Then on March 9th Maurice Greenberg, the deposed CEO of AIG, told the Financial Times that the first US $30 billion of US Treasury bailout last November to the last US $ 30 billion given last week, went directly to the big banks led by Goldman and Deutschemark. “Christmas came early for them,” said Greenburg. It was a gift because under the mark to market rules, the value of the CDO had fallen sharply, but only AIG was being forced to swallow the losses, while the counter-party banks had the full value of their investment returned.
The solution? On Feb 26th, James Galbraith, economist and son of the famous John K. Galbraith, testified before the US House Committee on Financial Services. In his testimony, he said the current recovery bill (stimulus plan) was based on an unfounded “mechanical assumption” and that monetary policy has little power to restore growth. In addition he stated that the different versions of the US Treasury and British plans will all fail, because “the plan to remove bad assets from the banks’ balance sheets is a costly exercise in futility. There is no reason to believe that the flow of lending will be restored, nor that banks which long ago abandoned prudent and ordinary lending practices will now somehow return to them, chastened by events. To guarantee bad assets at rates above their market value is simply a transfer to those who hold those assets. The plan would thus preserve the wealth of bank insiders and financial investors, while failing to prevent the collapse of the wealth of almost everyone else. I cannot believe that the American public will tolerate this for very long.
“There is in my view no viable alternative to placing them (the banks) in receivership, insuring their deposits, replacing their management, doing a clean audit , isolating the bad assets…And meanwhile to keep the economy running? There should be a public bank to provide the loans to businesses – small, medium and large – sufficient to keep them running through the crisis. This was the function in the Depression, of the Reconstruction Finance Corporation.”
Last week US Sen. Richard Shelby endorsed the Galbraith and LaRouche call for bankruptcy reorganization of the entire global financial system as the only way out of this general financial/economic breakdown.
Ambrose Evans-Pritchard in his article, “Shock and Awe Policies need to Halt Depression”, wrote that the lack of “soup-kitchens” and low unemployment have lulled people into a false sense of security, as economic events have a time-lag. At the current rate of breakdown, unemployment in the industrial countries will rise to 30-40% by summer and major social mayhem will come after about 12 months time-lag.
Look at the facts. During the period 1929 to 1934, trade and production output (agriculture/industry) for Europe and America fell 2.8% in 1930; some 5.1% in 1931; about 3.9% in 1932 and about 7.8% in 1934. But in the last five months the figures for Europe are: Hungary – 23%; Sweden – 20%; Turkey – 18%; Russia – 16%; Spain – 15%; Italy – 14%; Germany – 12%; France – 11%; Britain – 9%. In Asia, the export led boomers Taiwan – 43%; Japan – 30%; Singapore – 29%; Korea – 19%; China – 12%. And in the Americas, Argentina – 18%; Brazil – 15%; Mexico – 13%; and the United States about – 10%.
I can put it another way, sales for Volvo, the largest maker of trucks in the world, have fallen from 42,000 per month to about 115 in February 2009; and CAT, the largest and best known maker of construction and agriculture machinery, has seen sales fall from about 6,000 units per month to some 85 in February. And the largest auto maker, Toyota, has closed 19 out of 20 assembly plants in Japan. At the end of 2007, China supplied about 73% of all footwear in the world. Their export sales of footwear are now off some 45% from their high in November 2007. Millions are now unemployed in China as its vast export economy has grinded to a halt. China’s export surplus fell in February to US $ 4.8 billion, from US $ 40.45 billion last November as exports fell 25.7% and imports 24.1%.
The World Bank said Sunday that the global economy will shrink this year for the first time since World War II and that the global financial crisis will make it tougher for poor and developing nations to access needed financing.
The ramifications of the growing global financial/economic crisis on the world’s poorest nations will likely remain for some time, the bank said. Because richer nations are borrowing more, developing nations are being squeezed out and many financial organizations that have provided financing to lower-income countries “have virtually disappeared.”
The contradictions and the lack of ability to solve this serious financial/economic problem stem from our mind-set. We have been brain-washed for so long by the monetarists in academia, government and the mass media that we don’t understand basic fundamental truths.
Take the case of money. I am well known in Belize as the person who says that money is only “paper”. How many of you who read know what money is? It is not wealth.
As John Hoefle says, money is not an object, but an idea. You go to Brodies and buy milk, salt, rice, etc, and take a hundred dollar bill out of your wallet and pay for your groceries. But the value is not in the “blue note,” but in what it represents. The “blue note” has value only because we believe it has value. Billy will take your “blue note” because he knows his bank, Atlantic, will accept the “blue note” from him. Without that belief, it then becomes a mere piece of paper.
The value is not in the piece of paper but from the ability of the physical economy to produce wealth through the change or transformation of matter. A good example is iron ore. In the ground it is nothing but dirt, just a hard piece of sand or rock. But when man mines the ore and after smelting it becomes iron, and if the oxygen is removed, it is now steel which is now far more valuable than the iron ore. We then turn the steel into tools to mine and smelt and of course into excavators, bulldozers, lathes, mills to build bridges, highways, buildings, ships, trains, and spaceships. Each of these products is not only worth more than the materials from which it was created, but it also increases the productive power of society and the benefits of a high standard of living to humanity.
Let’s keep going: consider how these occur. All of it depends upon human creativity, from the knowledge of the special dirt to the use of limestone mixed and heated with the ore to produce iron to the complex tools build by man. The real source of value is neither the money, nor the raw materials, nor the machinery, but the ability of human beings created in the image of his Creator to figure out the nature of the universe, and to intervene to create what did not exist before. Human creativity is the sole source of wealth, while money is a mere convenience, a way to exchange wealth created elsewhere.
If we understand this truth, then we can solve our financial/economic crisis. If we use the creativity of our population to rebuild our productive base, and to rebuild it at higher levels of technology, then our problems are solved. We must build our way out of this crisis, which means we must think our way out.