The Big End of the American Economy

The Big End of the American Economy


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John Maynard Keynes advocated using the economic power of the State, through deficit funding

if necessary, to end depression by stimulating demand in the economy. His theories were

put into practice first in Sweden, then by President Roosevelt



The Big End of the American Economy?

By Richard Lawson


Every schoolboy knows that the American economy is the engine of the world economy. There is an ominous knocking sound coming from under the bonnet, and to those who can hear it, it sounds like a Big End.

The facts are that the economy of the US in the position of one of its cartoon characters who has run off the edge of a cliff but does not yet realise that there is nothing between its feet and the ground except a thousand feet of thin air. Like an aircraft, the economy can keep airborne so long as it keeps moving, but if it stalls, it falls. The bad debts of America’s sub-prime mortgages are beginning the stall process, and the turbulent flow will spread like a disease to other countries.

The first signs of institutional problems are showing in Bear Sterns in the USA, and RAMS Home Loan Group in Australia. Baseless rumours hit the prestigious Barclays Bank in the UK, soon after the near collapse and government-led Bank of England bail out (to the tune of £23 billion) of the Northern Rock mortgage lender. This is likely to be the first in a series of financial wobbles, as the financial sky darkens with the wings of sub-prime chickens coming home to roost.

For “sub-prime” loans read “ill-judged”. Lenders have been overly keen to lend money, because they know that most loans are nice little earners. All the lender has to do is to judge whether the loan applicant is a good risk, and write some numbers on a sheet of paper. Controversy still rages in my mind as to whether the lender has to draw in money from somewhere else, or whether he creates it out of thin air, limited only by the amount of gold his company has stashed away at Gringott’s. I suspect that the latter is the case.

Anyway, it falls to the debtors to stump off to their humdrum work each day for the next few decades to earn the money to pay off, first the interest, and eventually the equity on their loan. So keen were the lenders, that they forgot to take a reality check on the capability of the borrowers to pay back. Now we have a black hole at the heart of the home loan market in the US. House prices are falling in the US, and will probably start to fall soon in the UK, leaving borrowers in the unpleasant position of negative equity – repaying unfeasibly high loans that will never be realised in house value. Heartbreaking and demoralising. Enough to make you want to give up. The problem is that lenders believed that loans created value. Greed blinded them to the fact that it was a negative value.

To make matters worse, the world’s macro economy is no better. The great nations of the world look like people with a McJob who have taken out a mortgage on a £750k house with a swimming pool. The External Debt of the USA is $10 trillion (that’s 10 million million, or 10 to the power 13). As usual, the UK is flying along in America’s slipstream in second place with a stonking $8 trillion debt. The US debt is equivalent to only a single year’s GDP. The UK external debt is equivalent to 4 years’ GDP. Things do not look healthy for the Anglo economies in particular, nor for the world in general. Of the 198 countries in the world, only 5 have no external debt. One of these is Brunei. The others include such big hitters as Palau, East Timor and Leichtenstein. Well done those countries!

The current world economy recalls the old story of a ring of people who were blackmailing each other. One got so fed up he went to the police. The others rounded on him “Why did you do that? We were all doing fine”.

Maybe the world economy will continue to do fine. Maybe Northern Rock is a minor wobble, and the famous Power of the Market will reassert itself. Maybe also, the Market will meet the challenges of continually rising energy prices as demand for oil begins to exceed supply, survive the buffeting of increasingly energetic storms as Gaia strives to win the argument with ExxonMobil/Esso about atmospheric physics, and will survive such other unexpected quirks as fate comes up with, such as an outbreak of pandemic flu. Maybe the world economy will ride all these ups and downs. Maybe.

Or maybe not. Monetary value is built on confidence, and confidence can easily give way to anxiety, which can give rise to defensive money movements, which can give rise to global slump. After all, the Great Depression of 1928 was caused at least in part by widespread debt in the world economy.

Military planners always look at the worst outcome, so that anything else looks relatively pleasant. Our Governments should have a contingency plan ready in case the financial knitting begins to unravel.

What would a great depression look like? It is a total failure of the economic system, characterised by a succession of negative feedback loops. Incomes fall, trade falls, prices fall, profits fall, tax take falls, mining, logging and heavy industry falls, and banks fail. About the only thing not falling in the Great Depression was unemployment which reached one in four of the population. The only silver lining to the cloud is the fact that world CO2 output will fall, which will give us a chance to get to grips with global warming.

This reminds us of the need always to consider the economy in its ecological setting. The picture in 2007 is that the world is just waking up to the reality of global climate change as a result of man-made greenhouse gases, primarily CO2 from the burning of fossil fuels. A second reality is just beginning to dawn: we are entering the age of Peak Oil, when slurping noises are coming from the bottom of the world’s oil barrel. There is a finite amount of oil under the ground, and we are somewhere near half-way through. Despite brave protestations from parts of the oil industry that there is more oil to be found, the amounts of new discoveries are failing, at a time when demand is rising. Any schoolboy know that rising demand and falling supplies means Trouble, in the form of rising prices. These are critical times.

Crises offer us threat and opportunity. The threat is on a recession, leading into a global economic depression, characterised by economic stagnation, widespread poverty, civil unrest and the possibility of war, as in 1939, this time over dwindling resources and shrinkage of life supporting land.

The opportunity is that a breakdown of the current economic order could lead to a phoenix-like economic renewal, a rapidly rising ecological economy based on Green Keynesianism that would stimulate action to protect and heal the planet’s damaged biosphere. That is an immense job of work. There is no room for unemployment in a Green economy, but unemployment is the hallmark of a depression. Therefore green work will heal the depression and heal the environment at the same time.

John Maynard Keynes advocated using the economic power of the State, through deficit funding if necessary, to end depression by stimulating demand in the economy. His theories were put into practice first in Sweden, then by President Roosevelt (the New Deal programmes), and finally and tragically in the frenetic activity of the Second World War, which created a huge demand for production of the instruments of death.

In 2007, Global Warming is the threat equivalent to that posed by Nazi Germany in the 1930s. It threatens humanity with drought, flood, hurricane, famine, mass starvation, and mass migration. It can be met only through intense economic activity, primarily in the fields of energy conservation, renewable energy technology manufacture, production of energy efficient motors, ecologically sensitive re-afforestation, and carbon sink technology. Victory in this enterprise is possible, but only if levels of state spending worldwide are equivalent to, and indeed in place of, current military spending.

How should this money be spent? The key area of spending should be direct, in stimulating employment in the green sector of the economy, by producing a Green Wage Subsidy in the following way.

1. Tribunals are set up who are able to judge whether the processes and product of an enterprise is of net benefit to society and environment.

2. businesses and public enterprises who think they might qualify go to the Tribunals seeking “Green” Accreditation.

3. Businesses that get Green Accreditation may take on new workers (i.e. in addition to their present establishment) from the unemployment agencies, and the intake are allowed to keep their unemployment benefit. Unemployment benefit changes into a Green Wage Subsidy (GWS). In this way the Unemployment Benefit (UB) behaves exactly as Citizens Income (CI)

4. It will be illegal for employers to replace previous establishment with GWS workers, and if a worker thinks s/he has been so replaced they can make a complaint to the Tribunals, who would be able to reinstate the worker or, if necessary, revoke the offending company’s accreditation.

5. The GWS specifically stimulates the Green Sector of the economy during the Depression.

6. The GWS money is money that would otherwise have been given to unemployed people on condition that they do nothing, which is the present status of Unemployment Benefit (UB). GWS changes the same amount ov money from being a dead dole to a stimulus for greening the economy.

7. Although at first there would be little difference to public sector finances, apart from the stimulus to the green sector, because the GWS is permanent (as opposed to being time limited, as analogous benefits are currently structured) there would be a long term cost analogous to that of CI.

8. These costs are consonant with Keynesian doctrine of the state stimulating work in times of economic depression.

9. GWS is therefore a way of introducing CI gradually in such a way as to green the economy at the same time.

In Keynesian terms, the demand is in planet-saving industry and activity, just as in 1940 the demand was for the instruments of war. The Green sector of the economy is intrinsically labour-intensive, several reports of Friends of the Earth have shown. In 1996 I showed that the jobs available to be filled in the green sector of the UK economy were standing at between one and two million, which as it happens was equivalent to the number of unemployed in Britain at that time.

This is not the only green economic response to a global economic slowdown. Local Exchange Trading Schemes (LETS), or TimeBanks, where people barter their services and skills, are a complementary response. Depression also raises the question of who is the right agency to create the money supply, and indeed of what kind of money should be created. The town of Worgl, in Austria, produced its own local currency that required a stamp to maintain its value. This meant that it was better to spend the money than to save it, and the money circulated 13 times faster than national money. In the middle of depressed Europe of the 1930s, Worgl prospered, creating many infrastructure works and unemployment fell from 30% to low levels. The experiment was eventually killed by an unholy alliance between local socialists and national banks.

In conclusion, if the world economy slips into a recession or depression, it will present the Green movement with a unique opportunity to green the economy, to address the causes climate change, and reform the way money is created.

(c) Richard Lawson. 8/11/2007

Source: Green Health

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Dr Richard Lawson was born in Hayling Island, Hampshire, UK in 1946, qualified in medicine (Westminster Hospital) in 1969, and travelled overland around the world in 1971-2. After seven years of hospital psychiatry he transferred to general practice.

He is a member of the Royal College of Psychiatrists, and has been in general medical practice in Congresbury, North Somerset since 1979. He has been a UK Green Party member since about 1977, holding various national offices including Co-Speaker.

Married, with three children, he enjoys gardening, cycling, roller hockey, windsurfing, sand yachting, plays the flute, writes poems, short stories and songs, and is an ex-handglider pilot. He has a number of inventions, chiefly a double film, flexible aerofoil sail which he has been developing steadily for a number of years. He is a Quaker and a member/supporter of numerous socially conscious organizations.

More information can be found at  /

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posted 11 November 2007 




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