The Perfect Economic Storm

By Nat Weinstein

Leading media economic analysts and commentators are holding their breath as they wait nervously for the many-sided global economic bubble to burst. Most concede that burst it must—and that it’s impossible to predict when it will happen. The most recent example was the so-called “New Economy” collapse in 2000 that came as a complete and stunning surprise.

In rare cases the process of “irrational exuberance” that keeps economic bubbles expanding can go on for decades, even after repeated warnings have been issued. However, the biggest bubble of them all—one that is rarely if ever mentioned in the mass media—is the enigmatic and unprecedented 60-year-long expansion of the global capitalist economy. But let’s see what media economic analysts, who we can be sure are fully aware of the source of their nervousness, have to say about the state of the global capitalist economy.

Two examples of the ominous mood that has been developing for some time appeared as front-page headlines in two different sections of the Sunday, June 12, New York Times. The first appeared on the front page of the News of the Week section of this authoritative voice of big business. It’s titled: “The Perfect Storm That Could Drown the Economy.” The author, Daniel Gross, underscores his headline in his two lead paragraphs:

We seem to be living in apocalyptic times. On NBC’s “Revelations,” Bill Pullman and Natasha McElone seek signs of the End of Days. In the Senate, gray-haired eminences speak of the “nuclear option.”

The doomsday theme is seeping into the normally circumspect world of economics. In April, Arjun Murtie, a veteran analyst at the investment bank Goldman Sachs, warned that oil could “super-spike” to $105 a barrel. And increasingly, economists are prophesying that the American economy as a whole may be sailing into choppy waters.

To be sure, this sense of impending catastrophe, with talk of gloom and doom to come, didn’t start yesterday. It all began, of course, when the first two atom bombs were dropped on Hiroshima and Nagasaki in August 1945. The horror of more than 100,000 innocent human beings instantaneously annihilated, and almost as many more Japanese men, women and children dying from radiation burns over the next months and years, was a traumatic global experience. It served to bring home to the peoples of the world the realization that science fiction movies based on end-of-the-world scenarios were no longer pure fantasy.

The mass sense of impending catastrophe was made even more credible by the eruption of the Cold War and the nuclear arms race that produced enough thermonuclear bombs to obliterate most, if not all, intelligent life on Earth, several times over. A veritable Sword of Damocles had been hung by a thread over the heads of humanity on those two fateful days in August 1945.

The second report, appearing in the same edition of the Times, was featured on the front page of the Business section. It also tells a story that deals with another phase of the multi-faceted global social, economic and military crisis that has been festering for decades—the phenomenal escalation of housing prices. This one is appropriately titled: “As Real Estate Goes, So May Go the Global Economy.”

The author, Steve Lohr, argues that it was a deliberate policy whose purpose was to bolster the stock market. This is how he describes it:

The global surge in house prices is a boom by design, largely manufactured by the world’s central banks, led by the Federal Reserve. And it was done for good reason. Faced with a falling stock market and the collapse of the high-tech bubble, the Fed cut interest rates sharply in 2000 to try to limit the damage to the American economy and its trading partners.

Other central banks, like the European Central Bank, quickly followed the Fed’s lead. Higher government spending and tax cuts were also part of the formula. Cheap credit worldwide fueled the housing market, making mortgage payments less costly. Homeowners refinanced their mortgages at lower rates, and the savings went into consumer spending. They took out home-equity loans on houses of rising value, and spent that borrowed money on cars, clothes, furniture, restaurant meals and vacations. The higher consumer spending and the soaring value of the home nest-egg have kept the global economy chugging along.

A third report appeared a few days later in the June 16 edition of the British weekly, The Economist. In an editorial headlined, “House Prices After the Fall,” the editors argue that the housing bubble is growing to unsustainable proportions and is certain to burst. The following extract is a small but revealing sample of what the editors of this important media voice of British capitalism have to say on the deeply disturbing matter of the housing bubble:

This boom is unprecedented in terms of both the number of countries involved and the record size of house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history. The bigger the boom, the bigger the eventual bust.

Throughout history, financial bubbles—whether in houses, equities or tulip bulbs¹—have continued to inflate for longer than rational folk believed possible. In many countries around the globe, house prices are already at record levels in relation to rents and incomes. But, as demonstrated by dotcom shares at the end of the 1990s, some prices could yet rise even higher. It is impossible to predict when prices will turn. Yet turn they will. Prices are already sliding in Australia and Britain. America’s housing market may be a year or so behind.

One can read more such commentaries almost daily in the mass media, including by such prominent representatives of the banking establishment as Paul Volcker, former U.S. Federal Reserve Bank Chairman. He recently wrote:

“Under the placid surface [of the economy], there are disturbing trends: huge imbalances, disequilibria, risks—call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot” (Washington Post, April 10, 2005).

Why real estate prices rise faster than inflation

One of the peculiar characteristics of capitalist economy is that while most of the things for sale on the open market are produced in factories, there also are many things that can be had for a price but are not manmade. Land is one of these peculiar objects that we think of as a commodity with a price supposedly reflecting its “value.” And as long as people believe it has value, it can be bought and sold, like any other commodity.

Even stranger are the many things that can be bought and sold although they are not products of human labor—such things as love, sex, loyalty, friendship and other intimate relationships. And just as there are wholesalers and retailers of commodities produced by human labor, so too are there retailers who buy in order to sell these intangible substances.

However, land and the things built on it have another distinguishing characteristic from other objects that are bought and sold. Land is unique in another respect: it varies in price depending on where it is and what happens to be in its immediate vicinity. Things nearby, as varied as oceans and lakes, roads and mass transit facilities, as well as wealthy and “respectable” neighbors, affect the price that a piece of land commands.

In contrast, square miles of empty land in a jungle or a desert may be worthless in the eyes of capitalists, but a small hunk of land in a densely populated city can be “worth” anywhere from one to ten to a hundred or more dollars a square foot, depending largely on what is nearby.

That’s part of the complexity of factors providing us with a clue as to why and how real estate prices need not move in tandem with other things for sale.

And then of course, there are the things built on land which add to its price. But with buildings of all kinds there is a much more reliable means of measuring the value they add to the property—the necessary labor time incorporated in their construction.

But there is another quality possessed to varying extent by commodities and land contributing to its function as a repository of value and thus to its price. And, as we shall see, this attribute plays a special role in the fantastic rise in the price of real estate over the last 50 to 60 years.

This quality, a commodity’s ability to retain its value for longer or shorter periods of time, lasts only as long as it doesn’t deteriorate with time and the destructive action of the elements. Short-lived items like fresh fruits, vegetables and meat begin losing value as soon as they land on supermarket shelves, while long-lived things like houses and skyscrapers, retain their value almost indefinitely, if properly maintained. Moreover, real estate is more often than not a profitable enterprise—more than making up for the cost of maintenance.

The only commodities that are unaffected by time and exposure to the elements are gold, silver and precious stones.

To be sure, the most perfect repository of value is gold. But since the global monetary system is no longer based on gold, it no longer serves as effectively as it did for thousands of years.

Keynes gives capitalism a 60-year-long lease on life

It all started with the beginning of the overthrow of gold as the metallic base of the global monetary system that was initiated by John Maynard Keynes at the end of World War II. This lies at the root of today’s ever-more intractable global economic crisis. Gold no longer plays its historic role of swift exposure when kings, emperors and presidents quietly inject more paper currency in circulation than was backed by gold safely ensconced in federal treasuries and banks. Diluting the paper currency has the effect of proportionally reducing the value of each dollar, mark, pound or yen in circulation.

That is what lies at the bottom of the phenomenon of permanent inflation in most of the world’s nations.

But the Keynesian restructuring of the global economy did the job it was designed to do, at least in most of the world’s highly industrialized nations. Only now are there the beginning of unmistakable signs that the mother of all economic bubbles is about to burst. That’s really what has precipitated the latest sounds of alarm voiced in the mass media.

Keynes argued that by gradually separating the dollar from its base in gold, governments could run a carefully controlled annual deficit in taxes and other revenue relative to their expenditures that could continue for decades. And of course, it enabled capitalism to enjoy an unprecedented half-century of relative economic stability with only relatively soft landings after each cycle of economic expansion. Keynes’s scheme could not eliminate the boom-bust cycles of capitalist economy, but it did serve to soften the extreme highs and sudden, but less damaging, declines. This was unprecedented in the half-millennium history of capitalism.

Thus, while the phenomenal rise in real estate prices can only be understood in light of the Keynesian transformation of the global monetary system, there are other factors closely connected with the real estate bubble.

Another informative report titled, “What’s on Greenspan’s Mind? by Time columnist, Daniel Kadlec, appeared in the weekly magazine’s July 11 edition. Kadlec, like the other commentators cited above, is not very optimistic regarding future economic prospects. He writes, “If the trend lasts much longer, the housing bubble will graduate to a full-size blimp, and there may be no avoiding its fiery crash.”

But unlike most others, he ventures to explain where Greenspan goes wrong. Kadlec also adds his voice to the many others who have taken note that the chairman of the Federal Reserve Bank, “has publicly admitted that he doesn’t know how to regain his grip on the economy. In February he called the situation a ‘conundrum,’ and then last month added that ‘the economic and financial world is changing in ways that we still do not fully comprehend.’”

And after commenting on the Fed chief’s failure to cause long-term interest rates to rise and cool off the overheated housing market, he goes on to make an interesting observation that sheds light on factors contributing to the multi-faceted economic bubble:

“If Greenspan is perplexed, it may just be that he’s looking too hard—or is loath to acknowledge his role in the conundrum. The flood of easy money generated on his watch to rescue the economy from the burst Internet bubble and other threats has found its way into everything—from oil, gold and timber to stocks, bonds, real estate, art and the price of a Mickey Mantle rookie card. Nothing is cheap. With no bargains to be found, future returns are bound to suffer.”

But, like all the others, he doesn’t dare talk about how it all began with John Maynard Keynes who knew that it would end. Because, sooner or later, after decades of spending money that doesn’t exist in order to keep the system floundering along, the system will come into conflict with the first law of thermodynamics—matter, energy (and money) can neither be created nor destroyed.

Or, like your typical capitalist likes to say to the hungry and desperate masses of workers who he has systematically robbed and cheated: “there ain’t no free lunch”!/P>

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¹ “Tulip bulbs”: a reference to a Dutch craze to culture and sell tulip bulbs in the infant world capitalist market in the 1630s. An Internet encyclopedia describes it thusly:

“The name of the game was to buy low and sell high, just like in any other market. The whole Dutch nation was caught in a sweeping mania, as people traded in their land, livestock, farms and life savings all to acquire 1 single tulip bulb!

“In less than one month, the price of tulip bulbs went up twenty-fold! To put that into perspective, if you had invested $1,000 and came back on month later, your investment would have ballooned to $20,000! Now you can understand the mad rush to buy tulip bulbs at any cost. Tulip bulb mania affected the public psyche to an extreme. One drunk man in a bar started peeling and eating what he thought was an onion, while it was in fact it was the bar owner’s tulip bulb on display. This man was jailed for many months!”