How might the Crash be managed? (900)

At a time when the Western world is poised at the edge of disaster and should be trying to heal its broken currency system, we wake up this morning to find that the stress of it all is causing at least four bitter quarrels within and between the major nations (and maybe a fifth one that’s still being kept under wraps):

1. German Finance Minister Schauble is telling US Treasury Secretary Geithner to mend America’s own economic problems before interfering with Eurozone’s.

2. Chancellor Merkel’s Coalition government in Germany faces defeat. Several of her own party are threatening to resign over the matter of the proposed Euro backstop fund.

3. President Sarkozy has lost his majority in the French Senate and thus his hitherto credibility in speaking for France or the Eurozone.

4. In Italy, Prime Minister Berlusconi and his Finance Minister Tremonti are at dagger-point as to what austerity measures should be adopted — and, indeed, which of them should keep his job.

And what is the fifth one?

5. It is being rumoured in blogland that, in America, President Obama has so little grasp of America’s economic situation that the country is really being led by Treasury Secretary Geithner and the Fed Chairman Bernanke (both, of course, unelected).

So what will happen if and when the Crash comes? My guess is that, initially, the politicians will make themselves scarce. The only example that comes to my mind is the chaos that occurred in 1972 when the oil monopoly countries (OPEC) suddenly reduced supplies and simultaneously raised the price four times. In England there was an immediate need for drastic petrol and diesel rationing. This was when our civil service should have moved smoothly into action. But it didn’t. It didn’t have the knowledge of how our fuel system actually operated. What happened was that the top people at British Petroleum invited the top people from the other three or four major oil corporations to their penthouse offices, together with top government officials as note-takers. Between them, the majors organized an emergency system and the civil servants then hurried away to carry out their end of it.

If the present dollar-euro predicament turns into a major Crash — as many knowledgeable spokespeople (including big investors) are forecasting — which would inevitably involve China and much of the rest of the world, it will be devastating to billions of people within days or weeks as supply lines start to seize up. What will happen in my view is that the major transnational corporations, ranging from food production and supply through to energy through to communications will hasten to assume command of an emergency procedure. Maybe a score or so of the very largest would be involved in a first phase whereby they’d divide into crucial economic sectors and then other smaller corporations would be invited in as infills, and then supplier businesses and so on. By this time I’m assuming that the existing national currency systems within and between governments would be in great danger of breaking down. To keep at least a rudimentary economic system going initially and prevent their customers actually starving, the corporations would have to devise a brand new rationing system — namely money — for use between themselves. Otherwise, national currencies would be so haywire that they couldn’t operate. And then, of course, the corporation would have to extend it to their billions of vital customers. (And, of course, some of them own the biggest printing presses in the world, so this would be no problem.)

By this time, the various national civil services (with politicians trailing behind them when it become safe) would start to integrate with the corporations’ procedures just as mentioned above during the ’72 Oil Crisis. Some might think that the corporations would want to exclude them in order to increase their economic power as normality returned. But that’s paranoiac. Why should they? This would entail an entirely different ball game of infinitely greater stress and complexity than their own operations. Besides they, quite as much as the least individual in any civilization, still need an objective system of laws and justice and they need secular governments for this.

But if, in fact, transnational corporations had managed to devise an emergency money system, then they are going to leave one residue behind them. The emergency system is going to have to persist for a long time to come for at least months, if not years, even if, for reasons of amour propre, civil servants and politicians begin reviving their own currencies in parallel in order to get their own systems into gear again and to raise taxes. A rate of exchange would arise between each of the 200-odd national currencies and the emergency world currency. America, presumably still viable (after all, it has numerous shale gas basins!), would have to give up its pretensions of the dollar remaining as the predominant world reserve currency. It (and the newly split-up European countries) would have to agree with what China, Russia, India, Brazil and other emergent countries have been calling for for years. The corporations’ emergency world currency could at least be symbolic, if not exactly a prototype, of what is needed.

There’s hope for us yet. But, as always in human affairs, it takes a crisis to bring about major change. Thus it might need a world-wide economic crash to bring about a world-wide currency that can serve as the stable reference for any other currencies that different cultures would still like to retain.

Feeling sorry for Christine (400)

I felt sorry for Christine Lagarde yesterday as she faced the press after the IMF meeting in Washington. As a top-flight lawyer, she is superbly equipped verbally and she pulled out of the dictionary every hopeful-sounding adjective and adverb she could find. Also, like any seasoned advocate, she used the weakest part of the IMF’s armoury in the most positive way to make it sound like real policy. It’s a matter of “Implementation, implementation, implementation”, she said repeatedly.

But, of course, that’s precisely what has not happened in the last two years as the IMF, the Eurozone politicians and the European Central Bank have tried to devise a rescue plan for Greece’s economy. Two bail-outs have failed so far. Hundreds, and sometimes thousands, of public service workers and ex-workers have been demonstrating every day for the past four months outside the Parliamentary Building in Athens. Small businesses are going bankrupt. The better-off professional classes continue to skilfully avoid many of the recent additional taxes. The rich have sent their money out of the country. The tax-inspectors are allowing their files to get on top of them.

Despite “Implementation, implementation, implementation” what the IMF decided yesterday was to kick the can further down the road until a G20 meeting in November that could possibly devise a huge loan for the Eurozone as a whole. With interest rates on some of its bond debts rising to 50% p.a. already, Greece cannot wait that long. The IMF might at least have engineered a graceful mode of default for Greece so that it has a chance of surviving on its own but no, it stays trapped, at least far as the Eurozone is concerned.

If Greece defaults ungraciously in the next few weeks, or even days, then a string of other countries are in danger from those European banks, pensions funds and other investors which will want to withdraw their loans. Portugal and Spain certainly, possibly not Ireland, but then Italy almost certainly. And then France itself, the political mainstay of the Eurozone, will be in danger. The French Managing Director of the IMF, Christine Lagarde, might have to preside over the total break-up of the Eurozone, which will mean that even her own country will have to start standing on its own feet and not be dependent on subsidies from Germany, Finland and Holland. No wonder Christine was very nervous yesterday as she kept her hands steady on the table in front of her but couldn’t prevent the micro flashes of fear around her eyes as she faced the next press questioner

A double-twist by the US Government/Fed (500)

After their two-day meeting, the Federal Reserve (the US central bank) have announced “Operation Twist”. It certainly is a twist. In fact, it’s a re-twist on the twist that’s already been carried out.

What’s being put over to the totally bemused public (and many financial journalists) is that the Government (the US Treasury) will ‘buy’ $400 billion of government long-dated bonds by ‘selling’ the same amount of short-dated bonds. This is supposed to be benign in that no new money is being created. Thus there’ll be no danger of causing inflation. The idea behind it is that long-term interest rates of the currency will be brought down and thus tempt industry into investing in long-term plans and getting people back to work.

Never mind that most consumer-production transnational corporations are already sitting on massive profits that they don’t know what to do with, what’s all this about the government ‘buying’ and ‘selling’? The fact is that the US government is already insolvent and doesn’t have the money to ‘buy’ the short-term bonds in the first place. Short-term bonds are either owned by private investors (e.g. pension funds) and have to be bought with real cash, or they’ve already been ‘bought’ by the Government (the US Treasury) and then placed in hock at the pawnbrokers (the Fed) which then prints the money. This is called Quantitative Easing. If the Government wants to get hold of the pawned short-term bonds, then they’ve got to pay the Fed in order to get them out of hock, just as anybody has to do at the pawnbrokers.

The only way that the US Government can ‘sell’ the Fed-owned short-term bonds is by some form of subterfuge which breaks all accounting principles — by the Fed pretending not to notice that their collateral is being burgled and then used to buy long-term bonds. And then, of course, the newly acquired long-term bonds will immediately have to be placed in hock with the Fed in order for the new money to be created. Thus the Government now owes not just $400 billion, but $800 billion. This is not only the $400 billion of short-term bonds it has burgled but another $400 billion of long-term bonds newly put in hock.

Central banks are supposed to be independent from governments. They are supposed to have two distinct functions. One is to look after the value of the currency on behalf of the public by cudgeling the ordinary banks’ proclivity to manufacture credit. The other is take care of taxpayers’ money and cudgel the government if necessary if it tries to borrow way beyond what it’s able to tax. On these two counts, whatever politicians may say, central banks have compromised themselves decades ago. By colluding together, governments and central banks have been defrauding their electorates with steady inflation for decades. By this new double-twist, the US government is set to defraud its electorate even further.

Hyperinflation, here we come! This is what Paul Volcker, a past Chairman of the Fed, warned about in his New York Times article only two days before the Fed Committee sat. With three honourable exceptions, the Committee fell for Bernanke’s specious argument after having been worn down over a two-day meeting.

The only real modern disaster (850)

One recipient of my “Three disastrous cliques” piece has suggested that the cliques around Stalin, Hitler, Ma Zedong and Pol Pot were more disastrous than the three I proposed. The following is my reply.

I don’t doubt that all those you’ve mentioned had a clique around them in the terms I defined it (that is, no more than about half-a-dozen to a dozen in total agreement with the leader) and there’s no doubt they were disastrous to the tune of millions of deaths each. But they were no different (albeit on a much larger scale) than the Genghis Khans of history — and there have been many of those. They didn’t actually cause a major change-point in history or were associated with them. They were awful hiccups but then the major world system reverted to the current norm.

Actually, of the three “disastrous cliques” I quoted in my last piece it was only the first which amounted to a major gear change. The Geneva Conference was, as it were, an attempt at the complete consolidation of the nation-state as it had been sharpening up ever since Westphalia. By fixing the price of gold, not to its free-market valuation but to existing European and American currencies, the 1922 decision effectively suborned hitherto independent central banks to control by civil service treasuries. This resulted, of course, in the massive growth in national bureaucratic power (vis-a-vis politicians) enabling it to control (or attempt to control) the genuine new power that bureaucracies were truly afraid of — industry. With the benefit of hindsight we can now see that the growing bureaucratic empires would inevitably lead to bankruptcy of one nation-state after another as we are experiencing today.

However, the genie which was just beginning to escape from the bottle in 1922 was not industry alone (this was just about controllable within a nation-state) but its internationalization. This development was relatively trivial at the time. But, just as the power of nation-state bureaucracies has grown in all advanced countries since 1922, so have the power and reach of the transnational company (whether large or small). Thus, what we have now is not so much the comparative skill advantages of one country as against another (as described by economists in conventional terms of currency values and balances of payment, etc) but the comparative skill advantages of cliques anywhere in an increasingly specialized world. In reality, most of the trade of the modern world is already that of the movement of components of final consumer goods within and between major transnational corporations and the supply of specialist goods and services to them. This is increasing. The actual origin of all these, and of the nature of specifit nation-state governments and cultures, is of decreasing importance.

Thus we are becoming truly globalized, but in a way that politicians, bureaucrats and economists cannot yet see clearly — though they’re obviously aware of the phenomenon in a general way. In the last two or three decades there has been quite a number of prescient writers on this theme such as Walter B. Wriston (The Twilight of Sovereignty) and Keniche Ohmae (The Borderless State). But what is also apparent in all the advanced countries and those of the fast-growing emergent ones, is that the important cliques all these industries increasingly derive from similar new “meta-classes” whose children are educated in first-class schools and elite universities and almost exclusively find their marriage partners there

I take no moral view on this — que sera, sera — only that the new dynasties would be well-advised not to remain exclusive because they’ll make the same mistake as all dynasties have made in the past. There’s a great deal more potential talent outside the meta-class than inside it. (And modern evolutionary biology is also showing us that there are no specific “intelligence genes”. There are hundreds of them, they are constantly changing their associations every generation and everybody shares them.) As the world becomes more specialized the meta-class are going to need as much talent as they can get.

This reminds me of something with which I must now end. One of the biggest benefactors of my old school, Bablake, was Thomas Wheatley in the 16th century. He was a poor countryside boy (probably orphaned) who managed to make good in Coventry and became a master card-maker (a card-machine was an instrument used in wool-combing) and ultimately its Mayor. He’d sent to Spain for replacement machine parts made from the best Toledo steel but received, by mistake, a chest of silver ingots and cochineal. (Even their transport system made mistakes!) This was substantial wealth, equivalent in today’s terms to several million pounds. He sent his agent back to Spain to rectify the mistake but he was unsuccessful (the Black Plague was periodically raging in those centuries, of course). Wheatley felt he couldn’t profit from this mistake and therefore endowed the school with board, lodging and clothes for 40 poor boys of Coventry. The meta-class today had better start thinking along these lines, as the quasi state educational monopolies in all advanced countries continue to fail.

Three disastrous cliques (750)

The whole human world operates by means of cliques of no more than a dozen individuals, usually fewer. This applies to governments or businesses, the arts or the sciences, professionals or tradespeople, worthy or less-worthy pressure groups, legal or illegal enterprises, religious or secular cultures, physical or intellectual fashions, ideologies of the left or the right, highly intellectual specialisms or trivial hobbies, democracies or bureaucracies, elite classes or underclasses, teenagers and oldies, and so on. Even in the case of apparently over-powerful individual leaderships, a loyal clique is necessary immediately below them or they don’t last long. Even in the case of lone creative intellectuals, their ideas never see the light of day unless they acquire a clique of believers who propagate them.

It takes no more than a few minutes of thoughtful scrutiny of any purposeful decision-making activity that we read or see about us to realize this fact. But, other than those in the really powerful cliques at the very top of their particular heaps, most of the motley don’t realize this, anymore than they notice the air they breathe, or fish in the water they swim in. This small group-ness has applied to us ever since our ancestors broke away from other primates and struck out (probably forced out!), bewildered, fearful yet ever curious, into the savannahs of Africa six million years ago.

There are many more behavioural characteristics — social certainties and cultural predispositions — that our genes and epigenes have shaped in us due to the particular exigencies of life on the savannah. But the basic platform is still that of the small hunter-gatherer cliques of mature adults. This has not changed. Civilizations don’t succeed others bodily by means of some sort of spontaneous urge but only when they’re spearheaded by small groups who’ve adopted new physical or mental innovations or have moved to new locations and shown that they can do better than before.

Historians know this but they’re small in number and usually don’t come to balanced views about a topic until it lies many generations or even centuries or millennia in the past. Also, they’re not usually to be found as advisors to present-day power cliques. If they have any wisdom to offer it is only of an anecdotal sort and may seem unlikely to apply to specific modern circumstances.

But evolutionary science is entirely a different matter. Apart from a premature phase of eliciting catastrophic misinterpretations by politicians, Darwin’s ideas largely slumbered for about a century after his death until being revived with a whoosh when genes were elucidated beyond doubt 60 years ago. Evolutionary scientists who carry out precise experiments at gene level and upwards, and fellow specialists such as anthropologists who closely observe all sorts of society, all agree to a surprisingly large number of universal characteristics that are found in every society of whatever sort. And the small-group nature of our species is arguably by far and away the most important of these.

Because evolutionary scientists are also engaged in research which will have vast medical applications, their future reputation overall will grow and their role as advisors will become a great deal more influential than historians have ever been (or even economists dare I say?). They’ll not be advising us to change the principle or practice of clique-ridden cultures because they know that this will never change this side of a million years. But in a future of many more necessary specialist cliques — with even greater powers than now for good or ill — they will undoubtedly be able to offer better ways in which cliques can recruit better candidates. Undoubtedly they will be offering demoselection of governance rather than our present ‘democracy’ which has yielded cliques who don’t what they’re doing apart from bribing electorates to vote for them at election time.

Meanwhile, at least the present generation of children and young people in both the advanced countries and elsewhere will have to get through the consequences of those cliques which have led the Western world into our present parlous condition. My selection of the most disastrous three of these are:

1. The clique at the Geneva Conference of 1922 which overthrew the primacy of non-inflationary gold-backed money and made it subservient to government-manufactured stuff;
2. The cliques of Western central bankers and politicians ever since who have over-printed money to such an extent that almost all their countries are now deep in debt;
3. The cliques of traders at JPMorganChase and other investment banks who invented sophisticated derivatives in the last 20 years beyond all understanding of their consequences even by their own notional bosses.

A Junior Euro? (800)

On another list, Pete Vincent has proposed that the weaker Eurozone countries could branch off and have another sort of Euro currency. Such a Euro-Jr currency is an interesting idea and has some merit but, other things being equal, it would work no better than the existing Euro (except for one possibility).

The conventional 20th and 21st century (fiat) currency of any government exists only by how much confidence private people or institutions have that they will be paid back (in real value) if they lend money to the government if its expenditures continue to exceed its existing ability to tax. If they have no confidence in the future competence of a government then they won’t lend — that is, buy government bonds. If they have full confidence, then they might buy bonds with little or no risk premium above about a 2% annual return (that is, that the normal level of compensation people require for not investing it elsewhere or hoarding it for emergencies with complete security under the mattress.) If potential investors think that the future financial conduct of a government is risky then they will demand higher annual returns on their bonds according to the level of risk they perceive.

When the Eurozone started 11 years ago with such mutual back-slapping bombast (in effect, “we’re going to challenge the dollar!”), then private investors, banks, pension funds and other naive institutions were bamboozled into thinking that the initial value of the Euro would be maintained by prudent financial control. However, they didn’t realize that, despite all the wonderful aspirations, no Eurozone government had actually been set up with the ability to tax. There was a money-printing central bank all right — the ECB — but that’s only the half of it. There was no taxation system or budgetary control over the Eurozone territory. Reduced to essentials, there were only voluntary contributions by prosperous governments (and their electorates) such as Germany to the less prosperous countries such as Greece. Thus, initially, when investors bought Eurobonds issued by Greece they thought they would have the same potential value as Eurobonds issued by Germany. Because Germany and Finland and one or two other countries have become increasingly reluctant to be so charitable in the future, investors now know otherwise about Eurobonds. Those who buy Greek Eurobonds now require a return of 30% per annum (and still rising) due to the risk factor of a culture and economy that has been enticed into becoming charity-dependent over the past 11 years. Obviously, this can’t continue for much longer.

If, however, Greece and other similar countries such as Ireland, Spain, Portugal and Italy, were to form a Euro-Jr-zone then exactly the same situation would apply. There would be a relatively higher level of prosperity in one of them, but it would be distinctly lower than that of the Eurozone as a whole and it would thus be most unlikely ever start to be charitable to the others. Unless the Euro-Jrp-zone also had a unitary taxation and budgetary system (that is, imposed by a new central government), the Euro-Jnr would have no more chance of surviving than the Euro.

The Eurozone is now debating whether to issue a new type of Eurobond (that is, a real bond this time) but this would require a new pan-Euro government with the ability to tax as well — so that investors would have confidence in lending with sensibly low rates of return. So far, the political and the civil service Eurozone cliques have not dared mention this to their electorates. The consensus of objective observers so far is that the possibility of persuading 17 different electorates agreeing to yield their sovereignty to one new taxation authority is pretty well zero.

Ironically, the central banks of America, England, Japan, Switzerland and the ECB itself (!) have decided to guarantee the survival of the Eurozone until the end of the year. The irony is that the governments of all of them, except Switzerland (almost the smallest country in Europe!), are already so deeply in debt themselves that any realistic person would say that they have little prospect of ever paying their debts off except with several years of hard grind. The only non-bankrupt government with any large amount of surplus money, China (and hitherto by far the largest investor in Eurobonds of various sorts), hasn’t been invited in this rescue operation. It’s prepared to help further but only if the Eurozone “gets its house in order” as one of its spokesmen said yesterday.

The possibility I previously hinted at is that if the potential Euro-Jr-zone countries were to form a competent taxation/budgeting government then the Euro-Jr currency could survive. Indeed, if it also needed a helping hand, then China would probably help with initial loans. The Euro-Jr-zone could survive even if the Eurozone didn’t. Now there’s a wonder!

This shameful land (250)

About a few dozen modern slaves were revealed yesterday in England working for gangs of ‘Travellers’. Originally ‘recruited’ as alcoholic rough sleepers in our main cities, some have been enslaved for years and work on highly profit-making manual projects at home and sometimes even abroad. A few of them recently managed to escape and were discovered, not by the police, but by a homeless charity, Thames Reach.

We can multiply that number several times more due to the Asian slaves working for little or no pay in the homes of rich people from the Middle East who live in London. We can multiply that number several times more by the number of girls from former communist countries of Europe who were tricked into coming to England by ‘boyfriends’ and then deprived of their passports and forced into prostitution (often by gangs who are themselves illegal immigrants). At least four thousand at year come into the country according to an investigation by the BBC a year or two ago.

There’s not a great deal of will by politicians, senior Home Office civil servants or police to stamp this out. It could all be done relatively easily compared with a lot of other crime. There’s an occasional news flash on television when the police clear out a brothel, but this is a very rare event. All this is not to be proud about in this “green and pleasant land” that bright-eyed youngsters sing about at the final concert of the Proms.

The approaching sanity (900)

Some credence has been given to my last paragraph of yesterday’s piece by the news late yesterday that Italy’s finance minister, Tremonti, appealed to China’s Investment Corporation last week to buy the next wave of Italy’s debt due on 15 September. The news apparently rallied Wall Street share prices last night.

This oughtn’t really to be a surprise. Italy’s recent attempt at an austerity plan is even more likely to cause country-wide strikes and a collapse of its government than the present predicament in Greece. No-one knows the outcome of the discussions. Furthermore, there’s unlikely to be any sort of public disclosure at any time. More than likely, though, the fragility of the Eurozone is now so extreme that some deep understanding will have to be reached, and China will have to make some very important decisions. From China’s point of view, the Eurozone can’t be allowed to collapse if it’s all possible. The Eurozone is not only an important source of import goods (high grade machine tools, engineering know-how and luxury cars, etc mainly from Germany), but the Euro itself is an important currency ally against the ever-cheapening American dollar.

Also, if the Eurozone collapses, and many European banks are devastated, then the effect on American banks (holding substantial European liabilities) is such that America would likely plunge instantly into a deep depression. China wouldn’t want that to happen. It’s one thing for America to slide slowly into recession, as it is patently doing right now, but it’s quite another if America unleashes yet more quantitative easing and devalues the dollar at an even faster rate. From China’s point of view, America and the Eurozone must both survive somehow for as long as possible until both accept the necessity of a world-wide stable trading currency which China has been calling for for years.

Of the two problematiques, America is by far the more intransigent for psychological reasons. Just as the opinion-setters of England (politicians, civil servants and the media) experienced in the 1930s in trying to adjust to its governmental debt and the demise of the British Empire (and the necessity of constantly devaluing the pound), so America is experiencing the same today. America was probably at its peak of power in the 1960s at the time of taking on the communists in Vietnam — and losing — and it’s been downhill all the way since then despite its still numerous military bases in many countries. Its last big episode of invading Iraq, but now having to leave the country with even more problems than it had before (with Sunni terrorism of Shias running amok and without, as yet, America getting a drop of oil from Iraq’s massive undeveloped oilfields in the north), together with America’s increasing humiliation in Afghanistan by the Taliban, all this eloquently demonstrates that America must now adopt a more humble role in the scheme of things just as England had to (most of its intelligentsia anyway).

If America continues with its dollar-printing strategy, thus maintaining prime-mover advantage in cheapening its exports and subsequently throwing increasing inflationary strains on China and the rest of the emerging world, then it will be punished, just as England was. It won’t be China that will do the punishing. It will be the whole world market through the agency of scores of central banks around the world, mainly of the emergent countries, which are now buying gold as their ultimate safe foreign exchange reserve. Since 1999, this increasing necessity has already produced as smooth an accelerating price curve as any scientist could wish to see from an experiment.

The price rise is due to go vertical by this time next year. Before then, at levels of gold prices that will become approachably convenient to one country after another, governments will decide to back their currencies by the amount of gold in their central banks. And here the same prime-mover advantage will obtain. Those countries who are the earliest to do so might well suffer a brief hiatus of trade while their trading partners adjust but will very quickly benefit while the free market price of gold continues to rise. There won’t be a panic crash in the gold price. There will be a more or less panic flattening out. There will be a reversion to the illogical, but yet status-driven, centuries-old obsession with gold that will once again stabilize our financial systems and prevent money inflation for good and all (just as happened in England all through the 19th century).

But just a final word to those steady-staters who, like me, think that the advanced countries are already becoming locked into a particular urban-dense way of life that will last for a very long while (while some of the other countries — but by no means all — catch up), a non-inflationary world currency doesn’t mean stultification. Man’s frontal lobes are too curious for that. We will always be making discoveries and will always want to make more. There’s no reason why, in a world in which the mass of everything we need by way of consumer goods will be made, freighted and sold by automated methods, we should not also gradually carry out infrastructure changes that will lead to a sustainable economic future that will be friendly to nature and the amazingly fascinating world it displays about us.

The inevitability that was Greece (700)

Both Germany and Greece are now on political knife edges. In both cases, things have to give — in a major way — before too long.

Superficially it is for the same reason. Neither of them can take any more austerity. Increasingly, Germans are reacting against having to subsidize Greece any longer (and Portugal and Spain also for that matter, but less crucially for the time being). Otherwise, Germans could already be at a much higher standard of living. Increasingly, Greeks are reacting against losing the much higher standard of living they had received as a gift for joining the Eurozone.

Apart from the use of tear gas which, the German government have not employed against its citizens, there is one immense difference in their respective controversies which will probably lead to entirely different outcomes. The basic difference is that the opposition to the Greek government is almost completely that of public service workers and not of the professional classes (who, from all accounts are still doing very well). In Germany, it is both the professional classes and the workers who are becoming angrier from week to week because they are all being taxed more than they need to be.

There’s only one alternative to Greece defaulting. This is for the 17 countries of Eurozone to agree to a European Treasury which controls the budgets of all the countries and establishes a uniform taxation system. This will mean 17 governments (and their electorates) losing the fundamental basis of their sovereignty and, despite all their different languages and cultures, somehow becoming the European equivalent of America with nation-states being reduced to states only. Even if this were remotely possible for 17 parliaments to agree to this, it would still take how many years? Two, three, Four? Greece can’t wait that long. It can only be a matter of a few weeks now. Many people were expecting Greece to default during this past week-end.

What form will this default take? If past precedence is any guide, then it will almost certainly take the form of a military dictatorship, albeit with a civilian carapace for appearance’s sake. If Argentina’s default of 2000 is any guide then Greece will have two years of economic misery, if not close to hell, before getting on its feet again. Despite the fact that it will default on some or all of its $485 billion debts (or put them on ice for 20 or 30 years), and that banks or private investors will give it any credit, Greece still has $6 billion of gold in its central bank vaults. This is probably just about enough to give it the working capital for a sufficient cash flow when paying for necessary import resources (immediate payment would be required) and waiting for payment for its exports.

If Greece doesn’t default within a few weeks then every scrap of news emanating from Germany tells us that the Angela Merkel will no longer be able to maintain her present flimsy support for a sufficiently large bail-out. And, if Greece is still in the frame then the majority of Germans will be bearing Portugal and Spain very much in mind. In effect, Germany will find itself standing on the edge of leaving the Eurozone. This could happen in a year or two if and when there’s a change in the French government making it more amenable, but, otherwise, this is unthinkable just at the moment.

If Greece is almost at the point of declaring a default, re-introducing the drachma and leaving the Eurozone there is just one more Greek fact of life which is not yet mentioned in any of the present media accounts. This is that China is building major port facilities in Greece, presumably to give it better trade access to eastern European countries. Although China has invested a quarter of its foreign reserves in Eurobonds and is generally supportive of the Eurozone, it will almost certainly make sure that Greece will not collapse economically if Greece leaves the Eurozone. I don’t suppose there’s any understanding between Greece and China but if Prime Minister Papandreou has got any sense he’ll be bearing this very much in mind if he gives a nod and wink to an army general to take over.

If I were Obama (600)

On another list, Sally Lerner asked readers what they would do if they were Obama. This is my reply to that list which I would like to share with this Short List.

There’s nothing Obama can do domestically except perhaps appoint a task force to start making plans for emergency welfare after the double whammy that will probably start this morning when Wall Street opens after Labour Day.

Obama, like all major politicians, is trapped in a dilemma not of his own making — of something he is probably not even dimly aware of. This was the Geneva Conference of 1922 when the major powers decided not to return to the gold standard of pre-WWI, but to a pseudo currency standard which then allowed governments to print money without any underlying discipline. This led to a housing crash in America, the Wall Street Crash of 1929 and the Great Depression which then swept into all of Europe.

Obama, like Bush, must however take responsibility for turning down the persistent attempts over several years by China, Russia, India and several more emergent countries to establish a new world trading currency that would remain stable and be fair to all countries. Since Nixon cut off the last remaining link between the dollar and gold in 1971, America has led the whole world into world-wide currency inflation. This has now compounded to the point when America, Western Europe and Japan are on the verge of a condition that is already being called the Great Recession — a milder name for a far worse condition than the 1930s.

When the price of gold rises high enough to equalise money supply (money in use at all levels) then it can once again serve as the stable substratum for all national currencies even though, as in the centuries before 1914, it was an invisible substratum and only held as a reserve in case of panics. Four years ago, when the Chinese realized that America would probably never agree to go to the conference table, it started planning the Pan Asia Gold Exchange (PAGE). This started operations for Chinese buyers on the Internet on 1 September and is probably already responsible for a 5% rise since last Thursday (gold is even rising almost $20 an ounce as I write this and will certainly be higher when you read this). On 1 January PAGE will go world-wide with depositories and regional collection points in Europe, America and elsewhere. Even if an optimum price for gold is not reached in the next three months then it’s likely to soon after the New Year.

China, of course, was not involved in the 1922 Geneva Conference because, at the time, it had been carved up by military force into several large trading zones by the Germans, British, French and Portuguese (and not long afterwards by the Japanese), and scarcely existed as a nation. But, as the many American corporations which have set up in China will affirm, China is now asserting itself as a powerful economic force. If America can’t rid itself of its addiction to printing money, then gold will have to reinsert itself with help from China.

The best thing Obama could do right now as the Great Recession begins to bed itself in is to read a few books of economic history. Oh, and while he’s at it, get Bernanke and Geithner to read them, too. Then they can fly to Beijing, or Hu and Wen can fly to Washington, and get something sorted out.

Topping up the meta-class (650)

Now that America has recorded no new employment in the past month, perhaps the 9% figure can be regarded as the entree into long-term depression, or a steady-state economy. Take you pick. It doesn’t really matter what it’s called. Either way, and unlike most of the last 250 years, there is no current list (repeat list) of uniquely new consumer products enjoyed by the rich. Previously, such a list was available to be selected from by the masses, one by one, as wages grew. The lack of a list of wonderful new goods means there is now no powerful motivation to drive the economy. Demand in the last 20 or 30 years has only been spuriously created by almost infinitely available credit in what amounts to a conspiracy between governments and the banking sector to keep the machine going at a spanking pace to satisfy them both.

After all, each new technological era so far has had its own characteristic level of unemployment. There is no reason why a new one should be any different. Flint technology probably had around 0% or 1% unemployment; seed (and animal breeding) technology, say 2% or 3%; machine technology, around 5%; computer-driven technology 9%. And today’s economy is still only partially computer-driven. If we consider that automation still continues to make big inroads into production, transportation and retailing then maybe (to follow the previous exponential growth pattern) unemployment might proceed way beyond 9% to 20%, 30% or even more in the coming decades.

Maybe politicians in the advanced countries are straining at the education-jobs relationship the wrong way round. Maybe the really interesting, fulfilling, usually well-paid jobs are already catered for. This certainly seems to be the picture. The prosperous middle class that newly arose in the 19th century, living within and between the middling and the poor, has now become an almost distinct meta-class of around 20% of the population in the top dozen or so of the advanced countries. The children of this meta-class, mostly educated in private schools who, later, tend to marry one another almost exclusively after meeting in elite universities, already populate almost all the decision-making jobs in business, the media, politics, academe, judiciary, armed forces and the important governmental bureaucracies such as the treasury and the central bank. Even in the sciences, which is still the most penetrable by the talented of the hoi polloi, almost half of research scientists are already from the meta-class. Even in China, the most meritocratic form of government that exists in the modern world, we can already discern the increasing appearance at Politburo level of the of offspring of the previous communist nomenklatura .

Actually, despite the present high fashion of democracy via the ballot box (via talent shows on television by necessarily handsome and socially engaging candidates), America & Co are already changing to something much more akin to the older Chinese and Indian caste systems. Both civilizations had a meta-class — the Mandarins and the Brahmins. As they had systems which lasted for centuries perhaps they shouldn’t be sneezed at as examples. If this isn’t convincing then we ought to pay attention to modern evolutionary biologists who tell us that there is incontrovertible evidence that rank ordering is deeply instinctive in almost all mammalian species, and particularly so in the primates — which includes ourselves of course, having almost identical genes to the chimps.

So there we are. Perhaps the advanced countries are already overpopulated for reasons other than hunger or shortages of investment or resources which affect the rest of the world. Obligingly, the non-meta-classes of the advanced world are already doing their best to adjust to automated times by not breeding sufficiently. The indigenous populations of all the advanced countries are due to decline, some of them precipitously, in the foreseeable future. As for the meta-classes, well, perhaps they won’t need to breed strictly at a rate of two children per woman in order to replenish themselves at source, as it were. There are always plenty of highly talented children of the masses, if selected early enough and given fast-track promotion before the state education system dumbs them down.