quinta-feira, 3 de outubro de 2013

Western Europe Sovereign Debt crisis and ensuing depression (Tragedy and Hope)

Western Europe Sovereign Debt crisis
and ensuing depression
(Tragedy and Hope)

Trying to understand the reasons for the financial crisis raging in the Western world at the beginning of the XXI century, especially in Southern Europe (allegedly associated with the crisis called "Sovereign Debt" contracted by the majority of modern Democratic States), and the ensuing economic depression, I revisited an excerpt the work of Professor Carroll Quigley (Tragedy and Hope – 1966) which is transcribed below.

These chapters don't focus on the monetary, financial and strategic control of natural and vital resources (demand for power), and it is not guaranteed that some understanding of the facts that are at the root of this crisis would alleviate the hardships of the depression. But the knowledge of the basic mechanisms (economic, in this case) of their formation and its conduction may allow better interpret, decode or discard the "Bulletin of socioeconomic meteorology" which daily is presented in the media, schools and in daily life.

Economic depressions and ways to deal with them
Pag. 545
The basic concepts ...
The way in which the relative decline of investment in respect to savings results in economic crisis is not difficult to see.
In the modern economic community (closed economic system), the sum total of goods and services appearing in the market is at one and the same time the income of the community and the aggregate cost of producing goods and services in question.
Aggregate costs, aggregate incomes and aggregate prices are the same since they are merely opposite sides of the identical expenditures.
The purchasing power available in the community is equal to income minus savings. If there are any savings, the available purchasing power will be less than the aggregate prices being asked for the products for sale and the amount of the savings. Thus, all the goods and services produced cannot be sold as long as savings are held back. In order for all the goods to be sold, it is necessary for the savings to reappear in the market as purchasing power. The disequilibrium between purchasing power and prices which are created by the act of saving is restored completely by the act of investment, and all the goods can be sold at the prices asked. But whenever investment is less than savings, the available supply of purchasing power is inadequate by the same amount to by the goods being offered.
This margin by which purchasing power is inadequate because of an excess of savings over investment may be called the "deflationary gap". This "deflationary gap" is the key to the twentieth century economic crisis and one of the three central cores of the whole tragedy of the century.
Pag. 546


(Methods of outdoing the deflationary-gap)
The deflationary gap arising from a failure of investment to reach the level of savings can be closed either by lowering the supply of goods to the level of available purchasing power or by raising the supply of purchasing power to a level able to absorb the existing supply of goods, or a combination of both. The first solution will give a stabilized economy on a low level of activity; the second will give a stabilized economy on a high level of activity. Left to itself, the economic system under modern conditions would adopt the former procedure working as follows: The deflationary gap will result in falling prices, declining economic activity and rising unemployment.
This will result in a fall in national income resulting in an even more rapid decline in the volume of savings. This decline continues until the volume of savings reaches the level of investment at which point the fall is arrested and the economy becomes stabilized at a low level.

This process did not work itself out in any industrial country during the great depression because the disparity in national income was so great that a considerable portion of the population would have been driven to zero incomes and absolute want before savings of the richer segment fell to the level of investment. Under such conditions, the masses of population would have been driven to revolution and the stabilization, if reached, would have been on a level so low that a considerable portion of the population would have been in absolute want. Because of this, governments took steps to arrest the course of the depression before their citizens were driven to desperation (and uprisings).
The methods used to deal with the depression and close the deflationary gap were all reducible to two fundamental types:
a) those which destroy goods (reducing production capacity), and
b) those which produce goods which do not enter the market (monumental works or armmement).

Preventing depression through destruction of goods
The destruction of goods will close the deflationary gap by reducing the supply of unsold goods through lowering the supply of goods to the level of the supply of purchasing power. It is not generally realized that this method is one of the chief ways in which the gap is closed in a normal business cycle where goods are destroyed by the simple expedient of not producing the goods which the system is capable of producing. The failure to use full level of 1929 output represented a loss of $100 billion in the US, Britain and Germany alone. This loss was equivalent to the destruction of such goods.

Destruction of goods by failure to gather the harvest is a common phenomenon under modern conditions. When a farmer leaves his crop unharvested because the price is too low to cover the expense of harvesting, he is destroying the goods. Outright destruction of goods already produced is not common and occurred for the first time as a method of combating depression in the years 1930-1934. During this period, stores of coffee, sugar, and bananas were destroyed, corn was plowed under, and young livestock was slaughtered to reduce the supply on the market. The destruction of goods in warfare is another example of this method of overcoming deflationary conditions in the economic system.

Page 548
Preventing depression producing goods that don’t enter the market
The second method of filling the deflationary gap, namely, by producing goods which do not enter the market, accomplishes its purpose by providing purchasing power in the market, since the costs of production of such goods do enter the market as purchasing power, while the goods themselves do not drain funds from the system if they are not offered for sale. New investment was the usual way in which this was accomplished in the normal business cycle but it is not the normal way of filling the gap under modern conditions of depression.
We have already seen the growing reluctance to invest and the unlikely chance that the purchasing power necessary for prosperity will be provided by a constant stream of private investment. It this is so, the funds for producing goods which do not enter the market must be sought in a program of public spending.
Any program of public spending at once runs into the problems of inflation and public debt. These are the same two problems mentioned in connection with the efforts of government to pay for the First World War.

“The environment in which any solution may be implemented”
The methods of paying for a depression are exactly the same as the methods of paying for a war, except that the combination of methods used may be somewhat different because the goals are somewhat different.
In financing a war, we should seek to achieve a method which will provide a maximum of output with a minimum of inflation and public debt.
In dealing with a depression, since a chief aim is to close the deflationary gap, the goal will be to provide a maximum of output with a necessary degree of inflation and a minimum of public debt. Thus the use of fiat money is more justifiable in financing a depression than in financing a war. Moreover the selling of bonds to private persons in wartime might well be aimed at the lower-income groups in order to reduce consumption and release facilities for war production, while in a depression (where low consumption is the chief problem) such sales of bonds to finance public spending would have to be aimed at the savings of the upper-income groups. 
These ideas on the role of government spending in combating depression have been formally organized into the "theory of the compensatory economy." This theory advocates that government spending and fiscal policies be organized so that they work exactly contrary to the business cycle, with lower taxes and larger spending in deflationary period and higher taxes with reduced spending in a boom period, the fiscal deficits of the down cycle being counterbalanced in the national budget by the surpluses of the up cycle.
Page 549
This compensatory economy has not been applied with much success in any European country except Sweden. In a democratic country, it would take the control of taxing and spending away from the elected representatives of the people and place this precious "power of the purse" at the control of the automatic processes of the business cycle as interpreted by bureaucratic (and representative) experts. Moreover,

all these programs of deficit spending are in jeopardy in a country with a private banking system. In such a system, the creation of money (or credit) is usually reserved for the private banking institutions and is deprecated as a government action. The argument that the creation of funds by the government is bad while creation of funds by the banks is salutary is very persuasive in a system based on traditional laissez faire and in which the usual avenues of communications (such as newspapers and radio) are under private, or even banker, control. 

Public spending as a method of counteracting depression can vary very greatly in character, depending on the purposes of the spending.
Spending for destruction of goods or for restriction of output, as under the New Deal agricultural program, cannot be justified easily in a democratic country with freedom of communications because it obviously results in a decline in national income and living standards.
Spending for non-productive monuments is somewhat easier to justify but is hardly a long-run solution.
Spending for investment in productive equipment (like … Dams and other productive equipment) is obviously the best solution since it leads to an increase in national wealth and standards of living and is a long-run solution but it marks a permanent departure from a system of private capitalism and can be easily attacked in a country with a capitalistic ideology and a private banking system.

War possible solutions
Spending on armaments and national defense is the last method of fighting depression and is the one most readily and most widely adopted in the twentieth century.
A program of public expenditure on armaments is a method for filling the deflationary gap and overcoming depression because it adds purchasing power to the market without drawing it out again later (since the armaments, once produced, are not put up for sale). From an economic point of view, this method of combating depression is not much different from the method listed earlier under destruction of goods, for, in this case also, economic resources are diverted from constructive activities or idleness to production for destruction. The appeal of this method for coping with the problem of depression does not rest on economic grounds at all, for, on such grounds, there is
no justification. It's appeal is rather to be found on other, especially political, grounds.
Note1 -  from third party:  (Military spending tends to help "heavy" industry directly and immediately. Heavy industry suffers earliest and most drastically in a depression, which absorbs manpower most readily (thus reducing unemployment). This tends to make it very influential in most countries)  
Page 550
The adoption of rearmament as a method of combating depression does not have to be conscious. The country which adopts it may honestly feel that it is adopting the policy for good reasons, that it is threatened by aggression, and that a program of re-armament is necessary for political protection. It is very rare for a country consciously to adopt a program of aggression, for, in most wars, both sides are convinced that their actions are defensive. It is almost equally rare for a country to adopt a policy of re-armament as a
solution for depression. If a country adopts re-armament because of fear of another's arms and these last are the result of efforts to fill a deflationary gap, it can also be said that the re-armament of the former has a basic economic cause.
Note 2 -  from third party:  (Increasing defense spending enhances the political clout of the military-industrial complex and tends increase a nation’s reliance on the military in the conduct of its foreign policy and an escalation of conflict which leads to further increases in military spending. The vicious cycle ultimately results in the emergence of fascism: the adoption by the "vested interests" in a society of an authoritarian form of government in order to maintain their vested interests and prevent the reform of the society.
In the 20th century, the vested interests usually sought to prevent the reform of the economic system (a reform whose need was made evident by the long-drawn-out depression) by adopting an economic program whose chief element was the effort to fill the deflationary gap by re-armament.
Note 3 -  from third party:  (Quigley’s analysis, based on the historical developments in the aftermath of the economic depression of the early 1930’s closely parallels today’s events. The economic crises which germinated from the same systemic feature present in the modern economic system, followed a similar pattern in economic and political developments that we are witnessing today).

Tragedy and Hope? The tragedy of the period covered by this book is obvious but the hope may seem dubious to many. Only the passage of time will show if the hope I seem to see in the future is actually there or is the result of mis-observation and self-deception.
The historian has difficulty distinguishing the features of the present and generally prefers to restrict his studies to the past, where the evidence is more freely available and where perspective helps him to interpret the evidence. Thus the historian speaks with decreasing assurance about the nature and significance of events as they approach his own day. The time covered by this book seems to this historian to fall into three periods: the 19th century from 1814 to 1895; the 20th century after World War II, and a long period of transition from 1895 to 1950.
The 20th century is utterly different from the 19th century and the age of transition between the two was one of the most awful periods in all human history. Two terrible wars sandwiching a world economic depression revealed man's real inability to control his life by nineteenth century techniques of laissez-faire, materialism, competition, selfishness, nationalism, violence, and imperialism.
These characteristics of late nineteenth-century life culminated in World War II in which more than 50 million persons were killed, most of them by horrible deaths.
The hope of the twentieth century rests on the recognition that war and depression are man-made, and needless. They can be avoided in the future by turning from the 19th century characteristics just mentioned and going back to other characteristics that our Western society has always regarded as virtues: generosity, compassion, cooperation, rationality, and foresight, and finding an increased role in human life for love, spirituality, charity, and self-discipline.
On the whole, we do know now that we can avoid continuing the horrors of 1914-1945 and on that basis alone we maybe optimistic over our ability to go back to the tradition of our Western society and to resume its development along its old patterns of Inclusive Diversity.

Portuguese translation in the link bellow:

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