Monday, September 15, 2008

Today, speaking not as a Libertarian, but as a historian and a futurist...

...I want to think about the implications of the worsening financial earthquake.

Partisans of presidential elections will point to Dubya's record and say, Blame the GOP....

Libertarians will point to the existence of the Federal Reserve and fiat money, and say Blame the State....

People with retirement accounts will look at the huge bonuses of the executives who appear to have run the great banking conglomerates off the cliff, and say, Blame the corporate CEOs....

People who didn't go out and leverage their mortgages will look at all the people who signed up for ARMs and other fancy financial packages they couldn't afford, and say, Blame the people who got greedy for more than they could afford....

And on all these counts there is both merit and enough blame to go around for the firestorm I think we're about to live through. It will be as potentially life-changing and paradigm-shifting for this generation as 1929 was for the men and women who eventually emerged as the Greatest Generation when hauled from the crucible of the Great Depression into the fire of World War Two.

But none of that captures the complexity of what's really occurring in the American economy (which is the elephant in the room of the world economy today) right now.

The current leverage stock/investment/real estate boom has been going on for more than 20 years....

For that whole time, in a post-industrial America, we have built a national economy on two things: information technology and the generation of money/credit for the rest of the world. China and Dubai didn't sneak in through the back door; we invited them in, and used their capital to leverage derviatives.

Nobody really understands derivative financing, just as nobody really understood Milliken-style junk bond financing in the 1970s-1980s. Derivatives are an exceptionoally volatile instrument, essentially a non-linear complex system for raising adjunct funding. For awhile it was the fact that nobody understood derivatives that made them work, but there were hints of their instability as far back as 7 or 8 years ago in the Asian markets.

The dangerous complexities of derivative financing combined with the long-term rise in energy costs. America was founded on cheap energy. Few people realize that the English colonists who arrived in Virginia and Massachusetts in the 17th Century were not just fleeing religious persecution: they were also fleeing a restrictive coal and wood monopoly held by a group called the Hostmen of Newcastle. And what they found in American forests was a virtually free(in short and medium-term economic terms) source of energy. Low-cost energy means low-cost transportation. Low-cost energy and transportation combined with a non-existent tax structure, cheap labor, and availability of natural resources to produce the greatest sustained commerical/industrial boom the world had ever seen between about 1730-1960.

But those conditions had begun evaporating as early as the 1920s. The US enjoyed a wartime surge and two decades of postwar dominance primarily because America had the only major industrial plant on the planet not destroyed or severely damaged by WW2. This turned out to be a short-term boon and a long-term burden, as by the mid 1960s our industrial plant was decades older than that of our competitors, and our transportation infrastructure was on the brink of being rendered a cost disadvantage rather than an advantage by rising fuel prices.

Upshot: we are approaching a paradigm shift in American history. I have no idea what comes next (or else it would not be a paradigm shift), but I can hazard one guess: it will be traumatic.

What's at stake, however, on the political front is this question: is it possible to meet this challenge without compromising the essential American values of individual liberty and personal responsibility?

Or is a European Union-style surveillance state with high taxation and government domination of most major industrial sectors our unavoidable future?

3 comments:

kavips said...

I have no idea what comes next (or else it would not be a paradigm shift),

That is a great line....

Delaware Watch said...

"Or is a European Union-style surveillance state...our unavoidable future?"

Really now, this is an unnecessary bugbear. And necessity is precisely the point because there is no necessary connection between what might come after the stock market problems end and surveillance state. If there is such a necessity from a social democratic economic model, you haven't shown it.

Besides, the US now has more authority to engage in more unsupervised surveillance than any of the European states you cited in your other post. All you have to do in the US is make a phone call. There's the reign of relatively more liberty for you.

Brian Miller said...

Besides, the US now has more authority to engage in more unsupervised surveillance than any of the European states you cited in your other post.

I beg to differ. After living in London for five years and invoking my "right for surveillance footage," which allowed me to get video surveillance archives of my commute from my flat's door all the way to my office 25 miles away -- including all of my time on the train -- I can vouch for the European surveillance state's perniciousness.

I left the UK shortly before the mandatory national ID card -- which must be presented on demand to law enforcement -- was rolled out. The card, being implemented now, includes biometric data and an electronic record that includes prior address and passport information on it.

It also comes with new laws allowing national and local authorities to enter any property, for any reason, in pursuit of a missing/nonpresented card. And its a machine-readable open standard that will shortly be used as the UK's universal ID card for commercial, as well as government, transactions.

This is to keep the UK safe, of course! And after all, if you have nothing to hide, it shouldn't be a worry.

Orwell would blush at the audacity.