Richard Melson

February 2005

CFG BOOK IDEA

CAMBRIDGE FORECAST GROUP:

BOOK OUTLINE

by: R. Melson and L. Feiner

1998

Proposed Titles:

"The Sway of Opinion",

"Great Prophecies from the American Business Press",

"Business Hype vs the Future"

PRÉCIS:

If you were to look at human society, from outer space, as it were, what would you see? You would see human society as "islands of development in a sea of underdevelopment, a rich minority and a vastly greater poor majority.

This dichotomy, in our opinion, has been, is, and ( for the foreseeable future, will be),

the most important political and social issue facing everyone, everywhere.

It is an issue which has, to a limited extent, been addressed directly in the American popular media. Several points of view have been expressed. Examples of these are:

(1) The book Preparing for The 21th Century, by Paul Kennedy, (1993 Random House). According to Paul Kennedy the global poor face an unprecedented economic, political, social and environmental catastrophe, a catastrophe which will drag down the global rich as well, and, therefore, a massive global redistribution from the global rich to the global poor is "on the agenda";.

(2) The article The Coming Anarchy by Robert Kaplan, (Atlantic Monthly, 2/94) reiterates Kennedy's description of the catastrophes facing the global poor, but maintains that the rich can protect themselves by means of a "fortress strategy" developed by the right-wing Israeli military analyst, Martin Van Creveldt;

(3) The official viewpoint touted by the Clinton administration and the various international lending agencies, postulates a fortuitous match between the development needs of the global poor and the investment needs of the global rich, a view somewhat tarnished by the Asian financial crisis;

(4) The book When Corporations Rule the World, (Kumarian Press, 1995), in which author David Korten maintains that 3/5 of the earth's population ("the sustainers") has already achieved an adequate standard of living, 1/5 (the "overconsumers") consume too much, and 1/5 (the" excluded") consume too little. This polarization has been brought about by today's global economy which has replaced the "national economies" that brought about the post-war "golden age era" of growth with rising standards of living. He advocates the creation of global agencies to restrict the power of transnational corporations, the adoption of a global "no growth" strategy, and a redistribution of wealth from the "overconsumers" to the "excluded".

We believe, that for the last 30 years, the business press has, in fact, been obsessed with the global rich/poor dichotomy, but has expressed this obsession indirectly, through its ever changing anxieties and enthusiasms. As one reads through the business press, one constantly encounters; political, economic and environmental developments which "spoil everything" (the oil price rises of the 70's, the trade deficits of the 80's, the greenhouse scare of the late 80's) followed by techno-euphoria's-euphoria's-euphoria's which "change everything" and thus promise salvation (genetic engineering in the late 70's such as "bacteria that produce oil",[1] artificial intelligence in the mid-80's [2], high-temperature superconductivity in 1986, "cold-fusion" in 1989[3], the "new internet economy"[4] of the present),

Infatuations with the world's poor as billions of potential consumers alternate with fear of being "dragged down", either culturally or economically, by entanglements with the world's poor majority. This latter fear motivates search for "engines of economic growth" limited to the world's rich majority, (usually some sort of "techno-euphoria's-fantasy")

We divide the above analysis into several periods, each period constituting a chapter of the book.

1968 - 1973: In the last 60's the rate of return on assets in the industrialized countries began to drop. The U.S. financed the increasingly costly Vietnam war by means of monetary creation. Inflation precipitated a wave of speed-ups and strikes throughout the industrialized world. In 1971 the US was forced to devalue its dollar and the global dollar-exchange standard collapsed. In '73 at the first summit of the G7, the Bretton Woods regime of fixed exchange rates collapsed. There were fears that the resulting monetary instability would lead to a depression. However, owing to another change that was little noticed at the time, the invention of the microprocessor, computer technology was able to keep pace with the financial volatility, and, instead of a depression, the world saw the burgeoning of a computerized, global, speculative financial economy. This, in turn, further stimulated computer innovation, in a cycle, which has continued to accelerate to this day. Popular books about how to survive the coming, depression, devaluation, inflation, or whatever abounded. Keynesian orthodoxy was challenged by monetarism, "supply side economics", and the lesser known, but more academically respected "new classical economics" of Robert Lucas. Articles advocating monetarism, supply-side economics and return to the gold standard began to appear in the business press.

1973-1979: The inflation culminated in the OPEC oil price rises of 1993. Coming on the heals of the 1972 "Club of Rome" report, this price rise stimulated fears of drastic raw materials shortages in the future. The American business press responded articles bemoaning the coming raw materials shortages ("If You Can't Produce It, You Can't Sell It"), and extolling the profit opportunities in alternative energy manufacture ("The Coming Age of Coal, Shale Oil, Synfuels, whatever"). After the Carter administration adopted a policy of dollar devaluation to reduce the real price of oil (priced in dollars), articles in the business press began to adopt, a "things aren't so bad after all" tone. The European business press, on the other hand, began to recognize the North/South dimensions of the world's economy problems and articles appeared which characterized the raw materials price rises as a necessary form of "North/South" redistributionism, which should be supplemented by increased aid to the developing world, a sort of "social democracy" on a global scale.

1979-1982: The Iranian revolution. The second oil price. The US tight monetary policy under Fed Chairman Volcker. The Reagan revolution.

As it turns out, both the American monetarists and the European "global social democrats" had a point. Essentially, there was no energy shortage. Instead, the era of rapid postwar global growth had come to an end, the industrial country economies were beginning to experience declining rates of profit, and there was a clear need for new markets in the less developed world (clear to the Europeans at least). The world had undergone a crisis of stagnation, together with business failures and a "flight to hard currency", the "hard currency" in this case being oil ( since the dollar was being devalued).

The first oil price rise of '73 had given the European establishment a lesson in North/South economic issues, and the second one in 1979 had done the same for the American establishment.

In October of 1979, the IMF summit in Belgrade advocated a formal Western/OPEC petrodollar recycling agreement to allow the Latin debtor countries to lengthen the majority of their debt, so that the US could adopt a tight money policy without touching off a massive Third World debt crisis. Paul Volcker's response was to flee the IMF conference, fly back to Washington and unilaterally impose a tight monetary policy (and then back off from the policy in early 1980). The Carter administration flirted with the idea of a formal Western/OPEC recycling agreement, simultaneously advocated a massive multi-billion dollar government program to develop synfuels.

Except for the synfuels, little of this high drama reached the business media. Articles appeared about the enormous profits to be made in synfuels. There was a burst of enthusiasm about genetic engineering ("bacteria that produce oil"), and a boom in bio-tech stocks (which ended when oil prices dropped). In 1981, Reagan and the Republican Congress adopted a policy of massive tax cuts. and then gridlocked over commensurate spending cuts. American interest rates rose to high double digit levels. In 82' Reagan flirted with the idea of Western/Gulf State cooperation, and Israel invaded Lebanon.

Articles in the business press stressed "the segmented economy" with stagnation in the industrial sector balanced by a booming service economy. In August of '82, Mexico defaulted. Fortune magazine announced the founding of a new magazine "Fortune International The End of 'Let's Pretend'".[5] However, Americans were still very averse to thinking about North/South economic or political issues. At the end of '82, the Time Magazine "man of the year" was Volcker? Reagan? Sharon? Arafat? None of these. It was "the computer".

1983-1985: The Reagan administration working with Volcker, the IMF, and the World Bank devised a global economic strategy. Any thought of "North/South" capital transfers or Western/OPEC cooperation, ala the Brandt Commission Report, was, at this point, out of the question. Instead, the standard IMF/World Bank prescriptions were to be followed to the Third World debt crisis, namely the Third World countries were to contract their imports and export their way out of the crisis. This raised an obvious "fallacy of composition. To wit: "if everyone is exporting who is importing?". The answer to this question was to be - the United States! That is, the Reagan strategy was to have the United States be the "importer and borrower of last resort" (as David Hale of Kemper Financial Services put it). The U.S. budget deficit was to be a "Keynesian stimulus", if you will, for the world economy, and was to replace Third World markets that were lost owing to the IMF austerity programs. The U.S., furthermore, was deliberately to run a large trade deficit, in order to give the debtor countries someplace to export to. Surplus countries, such as Japan were, in turn, to use their dollar holdings to help finance the U.S. budget deficit. The depressed nature of much of the world economy and the role of the dollar as "safe haven" made this possible. In essence, the U.S. deliberately generated a large trade deficit in order to bail out the budget deficit.[1]

As can be expected, the world's finance ministers regarded this strategy of "debt-led" global economic growth as hair raising, but, in the absence of an alternative, they went along with it. In his 1992 book Changing Fortunes, former Federal Reserve Chairman, Paul Volcker, describes a conference of the world's finance ministers.

"(Then Sec’y of the Treasury Don Regan) aggressively delivered a speech telling his foreign counterparts that they had it wrong and we had it right......I happened to walk into the room in the middle of it all, with Regan in full flight, almost shouting. It was immediately apparent that this was not a high point for the niceties of international diplomacy...But Regan did have an important point. Their economies and those of the rest of the world were being substantially buoyed by the United States, quite directly by our rapidly expanding imports. The administration might in foreign eyes have seemed totally ideological in its tax, its budget and its exchange rate policies...But that same ideology was doggedly resisting protectionism and promoting more open markets around the world in the common interest".

As former Japanese Finance Minister, Toyoo Gyohten, put it:

"..if the United States were to cut its deficit and slow its economy who would replace it as the engine of growth?..So let me say there was a certain amount of mutual acquiescence in the crimes of another, because we were all sinners to some extent." Ibid.

From both a geopolitical and domestic political point of view, the Reagan strategy of "debt-led" growth certainly had a lot of advantages. First of all, it put the control of the world economy squarely back into the hand of the U.S. The OPEC petrodollar surpluses vanished,[2] so the whole dreaded issue of "Western/OPEC" cooperation vanished as well. The U.S. also gained an enormous amount of political leverage over the rest of the world. After all, the U.S. was now the world's "importer of last resort" and nobody wants to argue with a good customer. Finally, the downward pressure on oil prices deprived the Soviet Union of hard currency and certainly hastened the collapse of "the evil empire". The tax cuts together with the drop in inflation certainly pleased the American consumer.

Nonetheless, throughout the 80's, the Reagan administration was far more pre-occupied with Third World development issues than it was letting on. In fact, at the end of 1984, when Reagan was asked what achievement he was most proud of, he said, "getting through one more year of the Third World debt crisis."[3] Nonetheless, the Reagan administration (like the succeeding Bush administration) was very reluctant to get into public discussions of global economic issues, particularly North/South economic issues. Instead, the main approach of the administration was to play up the "miraculous Reagan recovery" generated by "supply side" tax cuts, and to explain the battering that American industries were taking (because of the high dollar, surging imports, the collapse of the Latin market for American exports, the diversion of investment capital to the financial and service sectors), by saying that the U.S. was "entering the age of information".

This does not mean that the Reagan administration was keeping its anxieties about North/South issues a state secret. Secretary of Agriculture, Bill Brock said that "there is a lot of Third World out there and we are beginning to discover how important it is to our well being"[6]. It's just that the administration preferred that the American public think about something other than Third World development

The American business press certainly obliged. Most of the articles concentrated on the "miraculous" Reagan recovery. Is it "real"? How long will it last? How high will the stock market go? Will Paul Volcker "spoil the party" ? The Asian business press, on the other hand, pointed out the manipulation behind the "Reagan recovery".

1985-1991: In 1984, the ballooning U.S. trade deficit began to drag down U.S. economic growth. The value of the dollar continued to soar, making U.S. goods less and less competitive. Reagan’s public image as an "America firster" was beginning to fray. Why was "Ronnie", who was elected to "put the rest of the world in its place", allowing "our recovery" to be "stolen" by the Third World once again. Had Reagan put OPEC in its place, only to allow us to be humiliated by Asia?.

In the fall of 1985, then Treasury Secretary James Baker responded to this dilemma by pressuring Europe and Japan to stimulate their economics, and thus become "engines of growth" for the world economy, taking some of the pressure off the U.S. There was a coordinated agreement to lower the value of the dollar, the so called "Plaza agreement", probably aided by some U.S. monetary easing (although Fed Chairman Volcker denied this). The value of the dollar dropped. Japan was pressured to liberalize its monetary and financial systems in order to let the Yen supplement the dollar as a global reserve currency. In the late 1980's European economic growth increased, and Japanese growth soared (along with the Yen, the Japanese stock market and real estate market). There were predictions that Japan would soon overtake the U.S. as the world’s leading economic power. As the dollar dropped, outside capital poured into the U.S. stock and real estate markets. The junk"bond market" flourished, along with a rapid rise in real estate prices, ( a rise which dramatically exacerbated the American problem of hopelessness).

In 1990, along with the collapse of communism, European and Japanese economic bubbles burst. German chancellor Helmut Kohl financed German reunification by huge amounts of government borrowing in marks, even as Europe was trying to unify its various currencies. The exchange rate of the Mark soared as German borrowing jacked up demand for marks. Other European countries, trying to keep their currencies on a parity with the mark, had to bring their economies to a halt by raising interest rates. Europe is still trying to construct a united currency, the Euro, to supplement the dollar as an international reserve and invoicing currency. The liberalized Japanese financial system was simply overwhelmed by the enormous volume of financial activity that was taking place during the "Japanese bubble". There is not enough space here (or anywhere else for that matter) to describe all the differences between the Asian and American financial systems. Japanese banks, historically controlled by networks of people from large corporations, the finance ministry and organized crime, were set up to take in low interest deposits from Japanese savers (Japan has always had a high savings rate) and use these deposits to make long term low interest loans to large Japanese companies. Large Japanese companies, in turn, farmed out much of their production to small "captive suppliers" who bore the brunt of downturns in the business cycles. Large Japanese companies were thus "buffered" from economic downswings, and the stock of companies could form part of the reserves of the Japanese banks. Japanese bank reserves could also consist of the stock of other banks. Unlike American banks, Japanese banks had few "disclosure requirements". The Finance Ministry kept track of their activity. During the Japanese boom of the late 80's, both the Japanese stock and real estate markets rose to unsustainable heights. It became apparent that a sharp market "correction" which could easily be tolerated in the US, or Europe could play havoc with the Japanese banking system, causing a chain reaction of disappearing bank reserves. For a while, large Japanese insurance companies tried to prop up the stock market, to "let the air out of the bubble slowly", but to no avail. Eventually a sharp drop in the stock market threw the Japanese banking system into a crisis from which it has yet to emerge. Nobody knew which banks were solvent and which banks weren’t.

During this period the business press began to contain articles critical of Reagan industrial policies. There were articles advocating a "US industrial policy" to overtake Japan, articles about "Japan as number one", and so on. Korea, Taiwan, Hong Kong and Singapore were characterized as "little dragons" intent on invading the US market, soon to be joined by "big dragons" such as India and China. When the word "dragon" was criticized by Asians as racist, it was replaced by the world "tiger". Articles extolling the virtues of robotics and artificial intelligence began to appear, as replacements for low-wage Asian manufactures.

The announcement of high-temperature superconductivity in late '86, precipitated a flurry of articles predicting the achievement of "room temperature superconductivity" an innovation which would "change everything". (As of this writing room-temperature superconductivity has, in fact, already been achieved with no notice by the business press).

In 1988, several things occurred which focused the US business press on North/South economic and political issues. The 1980's were announced as the warmest decade on record, precipitating fears of a global climate crisis, necessitating global economic and political cooperation. The spectacle of Reagan dealing with Khomeini in the Iran/Contra scandal, together with the outbreak of the Palestinian Intifada had the effect of "de-demonizing" the Third World. Articles about "North/South cooperation" and "sustainable development" began to appear in the American business press. Time magazine announced "the earth" as "man of the year".

The mood changed once again after the collapse of Communism. The was a brief flurry of euphoria about the economic prospects of the former Communist world. The greenhouse effect was forgotten. The Third World was declared "irrelevant", their cold war support no longer needed, their economic functions replaced by the Eastern bloc. This mood of "Eastern bloc euphoria" was, in turn, cut off by the Persian Gulf crisis in the summer of 1990. The spectacle of crowds in North Africa, Malaysia and Indonesia cheering Saddam Hussein, caused even Forbes magazine to declare, in one its editorials, that the West needed to pay more attention to the needs of the developing world.

1991-1998: This period was marked by an official policy of encouraging private capital placements from the West into the Third World. Lawrence Summers, then chief economist of the World Bank, recalculated the GDP's of the developing countries, making their economies larger. He declared that people in the West should stop regarding the Third World as "a problem" and starting seeing it as "an opportunity. Developing countries, in turn, fearful of competition from the newly liberalized Eastern bloc started to liberalize their economies. The outgoing Bush administration broke the European/American logjam on the stalled GATT negotiations by precipitating a run on the French Franc.

Candidate Clinton criticized Bush for not talking not about the economy and for not having "a vision". After being elected, he adopted the Reagan/Bush GATT/NAFTA economic strategy as his vision and talked about it ad nauseam.

During the Reagan and Bush period, Americans were given the impression that, aside from oil, the developing world was sort of "marginal" to American well being. It was assumed that the "rich man’s club" (America, Europe and Japan) was the global "engine of growth", which could, in turn, "pull up" the non-Western world. The non-Western world, for its part, had to "behave itself", open its markets, privatize its economy, welcome Western capital investments, tone down its "Third World rhetoric" and make nice with Israel. And, if it didn’t, well then, who cared, "we" didn’t need "them" anyway[7].

In 1990, however (fearful of competition from a newly capitalist Eastern-bloc), the Third World began to "behave itself". At that point, the official American line on the Third World, did a complete about-face. The Third World went from being a "problem", a "mess", a "threat", a "side issue", to being "the future", to being an unstoppable locomotive of economic growth that the U.S. had to board or be left behind. Clinton "talked up" Third World growth and played down problems and barriers to Third World development. The 21’st century was declared to be the "Asian century". There was even talk of "China as number one".

Private capital flowed into the Third World, generating a growth rate of 5.6 percent. US exports to the Third World surged, diluting protectionist sentiment and allowing the passage of NAFTA and GATT. One investment advisor said that "investing in Asia became a religious thing". Meanwhile the Federal Reserve was pumping out dollars to finance the Third World privatizations.

The large increase in the supply of dollars, the Mexican bailout of 1995, and the new Republican Congress's plans for a massive tax cut, caused a "flight from the dollar into the yen". The yen rose sharply. The "real value" of Japan’s massive Yen debt was growing each day, making Japan’s financial problems more and more difficult to stabilize. In mid-1995, a plan was worked out between the U.S. and Japan to raise the dollar. The U.S. government agreed on a plan of drastic spending cuts and the tax cut was put on the back burner. The dollar rose. Japanese financial institutions could now increase their reserves by borrowing Yen at Japan’s extremely low interests rates and exchanging them for dollars to be put into U.S. government debt carrying a much large interest rate. As long as the dollar/Yen exchange rate remained high this would pump profits into the Japanese financial system. However, the currencies of the Third World Asian countries were pegged to the dollar, and as the dollar rose, these countries became more and more uncompetitive. Nonetheless, dollars continued to pour into these countries on the belief that Asia with its huge, educated and hard-working populations was bound to be a very long term source of rapid and profitable economic growth. So sure were dollar borrowers of the continued dollar inflow, that many of them failed to hedge their borrowing against a devaluation of the local currency. Since the Asian boom was neither economically nor environmentally sustainable, it had to end sometime.

Because of the differences between the Asian and American financial systems, when the boom ended, it resulted in an area-wide financial and monetary crisis. When Thailand was forced to devalue its currency, global investors became nervous about all Asian currencies. There was a "flight" from Asian currencies, which were forced to devalue, one after the other. Many Asian borrowers of dollars, who had been cycling between dollars and local currency, found themselves stuck with devalued local currency, and unable to repay the dollar loans. This only intensified the crisis. To make a long story short, the very financial and monetary volatility which had stimulated [8]the American financial and service sectors, brought the Asian financial system to a halt.

In fact, in an effort to dilute protectionist sentiment in the U.S., the Clinton administration had exaggerated the importance of export markets for the American economy. Thus, many people were surprised when the Asian financial crisis, far from retarding the US economy, actually had a stimulatory effect on that economy. Capital, which had flowed into the "emerging markets", suddenly flooded back into the US economy, lowering interest rates, stimulating housing construction, raising government revenues, eliminating the deficit, and providing capital for the US "internet revolution".

Essentially, what had happened was this: the burst of "wealth accumulation" promoted by the US in the developing world from 1991 to 1997 had been, via the Asian financial crisis, suddenly and massively reinvested in America's economic and technological development. America had used its "imperial leverage" to write rules (via NAFTA and GATT) for the world economy, and had naturally benefitted massively from those rules.

The business press, less threatened by the developing world, now that America was so obviously on top, started the 1990's by singing the praises of the "emerging markets". India and China's infrastructural needs were to provide a burst of stimulus to U.S. heavy industry. Financial services, telephone systems, computer technology, grain and beef would all be needed to raise the standards of living of these billions of people. Cheap Third World rockets would lower the cost of communications satellites and spread the internet everywhere.

There were, of course, countervailing opinions. The pros and cons of "globalization" were debated. It was characterized as (1) a panacea for the material needs of the world's population, (2) a harebrained experiment in capitalist utopianism, (3) an irreversible process, and (4) (as hard as it might be to believe it now) a plot by the developing world to take advantage of the West.[9]

After the outbreak of the Asian financial crisis in 1997, the mood in the Business media was first one of caution about slowdown in the US economy, then euphoria about the resilience of the American economy in the face of the Asian slowdown, then panic after the August 98 Russian default[10], and, finally filled with predictions that America had given birth to a "new economy" based on digital communications technology, immune from the rest of the world's problems,[11] an economy that the rest of the world must now catch up with.

[1] A replacement for the Arab oil producers.

[2] replaces cheap Asian labor

[3] A miraculous solution to the "greenhouse problem" which had been dominating media attention after the hot summer of '88

[4] Creates an ever-expanding American consumer market to replace the markets lost in the Asian financial crisis of 1998.

[5] And then dropped the idea in the ensuing 1983 "Reagan recovery".

[6]. One of the official documents of the Reagan administration was the "Carlucci Report" which advocated official North/South redistributionism for cold war reasons, a sort of cold war Willy Brandt Report.

[7] In the late 80's, economists Paul Romer and Robert Lucas developed a new theory of economic growth which allowed for perpetual growth in the West without the participation of the Third World. It generated a great deal of enthusiasm among American economists, but turned out to be against the official economic policy of the early 90's..

[8] In Japan and Korea, finance depends on networks of personal, political and corporate associations. Once you have to unwind a deal with a borrower, you never do business with that particular borrower again. Thus, after the devaluation imposed loan defaults, nobody trusted anybody. America's well developed computerized financial sector, on the other hand, allows financial volatility to be a stimulus.

[9] The Trap by James Goldsmith (1994 Carroll & Graf) .

[10] A panic which was, to some extent, officially promoted by Greenspan and Rubin in order to scare a Christian Fundamentalist Republican Congress into voting additional funding for the IMF, which they regarded as a the beginnings of a satanic world government (in some respects not a bad characterization)

[11] Assuming that those problems didn't get "too bad".

[1].

[2]. Saudi Arabia, which had financial reserves of $120 billion dollars in the early 80's, was reported to be in deficit in 1993.

[3]. NYT Times Sunday Magazine.