The course of the Long Crisis

Another Red October, this time different.

Long established certainties are falling by the day. The pound, for instance, was more stable under Wilson and Callaghan in the nineteen sixties and seventies and maintained more of its initial value, than in the past year--a lunatic observation. If it holds for another year and becomes established truth, we will know how wrong the paladins of the new economy were when they proclaimed that something had tectonically shifted in the world.

Only a fool would predict with absolute certainty how the plunge into the long crisis is going to work out. Some of the steps on the way, however, seem to be very clear. A capital flight from the Mediterranean and Austria could well see the euro-crisis that has been more or less inevitable (I got some things wrong in my December 2007 prediction) spill into reality.

The core countries of the 'Rhineland model'--Germany, Belgium, France, Luxembourg and the Netherlands--may well be forced to honour only their own euros, which means an effective nationalisation of their currency by Germany.

Such a process would be driven by three factors. Firstly, the world seems to be rushing into the dollar--perhaps to buy commodities that will maintain value, thus (ironically) depressing those commodities denominated in dollars such as oil.

Secondly, markets could already be anticipating a Euro-disaster.

Thirdly, the analysts of the markets may have fooled themselves into thinking that, if low-inflation American growth was, unlike most in Europe, based upon the low wages paid to illegal labour, then a crisis of unemployment won't result in hugely expanded welfare payments and unbearable losses by citizens. That conclusion, I think, would be wrong, but logical given how many stressed out cocaine-ridden monomniacs can be found in the financial industries. Here's a reputable analyst link instead.

The possibility, which should not be discounted, that the US, for all its huge deficits, debt, and instability is fundamentally safer than anywhere else could, I suppose, be a motive for action. I'm not convinced that it is.

Nor should the simple rule that the US banking system runs alongside vast investment by government, universities, and individuals be discounted. This is the modern 'American system'. So if the banking system there is undercapitalised, returning money to it will have immediate and benign effects.

The benign effects could arise because it may seem that the rest of the American system is carrying on anyway, so restoring the banks to half-power, as it were, should work. It wouldn't work where they were expected to bear almost every financial investment burden, or where the stock markets were the only alternative. That's not something that could be said for 'PFI Britain'. But what happens when the alternative sources of investment are all in deep trouble themselves?

There are also three lurking dangers for the good submarine USA which could endanger its run through the trench of depression. Firstly, the states are, as far as I can tell, effectively disguising just how indebted they must be, given their levels of spending and their balanced-budget amendments. Here's an AFL-CIO paper from last August detailing the problems.

Sooner or later a major state, like Florida, or California, or a collection of Louisiana-sized states, could go into fiscal crisis. One clause I noticed in the recent Paulson/Dodd plan was an increase in the US debt requirement to over eleven trillion. I thought at the time they would throw some of that at States. Governor Schwarzenneger saw that too, and had a huge amount straight away. What if its not enough?

The second danger is that the US mass transit systems that are under state control, like railways and metro systems (the roads are generally federal) go into crisis. This could happen because they require vast insurance, and this month's AIG Insurance crisis directly effects them. If states underwrite their insurance, where is the money coming from? If markets do, how much will that add to transport bills?

The third danger for the US is that Vietnam, Korea, Japan, China, and Germany simply can't keep doling out cash to them as they have for decades now, and that they begin to require the dollars they get from present loans for purposes other than buying new loans.

If you think things are nasty now, just hope that none of these things happen. They are all very likely. We've already seen Argentina, Iceland and Pakistan enter fiscal crisis. In the slightly longer term, Russia, Iran and Venezuela can't be far behind. The UK and US shouldn't be seen as immune from the pressures of the darkening depths either.

Thank God mad schemes to privatise pensions and social security accounts never got off the ground--and reflect. As the hedge funds go down and the absolute cult of the free market shatters, cooperatives, social ownership, and networked, multi-hub finance tied to land, the long term, and localities, are going to be more important. We are in the depths; but there are ways out.

Mind the shelves, captain--and remember, economic waters react to non-economic events that can come from anywhere.

Here's the Poleduris Theme to the Hunt for Red October