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The #Money Thing

Stirling Newberry's picture
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[Welcome to Digby's readers. -- lambert]

Lambert asked me to write on "the money thing" and "straighten it out" for people. Let me turn that around, what we are getting wrong is "the reality thing." The "money thing" is a consequence of getting reality wrong.

So what has happened? What has happened is that the outside world is willing to fund the United States only to do those things that the outside world values. The rest, the US has to pay for itself. The Bush era killed the goose that laid the golden egg for Americans, and that is the thing that needs to be explained, over and over again, in no small part because economists and policy makers are not getting what happened.

Lambert warned me about English majors, but it is the MBAs that I worry about, they write things like "pursuing synergies in multiple horizontally integratable vertical market universes." As an aside, the previous phrase means that they are going to lay people off from merging the two companies because the two companies, while not actually being connected, service the same kinds of people. Just to translate from the Corporatese.

Shock Therapy for Main Street

What has happened is this: for decades the United States Dollar had two functions. One was as the central currency of the domestic economy, the other was as the lingua franca of international commerce. During Bretton Woods the other currencies of the world were pegged to the US Dollar, but even after this time, the United States, as the provider of security to the "Western" market, was the place to store wealth. While this is often termed being the world's "reserve" currency in popular thinking, "reserve currency" is a very specific term of art in finance, and it means something different: specifically the currency that banks do their exchanges in and hold reserves of liquidity for. This is not the same thing as being the currency that everyone uses to store their wealth in - a very large difference. In sociology the term is that the US dollar has "hegemony."

The two parts were connected: the health of the US consumer economy was the measuring stick for the developed world's economy. Over time all of the other developed world economies were gradually "coupled" to the United States. We provided security, they sold us "stuff" and used the money to buy capital goods and resources. After the collapse of Bretton-Woods, the United States was allowed to run a chronic trade deficit, in part because we developed the developing world, and the profits made up for part of the difference, in part because we spent down the credit gained after World War II, and in part because the United States provided military security, and was being allowed to over spend as a means of paying for that security.

Nixon dropped the peg between the dollar and gold. This was not a one to one gold standard, there wasn't one dollar for each unit of gold, but instead a system where the United States promised to buy gold at a certain price. Nixon "closed the gold window" and said that the United States would no longer buy gold at that price. The gold peg was a link between the role of the dollar as the world peg currency, and the ability of Americans to import goods. After the gold peg was ended, there was a period of instability where a new basis had to be found.

That new basis is called in the academic community that studies finance "Bretton Woods II." This is a peg by agreement. The United States acts, other countries react, partially accommodating the US, partially pushing back. The details of this system include the spread of a particular trade and financial order which is under the term "neo-liberalism."

This system imposed a discipline on countries: they had to develop in order to sell things to the outside, they had to sell things to the outside to buy oil and capital goods, and they had to buy these to keep political stability. Countries took in capital, and engaged in some mixture of consumption and investment. Investment to export, consumption to provide an incentive to leave old jobs and old life, and enter the new export driven economy. Countries that failed to walk this fine line had capital flee out, and were forced to go to the IMF for a "bail out" and engage in "shock therapy."

Shock therapy radically increased interest rates in the target country, slashed consumption and government services. The result would be high unemployment. But crucially almost no change in the elites. Several countries have been through more than one cycle of shock therapy, and the two main parties have continued to swap power since then. It also meant the end of domestically protected consumer industries in the target countries.

What the United States is seeing now is a "decoupling" of the role of the dollar as hegemonic currency, from its role as the US domestic currency. That decoupling is resulting in "shock therapy" for Main Street, even as Wall Street receives a massive bail out. The rest of the world is willing to lend to America the hegemony, but not to America the consumer. American consumers, repeatedly, voted for the consumption binge that led to this state of affairs, and voted, again, for neo-liberal shock therapy, so the complaining now is merely whinging. This is the America we wanted, worked for, voted for, and supported. The complaints about bank fraud and so on are merely a way of shifting the blame. Everyone in the US economy was attached to this system. Everyone's income came, directly or indirectly, either from the hegemony of war and finance, or from the consumer boom.

What confuses people is that the people predicting a meltdown of the US currency haven't been right, instead the dollar, while still relatively weak in historical terms, has strengthened. Nominal interest rates from the Fed are still very low, but there is little inflation. However, the trade deficit has plummeted, even though the rest of the world is also in recession. What gives?

The answer lies in the decoupling. There is the hegemony US, and there is the domestic US. Many critics of Iraq predicted that there would be a collapse of the US empire, and that we would go back to being a neo-Jeffersonian subsistence Republic. This view, prevalent on what might be called "the disaffected right," has been exactly wrong. The reason is simple: the rest of the world wants American security and financial hegemony, albeit with greater controls, but it does not care about American consumerism beyond the level needed to keep their own domestic economies supplied with dollars.

One can see this dynamic playing out in the recent G20 summit: where France and Germany wanted financial regulation, but were not interested in stimulating domestic consumption. One can see this in the debt markets: the treasury auctions in the United States have gone off, where as the UK auctions have stuttered. The libertarian illusion was that good old Americans were pulling their weight in the world, and that this imperial scheme was dropped on top of it. The reality was that the imperial scheme is profitable in the eyes of the rest of the world, whereas American suburbia and exurbia are the designated losers of the economic world. They aren't willing to loan us money to buy their goods any more, but they will loan us money to bomb the Taliban, kill pirates, and prop up the global financial order.

So that is what is going on: the bail out, as everyone admits, is socialism for Wall Street. However the other side is that the United States is now on shock therapy, and most of the economy is on the outside looking in. Taking out the defense and financial sectors, and the unemployment rate in the United States isn't the headline 8.5%, but is, in fact, closer to 15% and marching upwards. There is no domestic economy for all practical purposes at this point, other than what is needed to extract every loose dime from the American public to pay off debts. The American Empire is alive and well, as the Roman Empire was alive and well, even as its public was crushed under the weight of debts.

History has repeated itself.

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Submitted by lambert on

When in Rome, and all.

I suppose learning how to be happy, which is not the same as consuming, has its advantages in the current context....

Salutary point on "we voted for it." I grant that there's more than a whiff of "where's mine" on the "whinging," but then again -- why not?

What's the new way forward, then? Or, to repeat a question I asked to another blogger -- "What do I do with the anger?"

Sorry I can't stay long -- RL calls.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Submitted by lambert on

It has ceased to amaze me that feminists -- I generalize, no doubt falsely -- don't see finance as a feminist issue, health care folks (ditto) don't see finance as a health care issue, anti-war folks (ditto) don't see finance as an anti-war issue, I/P folks (ditto, ditto), pro-Constiution folks (ditto, ditto).... And so on down the line, for all the "progressive" conceptual and political stovepipes.

Finance is the issue that structures the choices for all other issues. It's what makes the system a system, and this system the system that it is. It's how we -- and by "we", I most definitely mean "they" -- "create our own reality." A reality that is, as Stirling points out, breaking down for everyone but those on the inside looking out (and down).

As a humanities major who is very, very bad with money -- the hamster button is at your right -- I can only claim to be trying to understand this stuff, not to understand it. But the centrality of the issue is not deniable. It should surprise nobody that the econoblogs are posting with all the passion and truth-telling of old school bloggers.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Sarah's picture
Submitted by Sarah on

talks about, is the impact a lack of sensible health care cost control has on our economy. HRC was right, back during Big Dog's first term. Insurers / HMOs are in the thick of the financial craptacularity too.
The world has changed. The fact that during the past 15 years the GOP kept the US from changing with it / to meet it on a level playing field (to use one of their favorite tropes) is not the fault of the workers (especially union workers!) or the citizens.
It's the fault of the moneymen. The moneymen make their money by selling (often ephemeral and almost always chimerical) "products", and since the days of St. Ronnie of the Raygun, have steadily sold out from under the middle class and working class of the United States, Mexico and Canada the one thing that let the working and middle classes exist: Opportunity. The jobs went where the wages were lowest. The factories sat idle. The new enterprises would not be built without bribes (tax exemptions for properties and industries). 'S been a vicious circle, and now that it's crashed and the scum are circling the drain, they have a vested interest in keeping the big picture out from in front of the people.


We can admit that we’re killers … but we’re not going to kill today. That’s all it takes! ~ Captain James T. Kirk, Stardate 3193.0

1 John 4:18

Submitted by ohio on

Though a little change in wording? On a personal level, money structures the choices of all the other issues. Perhaps finance structures the choices of entities larger than that of the individual, such as governments, foundations, businesses.

Edited to split into two comments...

Stirling Newberry's picture
Submitted by Stirling Newberry on

is going to be, for the time being, at the state level. The Federal Government, right now, is tied down very tightly, and has little freedom of action. Obama, or anyone else, would have to be spending their entire time on the Hegemony project.

States are going to have to take the lead, they are going to have to raise taxes and spend, because much of the money isn't going to go any place. Large or small, rich or poor, the states are where we need to direct our efforts, and quickly.

Submitted by lambert on

I'm pleased that I stumbled onto the idea of trying to highlight some local blogs.

It seems this also dovetails with single payer at the state level.

We need a more horizontal network -- and a media that understands that.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Submitted by ohio on

(I usually intro much more smoothly, but please don't take my bluntness as rudeness. I appreciate your post and find little in it to argue with except your solution. And my wails are cries of confusion, not necessarily of acrimony. Am I worried? Very. The ugly hasn't even started yet.)

I live in a state already hurting, running a deficit, legally limited regarding any more debt, and so on. basically, there won't be any more money from the state because there isn't any more.

So Stirling, where does all the money come from that you say the states should be spending?

Raise taxes? Here, the state cannot raise taxes except by supermajority---and that's not going to happen. And that law isn't going to change. We have no state income tax and we really don't have someone local with the intestinal fortitude to make one happen. And frankly, taxing people who have no money will get you nothing.

This is not theoretical. My fab GF and I each run our own businesses---tax beyond a certain point and there's a good chance we'll each close the local corp to open another headquartered elsewhere, stop hiring subcontractors or employees, or go away and never come back. That means even more people on their collective ass when it comes to jobs. And that lowers the amount of taxes you can raise as well.

As far as my own ideas...well, I got nothing. Actually, not true, but I'm more interested in your thoughts on this than my own.

gqmartinez's picture
Submitted by gqmartinez on

I was gonna ask the same thing. Now I know why I like you! But don't worry, I won't try to touch your . . .

The entire west coast is hurting. CA is probably worse off than the Feds. Oregon is trying to get employees to work for free. WA is cutting, cutting, cutting at the state AND local level (there are some proposals to get an income tax started). Even if we were to raise taxes substantially, it doesn't strike me as likely that we will be able to do much more than hold onto past levels of service (which doesn't include all the new folks needing said services).

I, too, would like to know what states can do.

Only tyrants rig elections.

coyotecreek's picture
Submitted by coyotecreek on

Stirling - have you read it? How does it match with what's going on right now, in your humble opinion?

In an update to the original book Perkins adds that trouble will be brewing aplenty when foreign nations begin to make other currencies their "money of choice". The UN recently moved to add the yen (perhaps others) to their portfolio - is this what he was talking about? (Sorry not to be as smart as so many others about these things - and I thank you for speaking to us in non-corporatese.)

basement angel's picture
Submitted by basement angel on

buzzing, squeaking and beeping as new neural pathways were carved while I read your article. Thanks for that. There is a lot in there that I haven't understood. While I'm going to need to read it a few more times, what is transpiring already makes more sense. I got so flustered a few weeks ago, I actually wrote Jaime Galbraith asking him to explain something to me. Amazingly, he obliged. But how often can one expect that?

Stirling, we may need more of this kind of writing. So many of us are trying to stay on top of what is unfolding but it so complex that without a fairly sophisticated understanding of our nation's financial system, I suspect most of us are handicapped. Thank you again.

"Someone needs to point out that elephants produce infinitely more shit than donkeys." Brad Mays

basement angel's picture
Submitted by basement angel on

I have no doubt I am the only person here who needed it explained. Grrrrrrrrrrr....

I was asking about debt levels during the Great Depression and how much room we have to take on additional debt because I couldn't wrap my brain around the levels we're talking about. Galbraith explained to me that our current level of debt is at 50% of GDP and during the Great Depression, our level of debt rose to 150% of the GDP. So that allowed me some structure in which to think about the debt that is being proposed in the stimulus plan, the bail out plan and even the national health care plan. What burns is that I know there are industries and families whose economists know this as well and that they are planning on corralling that debt to their own personal advantage rather than to the life and the health of this nation and our people. That burns.

"Someone needs to point out that elephants produce infinitely more shit than donkeys." Brad Mays

Submitted by jawbone on

how the Big Money crew have been eating our national seed corn of equity, hollowing out our economy to increase their personal wealth. I'd love to hear from Stirling things about Numerian's brief chronology of what's been going on in our financial system, along with anyone's take on it.

Seems to fit into what he's writing here, but I am so not literate in econ/finance.

Submitted by lambert on

so now all the wingers using twitter can share and enjoy.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

bringiton's picture
Submitted by bringiton on

for an enlightened and calm exposition. Please come back, again and again.

History repeats, or rather rhymes itself, precisely because it is writ by humans who have not changed their ways in a hundred thousand years much less over the past two thousand. Just as the socioeconomic masters of Rome succeeded in creating a top-heavy, unsustainable, inverted pyramid of wealth because they owned and controlled the economic machinery that produced both bread and circuses, ours of today build the world of Credit Default Swaps just because they could, because they control the means of production from Cheetos to American Idol.

And just as the leaders of Rome succeeded in using the prejudice, greed and xenophobia of Citizens to turn their attention to the false threat of strangers while the real danger of economic totalitarianism was constructed internally, so too did our own oligarchic capitalist Caesars and Senators and Technocrats use bigotry and greed to bring themselves to power with the full-throated support of roaring crowds, crowds composed of those who felt they already had their piece of the pie and damn sure weren’t going to share any of it with the damn niggers or the damn wetbacks or the damn welfare queens.

(Wikipedia, but succinct):

Reagan Democrat is an American political term used by political analysts to denote traditionally Democratic voters, especially white working-class Northerners, who defected from their party to support Republican President Ronald Reagan in both the 1980 and 1984 elections.

-snip-

The work of Democratic pollster Stan Greenberg is a classic study of Reagan Democrats. Greenberg analyzed white ethnic voters (largely unionized auto workers) in Macomb County, Michigan, just north of Detroit. The county voted 63 percent for John F. Kennedy in 1960, but 66 percent for Reagan in 1980. He concluded that "Reagan Democrats" no longer saw Democrats as champions of their working class aspirations, but instead saw them as working primarily for the benefit of others: the very poor, the unemployed, African Americans, and other groups. They also supported Reagan's strong stance on national security and opposed the 1980s Democratic Party on such issues as pornography, crime, and taxes. [emphasis added]

That the Reagan Revolution which has bankrupted the nation and threatens to destroy the middle-class found its strongest support among the self-satisfied bigots of middle-class white America is an irony too delicious to ignore. The very autoworkers who cheered on Reagan’s bombast and bigotry created their own future demise as surely as did the Roman citizens who cheered Sulla and Julius Caesar. I would feel sorry for them in their ignorance, if their collusion had not been so wanton and pompous and braggardly and the harm they caused had not done such horrific damage to so many innocents both at home and abroad.

Detroit, and Michigan, is where it is today because the people of Michigan, like the rest of the country, gave up on the notion of building a sustainable society and instead yielded to the basest possible human emotions of greed, bigotry and xenophobia. The Reagan administration and all that flowed from it did not just happen; it was extruded from the suppurating rotten core of the Real America, and now the puss-filled sack has burst and contaminated us all in blood and stench.

There will be no surcease from this repeating pattern until somehow most of humanity is elevated to see itself as part of the problem instead of believing that an embrace of tribalism, ignorance and fear is an effective solution to our common problems. Progressives, as much as we like to embrace our own version of exceptionalism, are not immune to the baser human emotions and will need to go through the same sort of transformation if we ever hope to have a sustainable positive and beneficial effect.

Recommended reading:

A brief essay reviewing the circumstances leading up to the fall of the Republic;

Suetonius: The Lives of the Twelve Caesars retold in Latin by Maximilian Ihm and in an English translation by J. C. Rolfe;

Gore Vidal’s meditation on Grave’s translation of Seutonius, written in 1959:

"Most of the world today is governed by Caesars. Men are more and more treated as things. Torture is ubiquitous. And, as Sartre wrote in his preface to Henri Alleg's chilling book about Algeria, 'Anyone, at any time, may equally find himself victim or executioner.' Suetonius, in holding up a mirror to those Caesars of diverting legend, reflects not only them but ourselves: half-tempted creatures, whose great moral task it is to hold in balance the angel and the monster within - for we are both, and to ignore this duality is to invite disaster."

TreeHugger's picture
Submitted by TreeHugger on

have gotten my first clicks every day for the past several years....invariably I find out what is going to be coming down politically long before the politcal blogs get it.
Your post today connected the dots in a way I've not seen made explicit by others. Other posts have chewed around the edges but you made a clear and easy to follow analysis of the current reality.

Thanks posting on this blog...it may reach some who do not access your posts elsewhere.

Submitted by lambert on

.. where'd the four trillion go?

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Bill Michtom's picture
Submitted by Bill Michtom on

"American consumers, repeatedly, voted for the consumption binge that led to this state of affairs, and voted, again, for neo-liberal shock therapy .... This is the America we wanted, worked for, voted for, and supported. The complaints about bank fraud and so on are merely a way of shifting the blame. Everyone in the US economy was attached to this system. Everyone's income came, directly or indirectly, either from the hegemony of war and finance, or from the consumer boom." S.N.

Was I sleeping through the Clinton and Bush regimes? I didn't see the voters crying out for NAFTA, WTO, the Iraq invasion, the destruction of our environment, our wages and our economy.

Nothing can destroy a government more quickly than its failure to observe its own laws, or worse, its disregard of the charter of its own existence. – Justice Tom C. Clark - Mapp vs. Ohio

Submitted by lambert on

... that as a country, we accepted the system/structure/set of possibilities that made it all possible. It's the old "What could be have done to prevent the election from being stolen in 2000?" question in a new guise.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi