Speculative fever and casino economies

I think it is pretty clear that the Fed, the Bush Administration and others in the wobbly box-seats of US policymaking will do everything they can think of to head off economic and financial catastrophe, as they see it - and the political and strategic catastrophe which they're not admitting yet but which they SHOULD know will go with it.

We always knew (see America's Suicidal Statecraft. The Self-destruction of a Superpower) that they would use the Plunge Protection Team and a variety of "helicopter drops" à la Bernanke, to prop up the economy and the credit markets.

The key question is to what extent any such measures will be effective.

They might create a short-term - a very, very short-term - euphoria; but, by their very nature, they only prop up a "system" which has failed and which, with ever increasing dismay, they are coming openly to acknowledge to have failed.

One crucial point is that, just as the Fed and the rest, before last summer, showed complete unawareness of the financial monster that was being constructed or even of the real threat of the sub-prime crisis, so now they show no understanding of the depth and fundamental nature of the economic and financial crisis with which they - and we - are confronted.

It is not a crisis which just turned up yesterday because something marginal went wrong in, for example, some real-estate or energy market or some hedge-fund bust.

The steady, relentless creation of the monster that we now confront goes back decades. It has soured, poisoned and corrupted the whole system - the real economy, the real credit markets - and it is global as well as national.

The creation of elements which have given particular character to the monster in recent years - and even months - has become increasingly more frenetic. Credit derivatives, SIVs, CDOs, hedge funds, private equity, carry trades and the rest gave an especially avalanche quality to the speculative fever that had already, for decades, been in process of creating a casino economy in the United States and other countries.

We should always be aware of course that there was a divide between the countries with a grave speculative addiction and those who, through their superior perception - or perhaps because of their naivety - took a different course.

The United States policies of self-destruction did not build up new, fake, casino economies in Asia and, especially in the last two decades, in China and India. There it built up real economies, investing in real things and producing real goods and services.

These economies will replace - obviously they already have to a large extent and continue to replace - the United States and the other addictive gamblers, in economic and financial terms. Replacement in political and strategic terms is a little way down the track but it is already on the way. Those who don't discern it are as blind as those who did not see the financial monster which I have identified above being created years, indeed decades ago.

The creation of these "real" rapidly-growing economies means that we have to recognise two fairly consistently identifiable groups whose destiny will be different.

The monster which confronts the United States and its speculative “clones”, including the United Kingdom and Australia as examples, does not confront China, India, the Tigers and their "clones" in the same way or probably to the same extent.

That does not mean that turmoil in the United States group will not have an impact and cause some turmoil in China, India and their "clones".

It certainly will; but the nature of the impact and turmoil there will call for a different range of remedial measures. They will call for some deep and fundamental adjustments but they will not necessarily be of the same comprehensive kind as those required in the United States and its "clones".

That raises a crucial issue of what we must understand to be required for the latter group of countries: a little fiddling around the margins of the economy and the financial "system" will not be enough. Extra "liquidity" from the Fed, some more tax cuts by the Bush Administration will not be enough. That will indeed only be fiddling while the speculative, debt-ridden economies see more and more of what they had, and what they still want to keep, go up in flames.

What we must rather recognise is that we must return to some "true" valuation of real investment - the sort of real investment in the production of goods and services that we had in the period between 1945 and 1969.

We must see again the value of real private and PUBLIC investment - which to far too great an extent has been abdicated to others. Real fixed-capital investment is the great engine of growth of income, wealth and employment. It always has been and always will be.

We must see the value of re-establishing stability in markets - for goods, services, currencies, credit and all the rest - which will encourage and stimulate real as distinct from "ownership" and speculative investment.

We must avoid the volatility of recent years on which speculation breeds and the real economy is diminished or destroyed.

These are huge requirements. They call for a return to the attitudes of mind that we had at the end of World War II.

Then we aimed, through national and global measures, to co-operate in establishing stable, growth economies, with full employment, which would reinforce policies of social, political and strategic stability around the world.

As the "Great Bust" which threatens us at the moment develops, we will see ever more clearly the need to re-create these attitudes and to formulate practical economic and financial policies which will go far beyond the "helicopter drops" of Bernanke and Bush and lead us towards a true recovery.

It won't be easy and it will take time. There are several years of struggle ahead. We will need to ameliorate conditions for those hit hardest during those years. We may hope that the current "Great Bust" will not last as long as the Great Depression did. We may hope that it will not result in - or help in the slide to - the catastrophe of world war that the Great Depression did.

But, if we are to realise those hopes, we must accept the imperative for transformation of the economies and financial "systems" which we - the United States and its "clones" - have at the moment.

Short-term expedients will not do.