Friday, September 27

Remember: economics is bloodless. A lesson from the U.S. Federal Reserve's role in the uh, "Arab Spring"

Law professor and political scientist Stephen F. Diamond was clearly unaware that there's no blood in economics when he lit into the Wall Street Editorial Board this July for recommending (on the Fourth of July, no less!) the installation of a Pinochet knockoff in Egypt to stabilize the Egyptian economy.  After summarizing the atrocities committed by the Pinochet regime Steve wrote:

"Either the Journal has been struck by some kind of severe cognitive disorder that allows it to paint over the history of one of the most brutal regimes to have ever ruled or they really mean it. If the former, they owe their readers and the Chilean and Egyptian people an apology and should retract the statement. If the latter, then they are in fact the leading edge of a new fascism emerging here in America."

Steve needs to get with the program. In the new global order there is no such thing as fascism. As I explained in 

the Brave New Global Economy post, the only types of government are a) economically stable ones and b) unstable ones.  Secondly, the WSJ board was just trying to be helpful, as this passage from the editorial indicates:

"Washington can also do more to help Egypt gain access to markets, international loans and investment capital."

That's the ticket!  Emerging economies can't prosper unless you first provide them with enough jobs, and you can't create enough jobs unless the economies increase their "foreign direct investment."  From that viewpoint it makes sense to recommend the installation of a leader who will delete statistical anomalies that make a big deal about not wanting to accept economic prescriptions that are good for their economy.

If Steve wants to argue that it wasn't statistical aggregates Pinochet deleted, it was people -- ah, but if those people have no real existence apart from the economic collective, well, you hire workers from the low-income demographic to mop up the blood, then you talk about the benefits of applying your mathematical models to the next generation of statistical aggregates.      

I don't think it's much of a digression to mention that if the Wall Street Journal is actually interested in helping Egyptians, it would ask Federal Reserve Chairman Ben Bernanke to stop his quantative easing experiment to stabilize the U.S. economy -- or as IMF chief Christine Lagarde calls it, "unorthodox monetary policy." 

Now why would stopping QE help the Egyptians?  QE is not all that unorthodox; only the huge dollar amount and long duration of Ben's version of QE is unorthodox. QE is known by another name: exporting your government's debt. This practice can have all kinds of weird consequences, as happened in the region that in the old era was called MENA -- Middle East North Africa. Take one example, summarized in Stephen Maher's November 2011 piece for Monthly Review titled The Political Economy of the Egyptian Uprising:

"In the year leading up to the revolutionary uprising, food prices in Egypt jumped another 30 percent, despite increased government subsidies put in place after the 2008 riots. This rapid rise in prices was at least partially driven by the decision of the United States Federal Reserve to undertake a nearly $2 trillion Quantitative Easing program, flooding the market with liquidity and inflating the prices of assets valued in dollars. This meant a sharp rise in commodity prices, which hit poorer countries the hardest.
Seeking to stabilize the system in the midst of the 2009 crisis, Western financial institutions simply relocated it: the uprisings that spread across [MENA] were partly fueled by this spike in inflation (the inflation rate in Egypt doubled in 2009)."

So to bring the Wall Street Journal Board up to speed:  Augusto Pinochet didn't have to deal with Bernanke's QE experiment; if he had, whatever improvements in Chile's economy that came from his ramming through economic reforms wouldn't have happened. Instead, he would have found himself in the same boat as the Gamalists: frantically trying to bail out an ocean of liquidity spewing from the Federal Reserve.

While I'm on the subject of Egypt, I might as well mention another point to the WSJ Board.  There's a widely held theory in Egypt (and here at Pundita blog) that the Gamalists were booted out of the government just because they were devotees of the very same economic prescription that the WSJ now recommends for Egypt.(1)  The Gamalists had to go because their "neoliberal" economic practices (and the cronyism that evolved from it) were threatening the land holdings and business enterprises of Egypt's generals. From that point of view, which is also my point of view, the ouster of Gamal's father, Hosni Mubarak, was just collateral damage in the purge of the Gamalists. 

After the coup the generals reinstalled in Egypt's government those neoliberals who'd learned to play ball. However, they're still up against the Fed's QE program, which hasn't abated ostensibly because it still hasn't met the Fed's economic targets.

Exporting your government's debt is another way of saying that you're driving down the cost of your nation's currency so that other countries will import more of your goods. The theory is that this practice will bouy your stricken economy.  However, the theory was never meant to be applied during a catastrophic financial crisis that engulfs many of the world's nations.

Bernanke overlooked this striking fact, with the result that his experiment bouyed not the U.S. economy but the U.S. dollar and specifically currency and commodity speculators here and around the globe. The result was that the U.S. dollar became a hot commodity fueling a U.S. stock market boom -- and the collapse of more than one government in MENA.

Ironically both the Tunisian and Egyptian regimes at the time of their ouster were pursuing the very economic policies that the Wall Street Journal wants an Arab version of Pinochet to ram through in post-Gamalist Egypt.  The WSJ Board might want to put that bit of recent history in their pipe and smoke it. 

The grim reality is that the Gamalists had been caught in a vise of events. Even as early as 2010 they'd realized they had to ease up on the pace of neoliberal reforms -- not to placate the generals but because the reforms hadn't translated into enough jobs fast enough, leaving many Egyptians still stuck in dire financial straits.  Yet the Gamalists found themselves frantically bailing water as Egypt (along with many other emerging economies) took the full brunt of Federal Reserve monetary policy.

One more point:  The passage I skipped over in the Maher quotes mentions an argument by David Harvey, author of The Enigma of Capital, which is that "capital cannot solve its crisis tendencies but merely moves them around," as Maher puts it.  I haven't read Harvey's book but if he (or Maher) is trying to pin Bernanke's manic quantitative easing on capitalism, he'd get an argument from me.  The huge size of Ben's experiment tags it as straight-out currency warfare gussied up in fancy economic jabber.

1)  DON'T click on that link unless you know a lot about the controversies surrounding neoliberal policies or else you'll get completely confused. I just grabbed that illustration at random, for readers who're unaware that the real target of the 'revolution in Cairo' was the Gamalists.


No comments: