Subject: ON THE NEXT ECONOMIC DEPRESSION: FROM THE CENTER FOR THE  ADVANCED STUDY OF AMERICAN INSTITUTIONS AND SOCIAL MOVEMENTS,  GRENOBLE, FRANCE.
 

17 June 2003
Grenoble, France

Dear Colleagues and Friends,

The distinct possibility of a major economic depression seems to be looming, according to many economists, and the military solution to this problem appears at best as a half-measure, unfit to solve the crisis. It is true that swollen military budgets offer investors immediate guaranteed returns on their investments, and the profits are relatively high, but the global sinking of the rest of the economy, where low-wage jobs and high unemployment are rapidly becoming the norm, promises only an acceleration of the vicious spiral downward.

Below are two articles which we received recently on this subject of economic crisis and military expansion : the first, item (A), is an essay sent to us by Professor Douglas Dowd, which he published recently with http://www.zmag.org; the second, item (B), is an article published at http://www.alternet.org, by Jim Lobe and sent to us by Joanna Learner.

Together, these texts seem to signal that  military-industrial expansion is causing more economic problems than it is solving for the US and for the rest of the world and an economic crisis of historic dimensions  is approaching.
 

Sincerely,
Francis McCollum Feeley
Professor of American Studies
Director of Research

__________________________________________
A.
From Professor Douglas Dowd
San Francisco, California
14 June 2003

Deflation And The "d" Word. Here We Go Again?
By Doug Dowd

In U.S. economic history, there have been only two periods of sustained
deflation:   from 1873 to 1897 and the 1930s.  Their length and severity led
both to be called "depressions."  There had been many downturns before 1873,
but none had lasted so long and been so widespread or as calamitous -- until
the even worse collapse of the 1930s.  Downturns are normal to the
capitalist process, and are called "recessions."  The difference is not
merely terminological:  A recession has usully been a national contraction
that reverses itself in due time; a depression originates from a weak world
economy and ultimately brings it down and, unlike a recession, never does
reverse, except through political intervention or, as in the case of the
1930s, world war.

As will be noted below, Japan has been in recession for about 10 years;
that all the world has had a kinder fate up to now is because the USA plays
such a central role in the world economy that one casualty (even one the
size of Japan) does not drag others with it -- indeed, Japan itself has not
sunk as far as it might because its exports to the USA have helped to
sustain it.  Of which, more later.

Now, for only the third time, the world seems to be entering a period of
deflation and, if in different form, global recession severe enough to
mutate into depression. There are many reasons for thinking so; we can only
skim their surface here; some of those reasons recall the 1920s, some are
new to our time. The import of what follows is not that history is going to
repeat itself; the many different characteristics of today's world insure
that it cannot; they also provide the possibility that what lies ahead
(including the lies that lie ahead) could be much worse than anything in the
past..

In the past two years or so, the financial pages have brought back
memories of the 1920s,  most obviously the popped stock bubbles and the
misdoings of CEOs.   In those same years, U.S. foreign trade and current
account deficits have also broken all records, and the always "strong
dollar" has become much weaker, as unemployment levels continued to inch
upwards.  Such matters continue to be noted, but now have begun to be
accompanied by the word not heard for many decades:  "deflation."

Unemployment, expected to be cured has all of a sudden come to be seen as
stubborn (and it will be later as close to double the announced rate).  All
that is acommpanied and partially caused by shrunken investment in real
capital, and large-scale tax/deficit squabbles.  In consequence, there is
much unease in business and among consumers, as well there should be..

In a Z-commentary more than two years ago, I drew some parallels (and
differences) between the U.S. economies of the 1920s and the 1990s -- both,
in their time, called "new" economies.   Among the parallels is that in the
first stages of the movement toward the abyss of the 1930s -- recession
after recession from 1927 to 1929 to 1933 -- what was to come was neither
acknowledged nor understood.  For present purposes it is important to
clarify what is meant by "first stages":  It wasn't until almost four years
after the crash of 1929, that is until 1933 -- when unemployment was at 25
percent,  and ALL the banks in the USA were closed against down (as in
Argentina, recently) -- that either businesses or economists had any idea
that the "new economy" was cracking up.  On the other hand, a significant
percentage of the population knew that something had gone awry, and had been
doing so before the crash.  The people referred to were those without jobs
and/or those with jobs whose incomes were painfully low:  Herman Miller
(ecnomist with the U.S. Census for 30 years) showed that if we were to apply
the standards of poverty measurement now in effect that at least half of the
U.S. population was living below the poverty level years before 1929. (Rich
Man, Poor Man /1974/)  Like poverty, unemployment was not even measured in
the 1920s; had it been, by present standards the jobless rate varied from 5
to 13 percent in the decade --  and  both measures are substantial
understatements in comparison with those of Western Europe.

There were of course many important differences between then and now (some
to be discussed); but one of the major similarities was that the ruling
powers of business and government were/are 1) a very tightly-knit family and
2) share/d the view that economic downturns automatically reverse
themselves, and that any interference by the government does more harm than
good.

The only seeming modification to that view was/is in the reliance upon
monetary policy (diddling with interest rates and the supply of money):  No
problem; such policy is controlled by their financial world, through their
Federal Reserve System and their chosen  "governors."   As 1929 became
1930-31-32-33, each worse than its predecessor, the biggies were singing
"Prosperity is just around the corner."  So it goes today, except that today
it is "growth" that is just around the corner.Many who say that believe it;
those who do not, but are in positions of influence or power, dare not say
so in public, lest in doing so they make a bad situation worse.  And in the
rare instances when someone who has or has had influence or power does issue
a negative statement, he is derided or ignored -- be it Stiglitz of the
World Bank, or financiers such as Stephen Roach, Warren Buffet, and George
Soros.  So the news is, as they say, all that is fit to print.

All that being said, what are the reasons to think this is a worsening
situation?  A good place to begin is with the word "deflation," a term not
heard since the 1930s.   What does it mean?  To answer that, one also has to
show deflation's whys and wherefores.  Its basic definition is that of
generally falling prices, rather than, as with inflation, generally rising
prices.

But the two processes are not simply the opposites of each other -- in
"reverse causation," in consequence, or in "reverse policies" for their
cure.  Also, inflation can be accompanied by more jobs or more unemployment;
but deflation always means rising unemployment -- and, in the USA, much more
so than the "official" figure.  (A note on that:  One is counted as
unemployed only if one is known to have been seeking a job but has not found
it; nor is one unemployed  if one is working one hour a week -- even though
he/she has had and needs a full-time job.  Until very recently, the Labor
Department kept no figures on such workers.  Now they provide those figures:
only in a footnote.  When they are counted, the present 6 percent rate rises
to just under 12 percent.  In Western Europe the more realistic measurement
is used; as is also a more meaningful measurement of poverty:  anyone with
less than half the median income is poor.)

The mild now gaining notice seems to be pointing toward an oncoming
general deflation.  Why?   The main sectors of demand and supply are those
having to do with consumers, businesses, foreign trade and investment, and
governments (fed, state, local).  They are, of course, interdependent,
organically related.

Consumers spend more or less depending upon their employment status, their
incomes, and their debt condition.  Although consumer expenditures now
continue to rise, they do so always more slowly, because of rising
unemployment, job fears, and already mountainous consumer debt, with every
reason for all those factors to worsen.  Business expenditures have been
weak for two or three years in the vital area of  capacity expansion and new
equipment; the reason being that the how much can be produced is greater
than how much can be sold profitably, both here and abroad.

Just how serious the relationships between consumer and business
expenditures are may be seen in the recent behavior of the automobile
industry -- the key industrial market here and elsewhere.  As most will have
noticed, in the past two years or so, the auto companies have reduced or
eliminated the interest costs of borrowing (from them) for purchasing a car.
They do that, rather than to reduce the price of the car (which would count
in the deflation index) because if there is anything the giants fear it is
price competition, lest it deteriorate into what they call destructive
competition..  However they MUST sell more cars; so they cut the interest
rates, a considerably safer move for them.  If that (and similar dodges)
were taken into account in the consumer price index, the rate of deflation
would be more alarming.
 

Foreign trade and investment.
The USA is now and has been for decades "the consumer of last resort" for
virtually all the other economies' production (from 10 to 20 percent of
their GDP).  As the Cold War began, so did U.S. expenses and investments
abroad -- expenses due first and foremost to our military establishements in
dozens of countries -- led by Germany and Japan, whose economies were much
strengthened thereby:  Think of the U.S. "expenses" in Germany for an
average of 3-400,000 GIs, plus airbases.  Meanwhile, U.S. companies were
investing cheaply and profitably in those same countries.  Even so, because
we exported more than we imported until about1970, we had a surplus in our
trade balance.

When Reagan took office in 1981, despite and because of all this, the rest
of the world owed us $1 trillion; when he left office, we owed just that
much to the rest of the world.  And since then that trade and investment
deficit has gone up by five times that -- rising recently at the rate of
$500 billion a year, and always having to rise.  Why?  Because if "the
consumer of last resort" ceases to do its job, all the other countries'
present troubles will deepen -- which is what is happening.  Thus it is that
consumer indebtedness is mountainous, the average household owing each month
more than its average disposable income; and just as mountainous is our
foreign debt, now over $5 trillion and rising.

U.S. consumers have been slowing their purchases because of domestic
conditions -- that, put together with the falling dollar will worsen other
countries' economies (as their goods cost us more, we will import less of
them), without materially increasing our exports to them, because they are
all already in or verging on recession.

The dollar began its decline against the Euro as year 2000 ended; it has
declined more than 30 percent since then:  20 percent in the past year.  To
which must be added:  Almost all economies' currencies are valued separately
from the dollar -- except those in East and Southeast Asia; they are
"linked" to the dollar, and thus  move with it:  No small "except" In that
China is one of those countries, that is no small exception.

That means a) that those Asian exports will also be cheaper than those of
Europe's exports, already true before the dollar's fall; it also means that
the US will import even more of Asia's (especially China's) goods than ever,
auguring more trouble for U.S. manufacturers -- of everything from clothing
to computers.  Nor can the USA do anything about it with tariffs or bans,
because (to quote the NYT of 5-22-03) "American and Japanese factories
operate the same factories in China that produce the deflation in the first
place.... America and Japan have little choice but to shop there for
imports."  Japan's exports to the U.S. are already falling.  In sum, there
are always fewer jobs in the relevant industries in both the USA and Europe,
as China -- only a few years ago way down the list of world economies, has
now taken Germany's place as # 3.

"Round and 'round the world economies' relationships go" -- and up and
down.  But surely the omnipotent U.S. government can pull a rabbit out of
the hat?  This government is more likely to pull a hat out of a rabbit.
 

Government.
The reference here will be mostly to the federal government, with only a
bit to say about our local and state governments and those of other
countries.   The US government is back in the 1920s in terms of economic
policy, its guiding principle that of  President Coolidge:   "The business
of government is business."   Today, add a small adjective:  BIG
business --specifically its Holy Family of oil, cars, and weapons and its
nephews and nieces, The Filthy Rich.

Given the emerging fiscal policies of the Bush administration -- massive
tax reductions for the top 10 percent -- especially the top one -- percent,
with falling contributions to the 50 states' social expenditures, and $400+
billion in miltary expenditures -- with, consequently a tidal wave of
federal deficits resulting from expenditures that will (do) little to
stimulate the economy -- all that and more of the same mean a federal
government which will exacerbate, not resolve, our economic problems:  They
will enrich the few (including the P. and the V.P.) by vastly reducing the
progressivity of the income tax while raising the retrogressive indirect
taxes of 80 percent of the population (sales taxes, the social security tax,
etc) while deepening our already scandalous social neglect.

Sensibly done, government deficits stimulate the economy:   The deficit
arises because it spends more than it taxes; when that spending is on
productive social projects (schools, public transportation, health care, and
the like), more jobs are creeated and, thus higher incomes and, thus, the
basis for higher taxes to reduce the deficits over time.

Not this gang.  This government lowers the income tax rates of the rich
and of corporatons, of dividends and capital gains (almost all for the
rich), while raising its military and security expenditures.  With
expenditures not falling while taxes do, that means that the indirect taxes
of the rest of us must go up.  The beneficiaries of the tax reductions (one
percent get about half of all of them) are unable to spend much more than
they do; those whose taxes rise -- i.e., most of us -- will have to pay more
in taxes and be unable to spend as much as we have, especially if we don't
have a job:  About 3 million jobs have been lost since Bush took office --
and that number, as noted above, does not include those who have given up
looking, or those who are working only part-time.  Until very recently, as
noted above, we could only guess at how many fit those unhappy categories:
Now we know it is 11 percent of us, at least -- as it is in Germany and
France and Italy, which measures the way we ought to, and in Japan, if it
measured as it should).   That's ; just a bit more than we had in 1939.

But will not those military expenditures stimulate the economy?  Not
much, other things being equal.  Other things, as just noted are not equal,
and although $400 billion is way too much, it is a small percentage of a $10
trillion+ economy.  Also, the industries getting most of those $$$ are few
and very high-tech, so a tiny percentage of the workforce is involved.
Moreover, non-military governmental expenditures have two to three times the
job stimulus of any military expenditures -- to say nothing of the greater
role they play in terms of grave social needs they could serve.

What are deflation's consequences?  They are mixed:  It sounds nice to
think that the prices of your food and clothing and other commodities you
need or want will go down; but, and quite apart from the fact that the
prices of many (if also a minority) goods and services will stay the same or
rise, one must consider that, given the limitations of contemporary fiscal
policy, with Bush's policies the economy will almost certainly continue its
slide toward an ever worsening recession.

That is here in the USA; but there is no longer just a USA, economically.
As we slide, others will slip and slide at least as much; down and down, is
the most likely effect -- and remember that #2 Japan has been in recession
for at least ten years and counting, and #3 Germany has been stuck on a
slowly falling freight elevator for 2-3 years (joined now by France and
Italy and Holland and Belgium and Sweden and....).

That's where we stand.  Some of the differences between the 1920s and now
have been treated above..  Now some others that are relevant.  Not least
among them is that ALL the countries of Europe were in economic distress or
crisis most of the 1920s; NONE of the countries in the world had any idea of
what a sane set of fiscal policies (taxing and spending) might be; let alone
any inclination to pursue a sensible path by good luck.

Much was learned between 1930 and 1945, and some of it was applied
systematically in most of the European and U.S. economies as the 50s and 60s
unrolled.  Now, however, Europe's economic policies are ruled over by the
European Union.

Those rules were imported from the USA of the 1920s as updated by the
Reagan adminisration, and even more explicit than ours.:  For example, any
country whose annual budget deficit is in excess of three percent of its
GDP, MUST lower its social expenditures until....  Until what?  Until the
arithmetic is OK, even though that wuld likely mean that the socioeconomy is
pushed toward the abyss.  It was Germany that insisted on that rule; it is
Germany that now is well in excess of the 3 percent, and which (along with
others) is trying to wiggle out of the rule -- with tsk tsks coming from the
wisemen of the USA.

Then this last fearful note.  The world economy today is the most fragile
in history; because it is more dominated by finance than ever before; and
the financial world is more dominated by speculation than ever could have
been dreamed of in a non-computerized world.  One big bubble has popped in
the past two years; just as one big one popped in October 1929.  The bottom
was still to occur, three years later.  In a recession, the downward shifts
in income and jobs are measured in percentages ranging from two to ten
percent.  Compare that with what happened between 1929 and 1933 in the USA:
Industrial production fell by 50 percent; average income fell by about 40
percent; farmers' income fell by 50 percent; those without jobs went up
sixfold, from 1.5 million to 12.8 million.  The depression left no sector of
the economy standing upright, nor any country's economy.  Each nation had
its own crisis, and all had a share of a worldwide crisis.  It did not come
to an end until World War II came to an end -- if then.  In Europe alone, 60
million people had died, most of them civilians -- through "collateral" and
intended "damage.".

A global economic crisis of the dimensions of the 1930s might conceivably
be averted; and might not be.  Predictions about such developments cannot be
made with any certainty.  But even a depression of lesser degree than that
of the 1930s could, in this world, make for catastrophe(s) even worse than
what ended in 1945.  To the economic fragility of the world economy it is
necessary to add today's existent and emerging political fragilities,
whether in Africa, Asia, the Middle East, or Latin America -- or,  for that
matter, in Eastern Europe and even in parts of Western Europe (as manifested
in rising quasi-fascist movements).   If all that is put in a focus that
includes the strong rightward tendencies and realities, in socioeconomic as
well as foreign policy/military tendencies, it is not excessive to believe
that an economic crisis is more likely to be used for dangerous political
purposes than for what could be constructive and enlightened
socioeconomically, at home or abroad.

Unfortunately, we have little need to speculate, given what the Bush
administration has already done:  A preemptive war in Iraq, with the plans
for other such wars well underway, along with a go-it-alone foreign policy,
whether as regards the environment, peace, justice or... the economy.  That,
taken together with a set of greedy, stupid, and harmful domestic policies,
mixed in with serious moves toward the suppression of dissent (or even
discussion), and a relentless media campaign that seems to know no shame,
and it is entirely too possible that in retrospect the 1930s and World War
III could come to seem, a few years from now, the way we are able to view
World War One:  terrible, but not so bad, in comparison with the permanent
wars abroad, processes lurching toward "compassionate fascism" at home.
 

____________________________________________
B.
From artist Joanna Learner
Battle Creek, Michigan
13 June 2003

Pentagon Dreams of Playing 'GloboCop'
by Jim Lobe

As it did in its speedy but still unfinished military campaign in Iraq, the
Pentagon is hastily planning to re-deploy U.S. forces and equipment around
the world in ways that will permit Washington to play "GloboCop."

While preparing sharp reductions in forces in Germany, Turkey and Saudi
Arabia, military planners are talking about establishing semi-permanent or
permanent bases along a giant swathe of global territory ­ increasingly
referred to as "the arc of instability" ­ from the Caribbean Basin through
Africa to South and Central Asia and across to North Korea.

The latest details, disclosed by the Wall Street Journal on June 10, include
plans to increase U.S. forces in Djibouti on the Horn of Africa across the
Red Sea from Yemen, set up semi-permanent "forward bases" in Algeria,
Morocco and possibly Tunisia, and establish smaller facilities in Senegal,
Ghana and Mali that could be used to intervene in oil-rich West African
countries, particularly Nigeria.

Similar bases ­ or what some call "lily pads" ­ are now being sought or
expanded in northern Australia, Thailand (whose prime minister Thaksin
Shinawatra will be here for talks this week), Singapore, the Philippines,
Kenya, Georgia, Azerbaijan, throughout Central Asia, Poland, Romania,
Bulgaria, Qatar, Vietnam and Iraq.

"We are in the process of taking a fundamental look at our military posture
worldwide, including in the United States," said Deputy Defence Secretary
Paul Wolfowitz on a recent visit to Singapore, where he met with military
chiefs and defense ministers from throughout East Asia about U.S. plans
there. "We're facing a very different threat than any one we've faced
historically."

Those plans represent a major triumph for Wolfowitz, who 12 years ago argued
in a controversial draft 'Defense Planning Guidance' (DPG) for realigning
U.S. forces globally so as to "retain pre-eminent responsibility for
addressing selectively those wrongs which threaten not only our own
interests, but those of our allies or friends, or which could seriously
unsettle international relations."

The same draft, which was largely repudiated by the first Bush
administration after it was leaked to the New York Times, also argued for "a
unilateral U.S. defense guarantee" to Eastern Europe "preferably in
co-operation with other NATO states," and the use of pre-emptive force
against nations suspected of having weapons of mass destruction ­ both of
which views are now codified as U.S. strategic doctrine.

The draft DPG also argued that U.S. military intervention should become a
"constant fixture" of the new world order. It is precisely that capability
towards which the Pentagon's force realignments appear to be directed.

With forward bases located all along the so-called "arc of instability,"
Washington can pre-position equipment and military personnel that would
permit it to intervene with force within hours of the outbreak of any crisis.

In that respect, the new global strategy would be similar to the U.S.
position beginning in the 19th century vis-à-vis Latin America, where the
U.S. has frequently intervened to protect its interests from real or
perceived threats.

Nearby countries so involved included Cuba, Mexico, Nicaragua, Haiti and
several others. The interventions were usually followed by long occupations
and the establishment of friendly but authoritarian regimes, like those of
Batista, Somoza and "Papa Doc" Duvalier. The U.S. Contra war against the
Sandinista regime in Nicaragua in the 1980s might be considered a sequel to
the earlier action. America's increasing role in Colombia's current civil
war also fits the pattern.

On a grander scale, the U.S. has assisted military takeovers in larger
countries like Chile, Brazil, and Argentina, with the usual bloody results.

Indeed, as pointed out by Max Boot, a neo-conservative writer at the Council
on Foreign Relations, Wolfowitz's 1992 draft ­ now mostly codified in the
September 2002 National Security Strategy of the USA ­ is not all that
different from the 1903 Theodore Roosevelt Corollary to the Monroe Doctrine.
The Monroe Doctrine asserted Washington's "international police power" to
intervene against "chronic wrongdoing, or an impotence which results in a
general loosening of the ties of civilized society."

The new and proposed deployments are being justified by similar rhetoric.
Just substitute "globalization" for "civilization."

The emerging Pentagon doctrine, founded mainly on the work of retired
Admiral Arthur Cebrowski, chief of the Pentagon's Office of Force
Transformation, and Thomas Barnett of the Naval War College, argues that it
is precisely countries and regions that are "disconnected" from the
prevailing trends of economic globalization that posed the greatest dangers.

"Disconnectedness is one of the great danger signs around the world,"
Cebrowski told an audience at the rightwing Heritage Foundation last month
in an update of the "general loosening of the ties of civilized society"
formula of a century ago.

Barnett's term for areas of greatest threat is "the Gap," places where
"globalization is thinning or just plain absent." Such regions are typically
"plagued by politically repressive regimes, widespread poverty and disease,
routine mass murder, and ­ most important ­ the chronic conflicts that
incubate the next generation of terrorists."

"If we map out U.S. military responses since the end of the Cold War, we
find an overwhelming concentration of activity in the regions of the world
that are excluded from globalization's growing Core ­ namely the Caribbean
Rim, virtually all of Africa, the Balkans, the Caucasus, Central Asia, the
Middle East and Southwest Asia, and much of Southeast Asia," Barnett wrote
in Esquire magazine earlier this year.

The challenge in fighting terrorist networks is both to "get them where they
live" in the arc of instability and prevent them from spreading their
influence into what Barnett calls "seam states" located between the Gap and
the Core.

Such seam states, he says, include Mexico, Brazil, South Africa, Morocco,
Algeria, Greece, Turkey, Pakistan, Thailand, Malaysia, the Philippines and
Indonesia. Those nations, the logic goes, should play critical roles,
presumably including providing forward bases, for interventions into the Gap.

At the same time, if states "loosen their ties" to the global economy,
"bloodshed will follow. If you are lucky," according to Barnett, "so will
American troops."

On the eve of the war in Iraq, which has been followed by an occupation
increasingly under siege, Barnett predicted that taking Baghdad would not be
about settling old scores or enforcing the disarmament of those famous
weapons of mass destruction, yet to be found. Rather, he wrote, it "will
mark a historic tipping point ­ the moment when Washington takes real
ownership of strategic security in the age of globalization."

Barnett's so-called arc corresponds well to regions of oil, gas and mineral
wealth, a reminder again of Wolfowitz's 1992 draft study. It asserted that
the key objective of U.S. strategy should be "to prevent any hostile power
from dominating a region whose resources would, under consolidated control,
be sufficient to generate global power."
_______________________________________
Jim Lobe writes on U.S. foreign policy for IPS, Foreign Policy in Focus, TomPaine.com and AlterNet.
 

******************************
Francis McCollum Feeley
Research Center Director <http://www.u-grenoble3.fr/ciesimsa>
and Professor of North American Studies
UFR d'Anglais
Université Stendhal
Grenoble, France
Tel: 04.76.82.43.00