Random Thoughts

Changing Economies and War & Consequences

Until the industrial revolution single artisans engaged in the complete production of articles, implements etc. Adam Smith in his 'Wealth of Nations' elucidated how the production of pins broken down into separate repetitive stereotyped steps of production assigned to a team performing separate steps, increased productivity manifold. Instead of a single artisan producing ten pins a day, five persons working at different steps of manufacture of pins could produce hundreds of pins per day. This assembly line process increased worker productivity and led to specialization by division of labor on an industrial scale by Henry Ford's car assembly line. It is also a probable basis of origin of the Indian caste system which in the form of priest, soldier and farmer antedates India and was a societal hierarchy prevalent amongst the ancestor Proto-Indo-European speakers in Caucasus and southern Ukraine, who migrated peacefully to Mesopotamia, Iran, India and the rest of Europe.

Textiles were the earliest industrial products and the rise of Japan, Korea, Taiwan and recently China, India, Pakistan, Bangladesh and others followed the same path of industrialization as the original, Netherlands, Britain and America. All the above countries ascended the value chain by using protective tariffs to develop other industries like machinery, electronics and automobiles. Soon after the industrial revolution, machines often made workers redundant and thus occurred the revolt of the Luddites. Excess production of textiles and manufactured goods required bigger markets and that is why Admiral Perry's American fleet was sent to threaten Japan to forcibly open up to trade. Other countries like India (best textiles up to 1800 AD) and China were de- industrialized and like African colonies for Europe and Caribbean and Latin American countries for the US, served to export cheap raw materials to Europe and America and became captive markets for their expensive manufactured products. The Japanese unlike other Asian countries learnt the proper lesson and took to rapid industrialization from the Meiji restoration to become an industrial, maritime and military power strong enough to score a decisive naval military victory against vastly bigger Russia in 1905. Theodore Roosevelt, a warmonger himself was awarded the Nobel Peace prize for successful mediating the truce between Czarist Russia and Imperial Japan.

Japan earned a seat at the table of great powers. It was the only non-European one and somewhat resented. Its disadvantage was a small territory and scarce resources, so it to took to colonizing like Britain and captured Korea and Taiwan and later Manchuria. The US with its penchant for trade embargos stopped selling it scrap metal, crude oil etc., precipitating the attack on Pearl Harbor. This provided FDR a legitimate excuse to join WW2, which he had been itching to openly, instead of previously secretly aiding Britain with arms and materiel.

President Woodrow Wilson had used similar skullduggery to embroil America in WW1 despite promises to stay out. He did this without regard to tens of thousands of US citizen casualties to salvage the huge loans of US banks to the British government which would have been lost if Germany won. Wilson's arrogance and stupidity led to crushing unbearable war reparation burdens on Germany by France and Britain setting the stage for the demise of the League of Nations, hyperinflation of the Weimar Republic and the ascent of Hitler, the Nazi Third Reich and WW2. The follies of WW1 also partly caused the Russian Revolution and the emergence of Communist USSR. The greed of France and Britain is the cause of the current Middle East mess in Iraq and Palestine.

Germany was no innocent angel. It had committed genocide in Africa in the WW1 era. The Nazis started the separatist tendencies of Croatia and thus sowed the seeds of the present mess in Yugoslavia, as did the Ottoman and Austro-Hungarian Empires. Present NATO powers are still making matters worse by granting independence to Kosovo and carrying out color and floral revolutions in Georgia, Kirghyzstan, Ukraine and setting up missile defenses in Poland and the Czech Republic. The USSR then promoted strife in China and Korea and Japan was a ruthless perpetrator of atrocities throughout Southeast Asia and China. The progress of colonization, military strength, industry and developed nation economies depended first on coal (steam power, electricity and naval steamships) and later on cheap oil (diesel engines for tanks, warships and automobiles). Japan, Korea, Taiwan and now China and to a lesser extent India took the next step up in the value chain from textiles to automobiles and electronics.

Cheap oil and crooked policies of vehicle manufacturers and the government in America allowed GM to buy up the Los Angeles rail tramcar system and scrap it. Eisenhower built up the interstate highway system promoting car use over longer distances. This led to the development of suburbia and exurbia in the US with abundant land. The better off people, mostly white, abandoned the cities with increasing African-American populations. Deteriorating inner city real estate values led to decreased real estate tax revenues leading to deterioration of city public schools dependent on those taxes. The reluctance to live in mixed neighborhoods and the impoverishment of city populations due to exodus of good manufacturing jobs, first to the outer suburbs and later to cheap wage countries, worsened urban poverty and increased crime and drugs. A similar thing is happening to Britain now though it is much worse in America with its foolish policy of gun sales.

Paul Kennedy in the book 'The Rise and Fall of Great Powers' comes up with a rule that great powers fall by overreaching when their declining economic power is unable to finance their military ambitions. The Roman, British and Soviet empires fell when their economies collapsed due to huge military expenditures. Constant skirmishes between the Byzantine (Constantinople) and Sassanid (Iran) empire weakened them so they were ripe for picking by the Islamic hordes (Turkish from Central Asia and newly Islamicized Arabs respectively). Other empires flourished by tribute from colonies. America has used the dollar's international reserve currency status by printing dollars and by increasing debt (Read the book 'Empire of Debt' or Chalmers Johnson's 'Nemesis' and the other two of the trilogy)

America, the richest and the militarily strongest power in world history, began using indiscriminate massive aerial bombing of civilians in WW2 (Dresden in Germany, Tokyo, Hiroshima and Nagasaki in Japan) but the tactic led to a standstill in Korea, a defeat in Vietnam and hemorrhaging bogging down so far in Afghanistan and Iraq. The last wars are projected to cost three trillion dollars with no end in sight. There have been nearly 5000 deaths of coalition forces and contractors, 30,000 injured and some mental or physical disability in hundreds of thousands.

The current wars became necessary for control of cheap oil to make the economy run, but has resulted in price approaching 120 dollars a barrel. The economic consequences are a severe curtailment of US citizen lifestyle. If one rounds up the median US household annual income to 40,000 dollars with deductions of 45% (25%federal taxes, 7.5% state and local taxes, 7.5% social security taxes, 5% health insurance), it leaves a disposable income of 22,000 dollars annually. A home mortgage plus real estate taxes or apartment rent of 12,000 a year leaves just 10,000 dollars a year for utilities (telephone, heat, air conditioning, electricity, water, sewage disposal), food, gasoline and car payments and maintenance, clothing, travel and entertainment. Rising petrol prices at nearly four dollars a gallon and sharp food price increase (milk up 26%, wheat up 400%, eggs up 60%, fruits, vegetables and meats up 10%) leaves the family budget in the red and the average household credit card debt is now over 9000 dollars with interest charges of 18%.

Falling home prices and resetting higher mortgage rates create a bigger problem. Nearly a quarter of home owners presently owe more on their mortgage than their house is worth, as they have been withdrawing equity from their homes for purchases and vacations through home equity loans. This is why they walk away and let the home be foreclosed by the lender. The foreclosed home swells the large inventory of unsold new homes and for sale old homes, accelerating the downward spiral in home prices.

Indian home prices will suffer a similar fate.

The US economy is 75% dependent on consumer spending, but the consumers are maxed out and in dire straits. The mortgage, credit card and automobile loans are in increasing default and securities created from these loans have been sold to banks, brokers, investment banks, insurance companies, pension plans and sundry investors, who now have stopped receiving interest and principal payments. They are compelled to write off these assets as non-performing, which shrinks their balance sheet and makes them reluctant or unable to make further loans or take market risk. The Central Banks of the US and UK are taking on these bad loans and in return are giving the institutions, government securities and cash, ballooning the money supply and spurring galloping inflation.

The days of big moneymaking in finance and investment banking are over and large layoffs are raising unemployment, further weakening the economy.

The US in a debt spiral with ten trillion dollars of debt, fifty trillion dollars of unfunded liabilities, nearly trillion dollar annual deficits each in the budget, trade and current account and five hundred billion dollars a year in off budget war expenses. Thus control of trillions of dollars of oil and gas assets of Iraq and possibly Iran are becoming a necessity.

Necessity ignores and will not stop for legal, moral or ethical constraints.

Irrespective of who becomes the next president and despite what they say now, none of them will withdraw from Iraq or stop threatening Iran. Some forecasters are predicting an abandonment of outer suburban and exurbia housing due to rising home heating and commuting expenses and a return to row homes with shared walls to reduce heating bills, commute time and expenses. Militarily there will be swing towards isolationist policies, withdrawal from the present over 700 foreign bases and more fair and balanced trade rather than free trade, especially if the present desperate gamble in Iraq fails.


More by :  Gaurang Bhatt, MD

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