Neo-Keynes! “A new period in world history

The golden age of deregulation and neo-liberal thinking is gone forever. Down with free markets. We are going back to collective regulation of the markets. This week, the Senate of the U.S. agreed on how the banking industry regulates and how this neat dog keeps walking next to the boss. It is the beginning of a period of control. We are going back in time, back to the 30s of the ideas of Keynes ‘keep in control’.

This weekend the 20 most powerful people of this earth came together to discuss the state of the world economy. There is an important topic on the agenda and it is economic recovery. Everyone agreed that it is a joint responsibility for all and the fragile recovery must not to crumble again. The G20 is primarily about how further financial recovery can take place. There are various opinions and we see that the leaders are right opposite each other on some issues. This week I show an analysis of the dilemmas of the G20:

Let’s start with Barack Obama. Obama is like working on two fronts. He issues Chinese currency policy and he attacks Europe on deficits policy. Lets start with the first. His attack on the Chinese Yuan seems to have had some effect. The Chinese have linked the Yuan to the U.S. dollar so that production cost can be kept at an artificial rate. The idea comes from the period when Bush saw China as a productive backyard of the U.S., and low production cost was a guarantee to keep inflation down and to stimulate sales at the same time. It is a wonderful system because the growth of employment in services across the industry with low wages is necessary. The idea was that everyone could be rich.

But the dialectics of advantage applies to the linked Yuan-Dollar. The collapse of  the financial markets in 2008 and 2009 was an unmitigated disaster for industry in the U.S. Everything disappeared and the economic recovery in the last half of 2009 and 2010 benefited China and not the U.S. Meanwhile, many low-wage jobs in the U.S. disappeared forever. A painful note as the engine of jobs in the U.S. is not as strong as China. Precisely at the bottom of a market, people are desperate for work. With 6 months to wait until they have a right to social payment, there is a fatal risk for many Americans existing right now. Time to start to blame the government.

What is better to than to designate an enemy. So the Chinese are. They manipulate the currency market by maintaining the link as we understand to the U.S. dollar. That is a good political game. The reality is different. The low-wage industry is gone for good in the U.S. If China were not in the picks, then there’s India and Brazil. They are just as cheap to produce as China. But that’s not the American problem. It is politics! And politics is to create the reality with each other and the moment with a new truth.

Barack Obama seems to have won the fight. The Chinese were willing to be flexible with the link with the Dollar … eventually! The Chinese are masters of diplomacy. Just before the G20 the problem was taken out. The Americans can be satisfied. It is ultimately symbolic politics. China has also a reason for the decoupling of the Yuan with the Dollar. A cheap Yuan makes it difficult to level inflation inside China. So this week China made the Yuan a ½ percent more expensive to the Dollar. What the Chinese do not want is that the balance between production and demand will be disrupted. So people just regulated! It is therefore ½ percent symbolic politics and makes sure that inflation is slightly reduced. What the Chinese actually mean with the flexible currency policy is still to regulate the currencies but in one moment they may increase it above current levels of the Dollar and the next time something below. This allows them to better regulate the currency and that is what flexible policy means. It isn’t a free market as with most of the currencies. So who won this battle? I think the Chinese have.

Then the debt crisis. It is just as interesting as the currency crisis. Again we see Barack Obama on the world stage strengthening the positions. This time Obama summarized the European union. There are a number of bottlenecks. Firstly, European countries firmly intend to cut government spending to balance the budget back to normal. Obama says (so does the FED) that this will damage the recovery of the economy. Such a way of saving is bad for the economy and for Europe, as a key export, and will hit the U.S. markets. It will eventually affect economic growth in the U.S. The U.S. has put huge sums of money into the economy to stop a free fall in financial markets over the world. So the U.S. opinion is that European countries owe the U.S. for stopping this free fall and now they are saving their own budgets!

But instead of investing, the EU is trying to regulate the issue. The U.S. believes that the EU’s example is bad for the economy and is a hitting a good friend. No, says Angela Merkel, ‘that we do not’. ‘A healthy balance is needed for recovery in the long term’. Here is the classic debate between market-led economy or free market economy, and the Keynes’s economy few and the neo-Liberals. We’re back in time, back to the 30s of the last century. Keynes revived. We’re back to doing visioning and this is necessary in these times. Politicians are supporting a vision of society. Without vision there is no direction, and there was a lack of vision for too long. So we get back to the classics of thinking what is the best for the recovery of the economy, back to the period when the government regulates with the aim of preventing excesses and helping the economy to move in an upright position. If this is the start of the neo-Keynesian period of time, we expect things to stabilize and we are only just at the beginning. The US Senate this week approved, after heated debates, the first new regulations on the banking system. Here is a fact, the times of regulation has started. It is beautiful to see how history repeats itself.

So the ‘decade of regulation’. The struggle between free neo-liberals and market-led economy is in full swing. We can expect that the neo-liberals will fight this battle with all their hearts. Everything is dependant on those excesses as we saw over the last two years. Each incident is a reason to go now on a tight leash. One of these excesses can once again be the Greek crisis. Europe next week: refinance billions this months and the question is whether it will be a trusted market. The market will determine a profit warning, Greek interest rates are too high again. You’ve been warned, the door is wide open for a new crisis. If refinancing is not possible then it is compulsory to be sold. No, this crisis is unstable and certainly not over. And yes, this is the start of a new way of thinking that will bring stability at the end. I call it the neo-Keynesian thoughts in the same way that the neo-liberal period that we have behind us is almost over.