My reading this past weekend included What Makes Civilization? The Ancient Far East and the Future of the West. The book is written by David Wengrow and published by Oxford University Press. It looks at the ancient advanced civilizations of Egypt and Mesopotamia and gleans insights that apply to events in today's world.
In particular, the book challenges the idea that civilizations develop by exchanging ideas with each other. Wengrow claims that, although the two ancient civilizations he studies developed over two thousand years of interaction, each retained certain basic practices and ideas unaltered. He concludes that civilizations don't share as much as we once thought.
The implication is that remaking one civilization in another civilization's image (as we are attempting to do in the Middle East) may be a fool's exercise. The immutability of civilizations has important implications for Europe at the moment, and our own economy as well. We're talking now of Greece, another ancient and venerable civilization which in modern times has become a rather spendthrift, corrupt, tax-evading culture. It's also a culture that has borne the consequences of its unprincipled behavior in the past, without learning a darn thing.
In the 1970s and 1980s, for example, while most Western nations suffered from bouts of double-digit inflation and vowed “Never again,” inflation in Greece reached a horrendous 35%. Of course, the Greeks don't want to see inflation like that again, but neither have they reformed their ways. At the moment, inflation in Greece stands at 5.5% and seems set to skyrocket higher once more, with ominous implications for the euro. It doesn't take a mathematician to see the writing on the wall.
The other day, I read an article by Michael Lewis, author of Liar's Poker, a book that helped define Wall Street in the 1980s. (Even if Michael and I didn’t share the same literary agent, I would still have great respect for him as a thinker.) The article points out that Greek debt, per person, now comes to roughly half a million dollars. The nation's total debt is $1.2 trillion, when you factor in pensions and other commitments. I doubt the happy-go-lucky, profligate Greek population are about to convert to fiscal austerity. Instead, they will cope with their immense debt by allowing inflation to soar once again.
Of course, many things could happen to affect Greece's future. The Chinese could step in, if they see it's in their interest. Perhaps China
would act in concert with Russia and/or India. Who knows? Many nations would find the stress placed on the euro by Greece's financial troubles to be intolerable. But as it stands now, double-digit inflation is most likely. To appreciate the consequences of the Greece crisis, we must turn to the U.S., and Friday's labor report...
Jobs vs. Commodities
Though better than expected (what isn't to the financial media?), the new report shows U.S. unemployment remains close to 10%, with little hope of improving anytime soon.
Paradoxically, business profits seem to be increasing very quickly. How can this be? As we've pointed out before, it has to do with the dichotomy between commodity prices and unemployment insurance claims. UI claims stand dismally close to 500,000, 18 months past their peak. In no other recession in modern times has UI claims remained above 400,000 for this long. The previous record, set in 1982, was 13 months.
Consequently, businesses today must spend less money on workers to make up for the higher cost of commodities. Every increase in the price of copper, rubber or tallow means job losses. Remember that many industrial commodities do not trade on futures markets. There's no speculation going on, just shortages that lead to higher worldwide prices.
In the past, higher industrial commodity prices reflected higher U.S. corporate revenues. Those revenues led to business expansion and more jobs. Today, revenues are not rising nearly as quickly as commodities, and the hirings are not taking place – at least not in this country. Instead, the U.S. now finds itself on the losing end of a zero-sum game in which most job creation is taking place in the developing world.
How long can our economy continue to have profits without job creation? Not much longer. We don't want to get into speculation, but political turmoil along with the emergence of new parties is likely to occur unless we quickly get into an inflationary stance. (As with Greece, we think inflation is inevitable in the U.S.)
In order to raise exports, we need a lower U.S. dollar – the lower the better (which by definition means inflation). Believe it or not, it's not easy to devalue the dollar in the face of the current shenanigans in Greece that are driving down the value of the euro. To improve the exchange rate, we need the dollar to fall faster than the euro. If all major currencies fall equally, no one wins.
So what can the Fed do? We were among the first to suggest that QE2 (a second round of quantitative easing) would be the obvious solution. Friday's employment report makes it seem more likely. In fact, we believe it's the only alternative.
