Helicopter Drops are not Enough
By James Cumes
Two years ago, early in 2006, I wrote, in "America's Suicidal
Statecraft", that -
"One of the more fascinating debates is whether, if and when we
crash, we will have deflation or inflation – and either one in its most extreme
form. Within this debate, we have such entertaining – or devastating –
suggestions as the helicopter drop linked to the names of Friedman and
Bernanke. Some forty years ago, one of the more beguiling habits of President
Bokassa of the Central African Republic, was to fling handfuls of coins and
paper money to his grateful people when he went on walkabouts among them. His
little gesture drew the crowds, increased his popularity and nurtured his
ambitions. Eventually, it helped to bring about his apotheosis as "Emperor
Bokassa I of the Central African Empire". He was crowned in a magnificent,
Napoleon-like ceremony, costing $20 million that the country could not, of
course afford; but it added circuses to the presidential appeal. Sadly,
however, the fantasy was short-lived. Even
his exuberant generosity could not prevent the Emperor's eventual overthrow and
imprisonment.
"Assuredly, there will be many extreme as well as some more
rational proposals when what seems to be the inevitable crash does arrive. By
that time, we may have reached what one commentator has called "The End of
the Western World we have known since 1945", the United States dollar may
have become a "monkey currency" like the Emperor Bokassa's and any
dollar notes that Chairman Bernanke might drop from helicopters might have even
less real value than the paper money with which the Emperor showered his people
on his Coronation Day, back in 1977."
We can readily understand the political and social motivations for
Bernanke and his associates now that the crash has come. Governments and
central banks in the West seem largely to share those motivations.
Already, the size of the helicopter drop goes far beyond anything
dreamed of in the past. Not just one helicopter but whole squadrons of jumbos
have been unloading what, in the case of the United States alone, must now
exceed one trillion dollars. One Harvard professor says that the American
economy is so large that such a sum is not of great significance and he might
still be unworried if the sum reached – as it probably will – two trillion or
more. The European Union, the United Kingdom, Japan and others – even Russia in
a sense – are conducting their own helicopter drops.
These will mainly help financial institutions. Unlike Bokassa flinging
money to the presumed poor, Bernanke, Paulson and company are unloading their
helicopters on the relatively rich – many of whom participated actively in
creating the financial chaos.
At this stage, we cannot be precisely sure just what the longer-term
motivation is for this splurging of "liquidity." A natural impulse
has been to stop panic and avoid such a precipitate collapse of the financial
"system" that the whole world market economy would grind to a
shuddering halt. That would hurt everybody; so everybody can be said to
benefit, at least indirectly, from the helicopter drops.
Again, in 2006, I wrote –
"There have
been references by the new Fed Chairman – not entirely in jest - to the device
of a helicopter drop to spread purchasing power to the masses, if that might
become necessary to avoid a debilitating depression and deflation. Whether
through the helicopter or otherwise, the option of printing more and more money
to relieve the burden of debt and to keep the economy running at anything like
acceptable levels, must have its attractions.
"However, any such
approach must bear in mind what happened during and after the German
hyperinflation of 1923. Effectively, the economy collapsed into barter, much of
the established society was destroyed and a new currency had to be installed. The
collapse of the economy and the ruin of the society were seen by some to be
factors in the rise to power of the extremist Nazi regime. While we cannot
forecast that this would happen in the United States and while, further, we
cannot paint a precise picture of the details that the process would entail, an
attempt to extract the United States from its indebtedness through the
unrestrained printing of money would certainly bring dramatic changes to the
political, social, economic and strategic situation of the United States. The
pattern of world power that might emerge is difficult to forecast in any detail
or with any confidence. At the very least, it might hasten the advent of a
period of acute instability as the United States was seen to lose its status as
a superpower and a period of transition to some sort of new world leadership to
ensue."
What we must try to be clear about is whether we have sufficiently
sound prospects to justify our undertaking these kinds of "helicopter
drops" in the light of the catastrophes they might themselves precipitate.
First, we must acknowledge that the financial "system" which
has prevailed for at least the last decade and, in some ways, for the last
thirty or forty years, is dead. Any attempt to keep it on life support will
only drag out and intensify the agony and risks to world security – strategic
as well as economic.
The death of this financial "system" was inherent in its
nature. It was a casino-type, speculative system which could live only in the
short term. It always threatened catastrophe for the real economy. Ponzi
elements were so entwined in it that as soon as people began to lose confidence
in it the whole structure had necessarily to fall down.
The "system" has been
based on a "licence to self-destruct" version of a "free
market" and the accumulation of levels of individual, household,
corporation and public debt, especially in the United States, that are so
unprecedented that, in any earlier age, they would have been unimaginable. The
emphasis has been on runaway consumption rather than production, on uninhibited
global borrowing to achieve it and massive "leverage" by often
Ponzi-like financial institutions to finance it.
The only question has always been not if but when the inherently
unstable structure would collapse.
Inevitably we now face a period of widespread instability and distress.
Potentially, that period is likely to be as long as or longer than that of the
Great Depression of the 'thirties and the distress even more bitter and global.
The threats to human survival, in the age of nuclear and other weapons of mass
destruction, are much greater than ever before.
In large measure, we must resort to "helicopter drops." For
political and social, as well as economic reasons, they are unavoidable. However,
even while we are making these drops of utter desperation, we should keep our
focus on whom the drops should help in the short term and on what must be our
longer-term goals.
Above all, those goals must include a return to sound economic and
financial policies, that is, policies which recognise again with absolute
clarity that genuine prosperity in terms of income and wealth depends on real
public and private, mostly fixed-capital investment, the development of ever
higher productivity and real production which takes account of the real needs –
food, clothing, shelter, health, education, etc – of all our people and which
does so in sustainable ways.
Inevitably, a return to sanity like this is going to take time. So the
helicopter drops will need to focus to a substantial extent on meeting
emergencies – to rescuing those whom the financial hurricane has left, so to
speak, without shelter and to finding some means of employing them in useful
tasks as soon as we possibly can - in weeks rather than months and months
rather than years. Even if it is only getting them to dig holes and fill them
in again, that could be more productive than giving life support to financial
institutions which don't deserve it and which are, in effect, already dead in
any meaningful sense anyway.
Let us be crystal clear that we surely would not dream of reviving the
"financial services industry" with which we have burdened ourselves
in recent years and which is now self-destructing. Urgently and most
imperatively, we must create something sane and satisfying to put in its place.
In proceeding to these reconstructive tasks, we need to reflect on the
economic and political system and what we must have it deliver. A capitalist
system has virtues but it must be managed with care, discipline and a deep and
abiding sense of responsibility. A democratic system has virtues too but it is
vulnerable to charlatans and self-seekers. A system of world security such as
the United Nations also has virtues but it must do what its charter intended
and not drift into inanities which only fecklessly bolster the institutions
themselves rather than attend to the goals of their founders. The United
Nations has totally failed in its responsibilities under the economic and
social provisions of the United Nations Charter. A whole array of other
international economic and financial institutions, including the World Bank and
the IMF, have similarly failed miserably. They have all been utterly useless in
preventing or even slowing our feverish race to catastrophe.
The longer-term goal of a secure and stable world we must always keep
in mind; but we still have an emergency situation right now with which we have
to deal.
Fundamental changes not only in the global economic and financial
situation but also in the global strategic and security situation are vital. As
a single superpower, the United States is already well along the road to
self-destruction. Those – mainly Americans – who brought about financial and
economic disaster for the United States also undermined its single superpower
status. The United States – and its closest allies - need to face up to this
and to the very real prospect that the dominance the United States had after
the Second World War will never return.
At the same time, the Administration in Washington needs not only to
acknowledge America's changed status but also to draw on the enormous
resilience and resourcefulness of the American people to help them – and us - to
achieve a lasting global recovery. Other countries must be drawn into this
effort. We hope the European Union can hold together. To the extent that it can
and can give impetus to a new and more realistic "globalisation" that
will be of enormous value. We must hope too that Asia, Latin America and Africa
will have a more influential role than in the past – both in devising effective
economic and financial arrangements and in ensuring global security. The BRIC
countries – to whom so much power has recently been passing – would seem likely
to be less subordinate and more equal partners in the quest for prosperity and
security than they were in the past.
This is not to underestimate the magnitude of the emergency and the
task of rehabilitation that confronts us.
Rather is it to emphasise the longer-term and more fundamental
objectives of relief and rehabilitation we now have. We need "helicopter
drops;" but they must be of kinds that do not merely attempt to raise the
undeserving dead. Instead, they must bring succour to the living; but, even so,
helicopter drops, in the short or the long term, will be not nearly enough.
In that context, the present
Administration in Washington and the one which will take office in January 2009
might reflect on what happened to Emperor Bokassa and the Central African
Empire. The masses rejoiced for a moment as Bokassa showered them with fancied
riches; but the "feel good" factor didn't last. The Central African
Empire soon dissolved; and Bokassa himself quickly became only a vaguely
remembered, trivial footnote in human history.
He is no longer with us but, if he were, he would no doubt agree that
helicopter drops have their overnight virtues but also their severe limitations
in the many tomorrows yet to come.
© James Cumes