Smoke and cracked mirrors
The underlying view of this column with regard to the global crisis that erupted over five years ago, in mid-2007, is that it is ultimately a crisis of confidence. The rupture that is ripping the developed world apart is between the general public – call them the people, the proletariat, the ruled, or whatever you like – and the elite group that runs the show, in finance, business, media and, of course, politics. This crisis encompasses the financial sector, where it actually began, the wider economy (of individual countries, regions and the world), to which it spread, and the entire socio-economic fabric.
At each level, the key issues are confidence, trust, credibility. The crisis is thus simply a reflection of the fact that these essential elements of human interaction — between individuals, institutions and countries – have been eroding for years and are now crumbling. Anyone with the slightest understanding of how the financial system works will realize that the intangibles of confidence and trust are not optional extras or nice behavior. Rather, they are the foundation of the entire edifice, so that it is no way surprising that as soon as they began to crack and splinter, the seemingly super-sophisticated system was exposed in all its underlying vulnerability. The response of ‘TPTB’ – The PowersThat Be, the contemptuous term used by anti-Establishment writers to describe the ruling elite – has been to try and paper over the cracks, mainly by pouring liquidity into the financial system and, in that way, keeping the wheels of the economy and of the wider society turning.
Because this response is not a solution – liquidity per se cannot solve anything, except a liquidity crunch, which is not the problem – there is no chance of things getting better in a fundamental sense. On the contrary, they will at best seem to stay the same but will in reality get worse, even if the deterioration occurs beneath the surface. The process of deterioration can be measured using financial, economic and social indicators – and even political ones. I have developed a simple but effective political measuring rod, the ‘extremism index’, to track the political expression of the deterioration in Europe – the critical front in the global crisis – via election results.
But the actual deterioration is occurring in the abstract, and hence unmeasurable, sphere of confidence and trust. Occasionally, the full extent of the ongoing demise of trust is thrown into sharp relief – and the last week has seen such an occasion. Last Friday, the US government’s Bureau of Labor Statistics published its monthly update of data from the labor market, including the unemployment rate – which is regarded as a critical yardstick of economic performance and hence carries enormous political weight. This is especially so one month before the presidential (and other) election/s.
Lo and behold! The unemployment rate plunged by 0.3% in one month, to 7.8% — below the psychologically important 8% threshold, and also back to the level in force when President Obama was elected. This development was entirely unexpected by economic analysts and actually ran against the grain of other economic data and surveys published in the preceding weeks. It therefore gave rise to a huge wave of overt disbelief, of which the best-known example became a tweet from Jack Welch (the legendary former boss of General Electric) effectively saying that Obama and Co. had fiddled the figures and the data were false.
The debate over Jack Welch’s response and his subsequent row with CNN and Reuter’s, and the much wider debate over the data themselves, are quite fascinating. If you haven’t been following, just Google the topic and pick a dozen or two articles on the subject. But the hullaballoo over Jack Welch is marginal, while the debate over the data is secondary: it is possible to write an intelligent analysis explaining why the data could not possibly be subverted by politicians (such analyses have been written and are available), and it is equally possible to write a blistering critique showing that “if something (in this case, the unemployment data) seems too good to be true, it probably is” – meaning that the coincidence of wonderful data at this point in time is totally implausible.
Nevertheless, the primary feature of the unemployment data row is how it highlights the extent to which trust in government and confidence in authority has been replaced by suspicion and even open disbelief. Jack Welch is very much part of the Establishment, yet he has no hesitation in proclaiming his belief that the POTUS (president of the US) is an unscrupulous manipulator – someone who will subvert government institutions and openly lie in order to improve his chances of being re-elected. Welch and his ilk either don’t stop to think, or don’t care, that their opposite numbers could do the same — indeed, they did the same and worse to George Bush (just read Paul Krugman’s vitriolic columns from that era). Concepts such as protecting ‘the office of the president’ – itself an abstract concept reflecting trust and belief – have been trodden underfoot, by all parties and players.
The economy and the political system that runs it have been reduced to a make-believe show using smoke and mirrors to obscure and deflect reality. But once the mirrors crack, even the make-believe cannot work.