05.11.2008
October 26, 2008 (the date of publication in Russian)
Alexander Aivazov, Andrey Kobyakov
NIKOLAI KONDRATIEV AS THE MIRROR OF THE GLOBAL CRISIS. Part 3
Re-formatting of global economy
Part 1: (http://www.rpmonitor.ru/en/en/detail.php?ID=11609)
Part 2: (http://www.rpmonitor.ru/en/en/detail.php?ID=11610)
WHAT DOES THE FUTURE PROMISE TO US?
In fact, the United States has been living on behalf of the rest of the globe for years. Producing not more than 20% of the global GDP, the US consumes about 40% of the global production. The total debt of the United States comprises $53 billion – a sum almost four times exceeding the nation's GDP. The financial crisis and the ensuing collapse of possibilities of crediting the US market will inevitably result in the fall of mass demand and contraction of consumption. Therefore, production is also going to decline, along with the required amounts of energy, and in case major oil producers don't agree to cut oil extraction to a minimal acceptable level, oil prices are likely to abruptly collapse. The gold market is facing a different dynamic: this commodity, serving now as the only universal measure of value, is also the only possible means of guaranteeing capitals from crises and defaults.
On the other hand, the decrease of demand in the United States in the process of financial crisis will inevitably result also in a decline of production in Europe, China, Japan, India and other states that used to serve as the major productive plant for supplying consumer goods and IT-products for the US market during the rising phase of the fifth K-cycle. This decline, in its turn, will lead to an abrupt contraction of the global markets, to revival of protectionist policies, and to exacerbation of existing contradictions between the United States, the European Union, China, Japan, India, Russia, Middle East and Ibero-American states, eventually resulting in disintegration of WTO. In the expected series of trade wars, the United States will get into most serious confrontations with the unified Europe – certainly, if Brussels does not victimize its interests on a direct order from Washington, and with China, which is today trying to establish its own free trade zone in the Asia-Pacific region, possessing the highest amount of gold currency reserves.
The exacerbation of trade wars will foster integration processes within major regional groups of nations, forming capacious regional markets with a tendency to constructing self-sufficient close-circuit economic associations. During the declining phase of the fifth K-cycle, these groups of nations, with economies oriented mostly on regional inter-state trade, are going to elevate their role of independent centers of influence. Some of these regional groups will establish themselves around the largest of the regional economies – like China, Russia, South Africa, possibly India. Meanwhile, Middle East and Ibero-American states are likely to unify according to the model of the EU, with several leading nations in one group. All these regional markets are likely to develop on the base of a very harsh regulation, substantiated with some new kind of Keynesianism.
Before this happens, we are going to face the third default of the US dollar that will put a heavy full stop to the almost seven decades-long domination of the dollar as the only global reserve currency. The default of the US currency will completely destroy the bubble-making factory, constructed by Alan Greenspan. Global economy will no more tolerate the situation when the whole financial system of the world fully depends on an egocentric and irresponsible policy of a single state. This means, in particular, that the creditors of the United States – China, Japan, Russia and others – will inevitably have to introduce reorganization of the US economy, to develop new rules of global economic development, and to create new global economic institutions.
Therefore, regional integration like that exemplified by the European Union, is likely to take place in various regions of the world, being motivated with efforts to safeguard national economies from the implications of the crash of the US financial system. Therefore, every regional group of states is likely to select its own regional currency. These regional reserve currencies may be pegged to the gold equivalent.
These groups of countries are likely to provide the base for a new system of global institutions and structures that are going to replace the existing WTO, IMF and World Bank which have discredited themselves demonstrating inability to solve the key problems emerging from the objective tendencies of global capitalism. The corresponding multipolar political system is likely to become much more balanced and reliable than the bipolar world of the second half of the XX century and, especially, than the later unipolar system.
TO BECOME THE LEADER IN THE NEW GRAND CYCLE
Meanwhile, Russia is today facing a most serious choice. In case our country continues to follow the fairwaters of US financial policies, counting on a bit of luck to escape the disaster together with the Americans, the Russian economy will be buried under the debris of the US financial system.
In fact, the Russian Government has not managed to establish a sovereign financial system until today. The Ministry of Finance and the Bank of Russia are actually investing in the deficit of the US budget and not in Russian companies and banks. Drawing out the supposedly excessive liquidity from the budget and hoarding it in the Stabilization Fund, the Ministry of Finance has in fact left the domestic corporate and banking systems on short rations. Consequently, the reserves of the Russian Federation, nominated in Western securities, comprised $476.4 billion dollars, while Russia's foreign debt rose to $459.6 billion – only due to the fact that Russian corporations, given the absence of mechanism of domestic refinancing, were forced to address Western banks for loans.
In this way, both the state and the investing sector have found themselves hostages of stability of the US financial system – which, as explained above, is inevitably going to collapse.
Only at the sound of thunder, Russian financial authorities hurried to create a national system of refinancing. The Bank of Russia started pouring money not into Western but into Russian banks, and the Vnesheconombank (VEB) received $50 billion for refinancing major Russian corporations that had borrowed in the West. In case a sovereign financial system existed before, Russian banks and corporations would not have to borrow billions of dollars in the West, while small and medium business would rise from its miserable shape, borrowing from domestic banks.
This error has to be reversed. Russian reserves should not be invested in a failed financial system. The so-called "Paulson plan" and other attempts of saving the global financial system in its present shape may only postpone the crash of the US economy for a couple of years or most probably for months, for expense of hyperinflation. However, this period will be followed with even more devastating crises and losses.
The virtual, fictitious, insecure capital has to burn down in the furnace of the crisis on the declining phase of the fifth K-cycle. The more liquidity Western governments will pour into the stock market, the more deep and devastating will be the new collapse. It is noteworthy that the "salutary" Paulson plan suggests increase of the US budget deficit that already reaches almost 80% of the GDP.
Refraining from underpinning the doomed bubble of US economy, Russia could choose a more decent way to the future. With its resource, educational and industrial potential, Russia has got a sufficient potential for overtaking the civilizational initiative and to become the major architect of the After-Dollar World, starting the essential changes along with Europe, Japan, China, India, Brazil and other countries. Not a single country except Russia is prepared for this role today. China does not have the experience of fulfilling the mission of a global power that the USSR in the post-World War II decades carried out. The unified Europe is not quite united in its approaches towards economic policy that is undermined by the influence of the immediate vassals of Washington.
Thus, only Russia can lead Europe, China and other nations of the world along the way towards a new economic architecture of the future world order, and thus to overcome the devastating implications of the declining phase of the fifth K-cycle. Approximately in 2012-15, when the US economy will collapse, Russia, with its huge potential of reserves, lands for cultivation, and scientific potential, is likely to become the most attractive place for investments, and for implementation of the most advanced technologies of the new cluster of basic technologies of the sixth K-cycle. Russia also necessarily has to enter OPEC and initiate foundation of a "gas OPEC" and "food OPEC" with the mission to organize resistance to the unbridled speculation at the markets of raw materials, energy, and fictitious capitals.
It is essential to remind that in the declining phase of the third K-cycle, the Soviet Union managed to efficiently use the Great Depression, speeding up to close the gap with the West during this cycle, carrying out a full-scale modernization and industrialization of its economy which enabled the country to win in World War II. That was the period of construction of the machine-building complex, as well as the foundation of new institutions and industries that later, in the rising phase of the fourth K-cycle, became the base for nuclear industry, organic synthesis chemistry, production of new construction materials. The state investments of that time enabled the Soviet Union, in two and a half decades, to win the race in exploration of the outer space and to reach parity of armaments with the United States.
A similar modernization effort, focused on new information technologies, was necessary to implement in 1970s, in the declining phase of the fourth K-cycle. Unfortunately, the Soviet Union, relaxing on incomes from oil exports, failed to undertake this effort, and eventually experienced a scathing defeat in the contest with the West, falling apart as a house of cards.
If Russia does not use a similar opportunity of today, instead continuing to spend its gold currency reserves and stabilization savings for underpinning the collapsing financial system of the United States, its destiny will be deplorable. Any financial pyramid, be it the scandalous "MMM Corporation" of 1992, Russia's state treasury obligations of 1998, or the US financial system of 2008, eventually collapses, burying all those who believed in its eternity under its debris. Therefore, Russia should invest its financial reserves in the basic innovative industries of the new, sixth technological pattern (mode), in the "economy of knowledge of future", in the infrastructure of Russia, and possibly also in the devaluated Western research companies – but not in the financial instruments of a decomposing system.
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