In 2019 – the last year for which we have complete statistics – all classes of financial investment had a total increase of 23 trillion US dollars, particularly Stock Exchange securities and public debt instruments. The global value of Stock Exchange securities alone grew by 17 trillion US dollars, from 67,000 to 84,000 US dollars, while, finally, the global value of bonds alone grew by 6 trillion US dollars.
A very weak house of cards. In fact, two events alone, such as the closure of the Straits of Hormuz, or a new “democratization” in the Middle East, would be enough to trigger an inflation led by oil or other raw materials cost, which would bring the whole great house of cards of public and private debt down.
A “short-term life”, an “altered stage” of finance that currently – with fintech and derivatives, born with Clinton’s banking reform – can afford not to consider the financial flows data, but only a manipulated calculation of probabilities, against which, however, you can insure yourself.
The entire Eurozone, which believes to be smarter than the others, lives on trade surpluses – often huge as in Germany – but also with a mix of low domestic wages and booming foreign trade, which makes the EU economies extremely vulnerable to asymmetric attacks from some non-EU expanding countries – not to mention the USA and China, which will tolerate for a short time yet this difference in level, which harms them significantly.
The European Target 2, the interbank payment system that no longer allows to resort to foreign currency reserves to offset banks’ liquidity deficits, has now a full balance of over 1 trillion euros, of which 800 billion euros are German flows only, which therefore live on purchases by the Euro area.
Hence a system that amplifies the asymmetric shocks, which are inherent in a “rigid” currency and not lender of last resort as the euro, but which favours above all the holders of greater surpluses than the EU countries, which are currently less capable of achieving trade surpluses. Therefore, for Italy, beating the surplus within the Eurozone is a primary goal of economic and financial warfare. It can be done.
Certainly Keynes’ old and still valid idea – launched at the Bretton Woods Conference – to find a single currency and also an account currency, namely bancor, which would revalue the currency of the country recording a surplus and devalue the country recording an excessive deficit, was defeated by the USA, the winning country, which had also financed Great Britain – that paid its debt to the USA until 1973 – but which wanted above all to internationalize the dollar, so that it could have a “high” value despite its structural trade deficit.
Therefore, this enables the EU countries which record higher balance of payments surpluses to purchase bonds – for example, Italian ones – while the further reduction in value of the Greek, Spanish and Portuguese bonds is maintained by favouring one or the other markets of government bonds and securities. Currently the shopping of public debt instruments is a primary method of economic warfare.
In this very weakened framework, the huge Covid-19 pandemic broke out.
It is the seal – if ever there was a need – of a new war economics.
This means: a) initial planning of actions; b) predefined distribution of resources; c) hierarchy of goals; d) careful selection of public and private spending.
Furthermore, democratic Socialism, but also social Catholicism, were born from the experiments that the great capitalist economies carried out during the First World War, such as the Beveridge Plan – a continuation of war Socialism by other means – just to paraphrase Von Clausewitz’s well-known statement – but also the subsequent democratization of Germany following the end of the Third Reich, which led the winners to maintain the workers’ co-participation in the management of small and large companies.
When this health and human tragedy is over, we can think about a sort of new “Glorious Thirties”, as a French economist called the years from 1945 to 1975.
Nevertheless, we shall give up what the Maoist Red Guards called the “four old habits”, i.e. old ideas, old culture, old habits and old behaviours.
But obviously we shall do so within our eternal Western culture, which respects all the others and, often, enhances them.
Old ideas: balancing the budget as a goal in itself. Let us consider that currently the EU Member States’ Constitutions enshrine precisely the “balanced budget” principle. It is a laughing matter. What should be done if Vesuvius erupted? Could we leave the whole Campania region without aid? What about Smith’s invisible hand?
What if a new pandemic broke out? What should be done? Are we not aware of the fact that probably also the current financial criteria may be undermined, not only by people’s demands, but precisely in their intrinsic structure?
Old culture: what if we rethought all the finance and productive economy?
What if, for example, we rebuilt the internal market, without thinking – as it will never happen – that trade-induced capitalization will be such as to refinance the system? The mountains of money on which the global “billionaires” are sitting like Uncle Scrooge are not really cashable now, even if it seems so.
Hence we are building a “Monopoly” that looks like a real system, but it is not so any longer.
Old habits: what if we tried to control production so as to avoid – even manu military – companies’ delocalization abroad? What if we understood, for example, that a mechanic from the Piaggio company in Pontedera is not at all interchangeable with a poor Indian immigrant?
Surely they will never make the same Vespa scooter. Hence, what if we invested not in the quick planned obsolescence – possibly with much advertising rhetoric – but in items capable of being a non-monetary investment for buyers?
This is the theory of generalized wear – even in goods production – that Ezra Pound expressed in the 45th Canto of his most important work.
However, there are no industrial nations by vocation or mission.
Nevertheless, the shrinking of the Welfare State following the eventful advent of the so-called “Second Republic” in Italy has been based on the concept – which is very hard to prove scientifically – that the cost of market limitation is always greater than the cost of a restructuring crisis.
This has never been the case, not even on a simple accounting level.
Hence a war economics against the pandemic is needed to rebuild the old Welfare State with new formulas.
The war economics, as it was studied after the Second World War, is made of many things: the economic “war cycles”, which absorb the Schumpeterian creative destruction; the calculation of the national income; the estimate of real capital and its depreciation, not to mention the input-output tables.
There is an old study by the Naval War College, drafted by Jim Lacey in 2011, which tells how US economists probably determined the allies’ real victory in the war against the Axis powers.
In 1931, a British intelligence cell supervised the German industrial reconstruction, while in the 1930s and 1940s, the economic experts – not the poor ideologists of the current tout va bien – identified the industrial sectors which had to be selectively funded, as a priority, to secure the victory and the war efforts.
A cost-benefit analysis was made – not the ridiculous one that is currently so fashionable for infrastructure in Italy – but the one based on Leontief’s matrices.
Preference for strategic bombing, for example, as well as for precision weapons and for surgical actions on convoys.
The battle of materials theorized by Ernst Jünger was made by the Allies, not by the Third Reich.
Hence, in the current Covid-19 times, selective investment is needed in biological sciences and electronic infrastructure – all public investment, even if some private entities would have the possibility to invest in these fields – but also in technical and mass information, scientific training and all the new technologies.
The private sector may currently have the capital to invest, but it has not the heads for it while, in the medium or long-term, the public sector can afford a return on non-financial investment and, in any case, lower than the one that a private investor in the same sector would expect.
This is the reason why, based on my first-hand experience of that era, I can say it was silly to privatize IRI’s large product and business sectors.
This is also the reason why energy is still mostly public in Italy, precisely because the capitalists in the sector would have been forced to – or would have anyway preferred – a “shorter” timeframe for the return on capital.
As is the case with household appliances, cars and even computers. As often currently happens, they are homogeneous products, but selected by consumers on the basis of structurally non-efficient criteria such as colour, fashion, user-friendliness, advertising, etc.
The next industrial revolution will be much less advertising-based than the current one. The market is already rather updated and selective.
The Washington Consensus is also over. Disciplined fiscal policy is not necessary, as the most recent European history has shown us. Quite the reverse. “Fiscal moderation” does not produce capital and investment. Also the “public spending readjustment” does not produce the desired effects, because the average wages of those who remain at work are lowered and the positive interest rates do not always guarantee the investment expansion, but probably above all the unearned and unproductive income.
Furthermore, there is no free “market” of exchange rates, considering that it is guided by exquisitely political evaluations and that the privatization of public companies does not ensure greater quality of management. Quite the reverse. It entails a distribution of “donations and contributions” to the new political parties – as happened with the “Second Republic” in Italy. Finally, deregulation is not necessary given that it permits the exploitation of the lower labour costs, but does not automatically optimize the production formula.
With these economic and financial mechanisms, the wealth produced in the Glorious Thirties has been drained. However, much less wealth than expected has materialized.
The offensive weapons of war economics are still traditionally the same: limiting the financial flows in the enemy country; the embargo; the manoeuvres on the public debt (to cause the fiscal crisis of the State or its insolvency). Today it is a matter of overturning these rules, so as to identify those that capitalize on the Covid-19 epidemics and stop their adverse actions.
For Italy, the cost of this epidemics is now quite clear: if it ends next May, although it is unlikely, the cost for companies – generically calculated – will be approximately 300 billion euros.
If the epidemics lasts until next December, companies’ losses will be over 640 billion euros.
Obviously all this requires a war economics, both in terms of a planned strategy for investment and subsidies and in terms of the future reprogramming of Italy’s production system.
This system shall be targeted to take essential market shares away from the States that would currently like to benefit from our crisis, both to acquire our companies at low prices and to make the remaining Italian companies ancillary to their production formula.
This is the new war economics.
Giancarlo Elia Valori