The news from the popular uprising in Egypt changes from day to day, with the outcome still very much in doubt. But whatever short-term resolution is arrived at will not be the end – only a beginning.

Contrary to a common opinion, the events in Tunisia and Egypt do not only concern the Middle East. They have global significance.

From the Western perspective, Middle Eastern politics have been, for a decade, defined by the struggle between secularism and Islam. Yet there is hardly a whiff of Islamism in recent events.

Both Tunisia and Egypt have been, by current standards, model nations: secular, business-friendly, stable, hard on terrorism and benefitting from excellent economic growth rates. Yet what now surfaces is massive anger and resentment of the population against the ruling elite.

This is where these local situations intersect the global framework.

Egypt has had peace, economic growth and internal stability, but the uprising points out that most, if not all, of the benefits have remained concentrated in the governing and economic elites, with little left over for the great mass of the people. The expensive and fashionable goods available in the upscale malls of Cairo and Alexandria were totally out of reach of the Egyptian multitude.

This is not an isolated situation. The world has seen, since the fall of the Soviet Union, an apparent period of peace, economic development and growing prosperity. Statistically speaking, great progress has been made. But this has been counterbalanced by two dangerously negative trends.

The first is that while wealth has increased, there has been a simultaneous reduction in economic security. Employment once considered stable, as well as skills thought valuable, can today be unpredictably affected by global corporate decisions, government policies and technological changes. Thus, despite the spread of nominally democratic forms of government, individuals and communities have ever less control over their own fate.

Second is the fact that wealth and political power are increasingly concentrated at the top, leading to ever larger disparities between the bulk of the population and the ruling class. This trend is exacerbated by the tendency of modern elites to become self-perpetuating, even as economic security decreases for the greater number. While modern communications and media offer the dream of improvement to all, the reality is that only a few will actually achieve it.

These trends generate a powerful tension between the ideal of a globalized, democratic and prosperous world community and the actual life experience of the vast majority of earth’s inhabitants. The ideal, well advertised by its chief beneficiaries at the top of society creates extraordinary expectations. These then collide with an often sordid reality, devoid of hope and promise.

It has been said that violent revolutions occur not when populations are reduced to complete misery, but when what they have, or what they believe to have, is taken away or denied them. Even when the cause of the “taking” is a random and unavoidable event, the resulting anger and frustration is likely to be directed at the wealthy and powerful.

These tensions and frustrations prevail over the entire globe. The case of Egypt is thus not likely to be an isolated one, but instead a harbinger of things to come.

Will such upheavals become a common occurrence, or is there a way out?

There may be, but it will require clear thinking and hard work.

It is clear that we are witnessing a breakdown of established community, be it national, ethnic, or cultural. Political systems are becoming gridlocked while the seeking of the common good has been subordinated to the pursuit of special interests.

The remedy is to reestablish the broken or frayed relations between the disparate parts of the community, to reconnect the population with its own identity.

Within a national framework, this is best done by defining anew the national interest for the present time, and building a reform agenda on that basis: Who are we, what are we after, what needs have to be responded to today and tomorrow? The answers to these questions can be translated into common goals that the entire nation can pursue. It is only through such work that we can reconcile and unite the disparate components of the national community.

Simply maintaining the status quo is no longer enough. We must again learn to move forward together.

In late February 2007, while the markets were racing upwards amid general euphoria, the Dow Jones Industrial Average index suddenly plunged over 400 points. Stocks then quickly resumed their upward march.

Two weeks ago the markets were similarly upbeat: the recovery was progressing, consumers were buying and the Fed was providing additional stimulus. As if on cue, the DJIA plunged over 400 points in a few days, and may well drop further.

In 2007 the credit boom was in full swing and glowing reports of the “new capitalism” filled the financial press. Today the news is that a “double-dip” recession has been avoided and global growth has resumed.

Such similarities can be attributed to random coincidence but they can also have a similar origin. We have now learned, at considerable cost, that the euphoria of spring 2007 was a false beacon. It covered profound systemic problems which appeared several months after the February market drop.

Are we in a similar state of denial today? Are our predictions of full recovery well founded, or are they based on flawed assumptions as was the 2007 boom? The underlying facts are not positive:

First is China, without which the global recovery would be minimal or nonexistent. Systematic mercantilism has assured her the lion’s share of global growth, and massive credit creation avoided a serious recession. The first policy, however, has generated both global disequilibrium and increasing political resistance; the second has fueled dangerous internal inflation. There is now doubt that both can be dealt with without undermining China’s growth.

Chinese appetite for raw materials drives the commodity boom, enriching Brazil, Australia and other suppliers. But this also drives currency appreciation, threatening their non-commodity exports and related national industries.

In Europe the recession has widened the gulf between strong and weak economies. Rescue packages from the EU and IMF are doubling in value year on year. It is doubtful the newest one (Ireland) will be the last.

The U.S. has improved somewhat, but huge issues remain to be resolved: toxic assets on bank balance sheets; high and persistent unemployment; unfunded liabilities at all levels, and yet to be reduced budget deficits. How sustainable is this “recovery” once bail-outs and stimulus packages end?

One view is that the problems created by the 2007 crash have been dealt with and will gradually fade away. Another would be that cracks were papered over but nothing was resolved, with the final reckoning only postponed.

We have long believed that the key issue is the imbalance between the global monetary mass and the total amount of assets available against it. While large trade and budget deficits have increased the global store of loose capital, available assets have in fact shrunk. The result is a series of asset bubbles, each ending in a damaging bust. As money moves ever faster around the globe no institution, national or international, has either the power or the means to control it. We are on a runaway train with no brakes, and no engineers at the switch.

In this second view, the means used to fight the recession, while dampening its effects in the short term, have in fact aggravated the problem. The large increase in liquidity effected by central banks and governments have only “fed the beast”, resulting in greater imbalance and more instability.

The unresolved and growing problems listed above are thus likely to provoke a second crash, to be expected in the spring of 2011.

The great efforts and means expended to tame the recession were aimed at “saving” the financial system, with some regulatory tinkering at the edges, but no structural re-design. As these efforts end in failure, the realization will set in that the system is irretrievably flawed and in the end self-destructive.

At that point public pressure for alternative policies will become irresistible. In the United States, with political volatility at record levels and the 2012 presidential election eighteen months away, temporization will be impossible. Politicians unwilling or unable to act will be replaced.

The current political and economic gridlock will break, and the country will move in a new direction. Where the U.S. leads, other nations will follow.

The extraordinary rise of China on the world stage is the wonder of pundits.

Its achievements are numerous: rise from socialist backwater to the world’s second largest economy; sustained growth of 10% a year; acquisition and mastery of every edge technology, from high speed trains to solar panels; investments and acquisitions worldwide; an impressive space program and simultaneous military build-up.

China sailed unscathed through the Great Recession, blending savvy management with a well aimed stimulus package, all while staging phenomenal Olympics without missing a beat.

Are we seeing a new world superpower? Maybe, but if history is any guide, also a possible disaster in the making.

There is remarkable resemblance between China today and another country which, two generations ago, was the object of similar admiration: National Socialist Germany.

Between 1932 and 1938 Germany lifted itself from depression to full employment; built the first superhighway network; regained full control of its destiny; built the world’s most effective armed forces; and staged the Olympic Games of the century. Many thought it had all the answers, and would rule Europe for generations.

Yet Germany’s rapid rise would end in catastrophe. By 1945 it was a smoldering ruin, its territory diminished and occupied by foreign armies, its power gone and its industry destroyed. Its apparently irresistible master plan had ended in total failure.

Where was the flaw? Most find it in the boundless ambition and ruthlessness of its leader, Adolf Hitler. Yet the same plan would have failed under any other leadership.

Germany’s intent was to redress the seeming “injustice” and humiliation of the 1919 Versailles Treaty and regain its “rightful” place as the dominant country in Europe. This would be done by gathering all Germanic people into one state, while gaining control of the resources of Eastern Europe to feed German industry and commerce. This territorial expansion would be backed by armed force, combining aggressive tactics with the latest military technology.

To those ends the great German corporations were put under state control, the population mobilized under strict discipline and the national economy gradually transformed into a war support machine. Treaties, agreements and international rules were disregarded as needed.

The policy was initially successful. The economy expanded and unemployment disappeared while political strife was absorbed into the National Socialist state order. German-speaking territories were annexed or occupied. The 1936 Olympic Games displayed the “new Germany” to an admiring world.

But the fatal flaw was that German dominance had to be established before resistance from other powers became significant. Once the National Socialist state had claimed all legitimately “German” territory it had to acquire other nations’ to achieve its strategic goals. That meant war. Despite its achievements, Germany did not have by 1939 the resources to take on an alliance of the other world powers. War was a gamble it chose to take, and lost.  

China’s policies bear a striking resemblance to the German model, if one replaces “territorial expansion” with “economic dominance”. China’s aim is to erase the memory of the “century of humiliation” by becoming the world’s undisputed economic and technological leader. To that purpose it has combined the power of its government with that of its massive state-owned industries; created a vast apparatus of state mobilization and control; repressed all resistance; and, as needed, disregarded all commonly accepted legal and commercial rules.

Success has been spectacular, and the 2008 Olympic Games displayed this “new China” to an admiring world.

But all the easy success has been achieved, and China now stands on the thin line between the near legitimate and the outright predatory. There is no question its practices have stretched its partners’ tolerance to the breaking point, and contributed much to the tenuous economic situation of many nations, the U.S. first and foremost.

Should the economic situation within these countries degrade further, public pressure against the continuing transfer of wealth, employment and technology to China will become irresistible.

Can China take on the rest of the world in an economic contest where its own weapons – currency undervaluation, tariffs, subsidies, taxes – are turned against it? No one knows, but its leaders may decide to tempt fate, believing they now have enough resources to dictate their will.

Before that decision, however, they should carefully consider Germany’s fate. In 1936 it was the world’s darling. But that was only the beginning. The end was 1945.

The enduring strength of America is in the free experience of creating a different future together. The capacity to do so is built on the Founding Fathers’ extraordinary confidence in the abilities of the people, without regard to class, education or wealth.

In their eyes the provision to the people of the freedom to grow to their full potential trumped all the relative advantages that other nations derived from the stability and power of political or economic hierarchies. The express and deliberate limitations the Founders set on the power of government attest to this fundamental belief.

This freedom to be and to do, both individually and collectively, has served America well, despite the frequently observed “messiness” of its democratic practices. Though the people often responded late to great national challenges, they did so with overwhelming strength, creativity and dedication. In doing so they more than matched the best that adversary authoritarian societies could put forward.

We Americans are again facing such a challenge, both internal and external, and need to call on every source of strength in terms of our given rights and the corresponding duties, seeking inspiration and nourishment from what we are and are meant to be.

Our national dilemma has for generations been presented to us as a choice between Left and Right, Progressive vs. Conservative, egalitarian Socialism against creative Capitalism. Before we engage in this debate, it is necessary to ask the question:

Are these the real and true choices that lie before us? And, where, between these options, does our nature as Americans fit best, if it fits at all?

The above choice in fact is a false one, because neither the right nor the left option fits America well.

On the one side is socialism, essentially a redistributive system entirely controlled by the state. Organized redistribution of goods run counter to the American conviction that the work and initiative of the people, when given sufficient freedom, will produce the greatest material abundance for all, making coercive redistribution both unnecessary and counter-productive. A safety net may be needed in exceptional circumstances, but not state control ofnational wealth. Attempts at such control only produce an intrusive bureaucracy which reduces economic efficiency.

On the other hand, unfettered capitalism inevitably carries with it the tendency to industrial and financial concentration. This is equally deadly to private initiative, and inevitably results in the impoverishment of the majority for the benefit of the few. That leads to the establishment of wealth-based social hierarchies and the corruption of the political process in their favor.

America’s solution to the problem of wealth accumulation has not been enforced redistribution, but the prevention, through the proper legal framework, of excessive industrial and financial concentration. To this was added the creation of trade associations and labor unions to maintain the balance of economic power.

In all circumstances referred to above the American way has been to favor productive energy over imposed restraint, and the consensus of the whole over the power of the few. Just as the Constitution seeks balance between the judiciary, legislative and executive powers, American economic life has sought a creative equilibrium between economic players.

Such equilibrium requires constant adjustment, as changing circumstances always threaten balance and consensus. Key to this process is the maintenance of individual and collective freedoms on the one hand, and the establishment of consensus on the other. Organization restraint and compromise are effective only if their benefits are realized and accepted by all.

Unfettered individual freedom leads to the domination of the many by the few, while enforced equality leaves no freedom at all. This is the core of the issues we face today. We have, as a nation, so far succeeded in navigating between these extremes, by recognizing that unless our liberty is shared by all our fellow citizens, it will be taken from all.

For too long we have focused on the incomplete ideologies of Right and Left. We need now to return to our common center, where our strength as a nation lies.

In late February 2007, while the markets were racing upwards amid general euphoria, the Dow Jones Industrial Average index suddenly plunged over 400 points. Stocks then quickly resumed their upward march.

Two weeks ago the markets were similarly upbeat: the recovery was progressing, consumers were buying and the Fed was providing additional stimulus. As if on cue, the DJIA plunged over 400 points in a few days, and may well drop further.

In 2007 the credit boom was in full swing and glowing reports of the “new capitalism” filled the financial press. Today the news is that a “double-dip” recession has been avoided and global growth has resumed.

Such similarities can be attributed to random coincidence but they can also have a similar origin. We have now learned, at considerable cost, that the euphoria of spring 2007 was a false beacon. It covered profound systemic problems which appeared several months after the February market drop.

Are we in a similar state of denial today? Are our predictions of full recovery well founded, or are they based on flawed assumptions as was the 2007 boom? The underlying facts are not positive:

First is China, without which the global recovery would be minimal or nonexistent. Systematic mercantilism has assured her the lion’s share of global growth, and massive credit creation avoided a serious recession. The first policy, however, has generated both global disequilibrium and increasing political resistance; the second has fueled dangerous internal inflation. There is now doubt that both can be dealt with without undermining China’s growth.

Chinese appetite for raw materials drives the commodity boom, enriching Brazil, Australia and other suppliers. But this also drives currency appreciation, threatening their non-commodity exports and related national industries.

In Europe the recession has widened the gulf between strong and weak economies. Rescue packages from the EU and IMF are doubling in value year on year. It is doubtful the newest one (Ireland) will be the last.

The U.S. has improved somewhat, but huge issues remain to be resolved: toxic assets on bank balance sheets; high and persistent unemployment; unfunded liabilities at all levels, and yet to be reduced budget deficits. How sustainable is this “recovery” once bail-outs and stimulus packages end?

One view is that the problems created by the 2007 crash have been dealt with and will gradually fade away. Another would be that cracks were papered over but nothing was resolved, with the final reckoning only postponed.

We have long believed that the key issue is the imbalance between the global monetary mass and the total amount of assets available against it. While large trade and budget deficits have increased the global store of loose capital, available assets have in fact shrunk. The result is a series of asset bubbles, each ending in a damaging bust. As money moves ever faster around the globe no institution, national or international, has either the power or the means to control it. We are on a runaway train with no brakes, and no engineers at the switch.

In this second view, the means used to fight the recession, while dampening its effects in the short term, have in fact aggravated the problem. The large increase in liquidity effected by central banks and governments have only “fed the beast”, resulting in greater imbalance and more instability.

The unresolved and growing problems listed above are thus likely to provoke a second crash, to be expected in the spring of 2011.

The great efforts and means expended to tame the recession were aimed at “saving” the financial system, with some regulatory tinkering at the edges, but no structural re-design. As these efforts end in failure, the realization will set in that the system is irretrievably flawed and in the end self-destructive.

At that point public pressure for alternative policies will become irresistible. In the United States, with political volatility at record levels and the 2012 presidential election eighteen months away, temporization will be impossible. Politicians unwilling or unable to act will be replaced.

The current political and economic gridlock will break, and the country will move in a new direction. Where the U.S. leads, other nations will follow.

 For weeks now the election focus has been on the numbers: how many seats will the Democrats lose and Republicans gain, and which chamber might switch from blue to red. The numbers are now in.

The win/lose score is certainly important for the immediate future. But the excitement over the Republican advance and its potential consequences masks a more fundamental fact: the extraordinary recent volatility of the electorate.

The 2002 and 2004 elections were triumphs for the Bush administration, but from there it was a long slide downward. In 2006 the Democrats were ascendant, and 2008 was an apotheosis. Now, scarcely two years later, the Obama Express has driven off a cliff.

One can of course blame the electoral disasters on circumstances; on the economy and inconclusive wars; even on arrogance or gross incompetence. But today’s conditions are still far from desperate: a depression has been avoided; one war at least is winding down, and some economic growth is taking place. As for leadership, both Bush and Obama enjoyed, not so long ago, outstanding approval ratings.

Why, then, the wild swings? Why are voters shifting from full support to apparent rejection of their chosen leaders? The logical explanation is that, somewhere, there is an unavoidable conflict between expectations and reality.

Leaders are fallible and imperfect, but that is not new. Americans have been, as a rule, tolerant of such failings. If on the other hand expectations are the problem, we need to know why and where the actions of politicians fail to meet the wishes of the voting public.

Here one observation stands out: both administrations have been far more ideologically oriented than earlier ones. The Bush years were grounded in conservative values. Obama, by contrast, governed on a largely liberal platform. Despite their best efforts – and on this score they deserve no blame – both presidents, and their parties, rapidly foundered.

Conservative or liberal, left or right; that has been the choice. But either way it does not seem to work, which raises the question: is this the only choice available?

The left-right divide has ruled our politics since Woodrow Wilson was elected in 1913. It guided the nation through the challenges of the Depression and the Cold War. These now being far behind us, it is right to ask whether this guidance is still valid.

According to conventional wisdom, each main party commands between 40% and 50% of the electorate. Between them is a 10% wedge of uncommitted voters. These will support either party, depending on circumstance, special interests, or even a candidate’s personal appeal.

Indications are that this center has grown hugely over the last decade. According to some counts, it now outnumbers either of the two main parties.

If that is the case, then the center is no longer a client minority. It swings its own increasing weight. The tail is wagging the dog. As the cores of both parties become more ideologically exclusive, the center is bound to grow further, until it becomes the decisive factor.

If so, what does the center want?

Not ideology, if recent political trends are to be believed. Both left and right have been tried and found wanting, which gives us a clue: the center wants solutions.

That means: jobs that are not sent abroad and employment that is stable; an economy that works without massive support; incomes rising over time pension schemes that deliver; strategies that achieve victory; banks that invest rather than speculate, and stocks that stand for real value.

The blockage in our political life comes from what is, at bottom, a huge misunderstanding. The leadership offers a choice between two grand schemes, both increasingly obsolete and of decreasing effectiveness. The public by contrast demands policies that make life manageable at ground level.

The two parties have not yet understood that between their well-disciplined, card-carrying, and shrinking core constituencies there stands an ever bigger, nameless one, without structure or ideological commitment. It has a powerful and still growing body, which already throws its weight around. But as yet it has no head, no consciousness of its own strength.

Maybe one party will be able to become that head, and thereby gain a decisive advantage. If not, the leadership vacuum at the center will inevitably draw new political entrepreneurs.

 Either way, it is likely to dominate the politics of the next generation.

 The main political divide of the 20^th century was between capitalism and socialism, which in the U.S. were identified, respectively, with the Republican and Democrat parties. In the end both systems blended, with the resulting compromise favoring capitalism in terms of economic development, and leaning to socialism as to public services and entitlements.

This blending eventually led the concentration of power and wealth at the top of the social pyramid, within what is being referred to as “the ruling class”. Under this arrangement the members of political and economic elites control the levers of power and use them to further their own interests.

As a result the main contest, which once had pitted the right against the left, is now between the high – those who monopolize both power and wealth – and the low, with shrinking income and influence but holding an overwhelming numerical advantage. The claims of the high rest on expertise and experience; the low relies on the rights to individual initiative and self-government.

The current election still opposes Republicans and Democrats. But a far more intense struggle is rapidly coming to the surface. On one side are the elites, commonly referred to as “Wall Street” and “Washington”; on the other “Main Street” and the “country class”, spearheaded by (but by no means limited to) the Tea Party.

This quickly spreading conflict endangers the representative principle on which the entire structure of the Republic is based. It is therefore critical to develop some potential common ground before this erosion of trust and communication proceeds much further.

This is particularly critical as the middle class, which traditionally arbitrates between the rulers and the people, is shrinking: a small segment is rising into the elite, while the majority is pushed down into the proletariat.

The solution is not, as many are claiming, a drastic shrinkage and curtailment of government. Such a development will be two-sided: on one hand is an increase of liberty, on the other the risk of anarchy. History shows that in periods of anarchy, where there is little or no government, life tends to be nasty, brutish and short, while the economy sinks to the bare subsistence level.

But history also shows that excessive government intervention in the life of citizens, whether through extreme taxation or intrusive regulation, stifles initiative and innovation, limits the drive to create and build, destroys wealth and fosters inertia.

Where then is the true balance?  

We can all take care of ourselves in “normal” circumstances, where the conditions of our life are within our power. What we cannot deal with are drastic changes beyond our control, be they natural disasters, wars, or economic changes so unexpected and far-reaching that our usual means of coping are overwhelmed.

We do not want government to interfere with our lives in such “normal conditions”. Private initiative is not only perfectly adequate there, but does a far better job, particularly in the economic realm.

We also provide the government with the power, freedom of initiative and economic means to insure that these conditions continue to prevail, and are restored when disrupted by an unforeseen event. Power is delegated to government to deal with what is too big for us to handle on our own.

In other words, while we can act (and should be free to act) in our own interest, we give our government the means and power to act in the national interest. This is the foundation of the representative principle, and of the bond of trust between the governed and the governing.

The greatest threat to this bond is the concentration of power or wealth, because it gives its beneficiaries the illusion of self-sufficiency and isolates them from the common citizen.

“Power corrupts”, said Lord Acton, “and absolute power corrupts absolutely”. Something very similar can be said of wealth. A nation where power or material riches carry no obligation or responsibility to the common good is a house divided. It is heading for internal strife, and possibly downfall.

At the same time let us not forget that a nation where everyone is solely responsible for one’s fate is no house at all. It is not the victory of one side over the other, but a correct and sustainable balance that will determine the future of the nation.

Over the last two decades “outsourcing” has been the operative word for U.S. multi-nationals. The word stands for moving industrial production, be it manufacturing or associated services, from the U.S. to “lower cost” locations. These facilities are increasingly concentrated in China.

This practice has resulted in large U.S. trade deficits, as imports from the outsourced plants replace domestic production. These deficits have an adverse impact on our Gross Domestic Product and on the value of the dollar. They have also contributed to the rise in U.S. unemployment.

The export of American jobs abroad has been well documented and is currently becoming a focus of political activity. Much less understood is another negative impact, which can be described as the shrinkage of our national asset base, or more directly as “the destruction of wealth”.

To explain this, let us take as example a U.S. manufacturing plant, employing six hundred persons, and located in a midsize American town. The plant’s output could be domestic appliances, electronic components or car parts.

If the plant is of relatively recent vintage, it will be equipped with highly automated, energy efficient production machinery, including robots and production control computers. It will have work safety equipment per U.S. government regulations. All effluent and emissions will be treated according to environmental rules. Amenities such as air conditioning, cafeterias, showers and toilets will be up to U.S standards, which are among the highest in the world.

All the above, including the land the plant is built on represents considerable invested capital. But this is only part of the economic equation.

The plant is surrounded by “satellite” assets and activities, supported by the wages and salaries it generates. This includes housing for the employees; businesses servicing the plant; restaurants and motels; doctors’ offices, law firms, real estate agencies and shops of all kinds; schools, clinics, city administration, and firemen and police with their own buildings and equipment.

Now one day production is moved to China. The plant closes.

Both the plant and the “satellite” assets lose their value. Stores close, house prices crash, professionals, skilled workers and shop owners move out.

The Chinese plant that replaces it, built with cheap labor on land acquired at low cost, is far less valuable, and its sale value is questionable in China’s state controlled economy. Because environmental and safety rules are much looser, the associated equipment is rudimentary. So are amenities and facilities for the employees.

The same holds true for all “satellite” assets: housing, stores, administration, and services. In the process of moving the plant from America to China maybe half of the total value of the assets concerned has disappeared.

Now multiply this by the thousands of facilities that have been moved from the U.S. to “low-cost” locations. These American domestic assets have vanished, but equivalent ones have not been created elsewhere. The transfer may have lowered costs for the corporation involved, but the overall result is negative.

After the transaction the employees involved receive lower wages, live in smaller quarters, and are more at risk of work accidents. More energy is consumed per unit of output and more pollutants discharged into the atmosphere.

Wealth has been destroyed, whether that wealth is counted as individual possessions or as natural resources. China has gained some, but the U.S. has lost more. Global living standards have been brought down a notch, and the total wealth of humanity is now a bit less.

Outsourcing our national economy, while it may temporarily enrich some, in the end makes us all poorer in the aggregate. It generates less wealth for fewer people. It is not progress, but a 

There is no question that, barring a major unforeseen event, the state of the economy will be the main determinant in the November election.

The official line is that despite issues with employment, mortgages and credit the overall picture is improving. Should this be so, the political map is not likely to be drastically altered in the fall. The Democrats will lose some seats in both houses of Congress, but with a stronger economy they will make up for it in 2012.

If such improvement, on the contrary, does not materialize, all bets are off.

This then leads to two questions: first, is the current recovery for real; second, if it is not, why? If the current recovery falters, whoever has the answer to the second question might emerge from the election a winner, possibly for the long term.

First then comes the analysis of the “recovery”, and that raises an important caveat: that whatever improvement there might be in economic conditions is not the result of “normal” economic forces.

In the past it has been assumed that the economic cycle had a “natural” life of its own, fed by investor and consumer psychology, supply and demand, speculative excesses and panics, and so on. Governments could influence this process to a degree, but not abolish or replace it.

The current “recovery” on the other hand is unique, due to a massive and coordinated intervention by governments across the globe. Left to themselves the markets, the current theory goes, would have crashed into a “second Great Depression”. To avoid such an outcome a massive bail-out of the financial system was needed, following which restored credit availability and consumption would lead to an economic revival.

In other words, the current economic cycle is a manufactured artifact. As this has never been attempted on such a scale, we have no past experience to tell whether it will succeed or not.

At the present time, that question is still unanswered. The financial bailout and unprecedented government spending have for the time being arrested the downward slide and in places brought some improvement. At the same time warning signs of further trouble abound: still rising mortgage delinquencies, state deficits and unemployment in the U.S.; real estate inflation and excessive credit expansion in China; sovereign default risk in Europe, and so on. Underlying it all is the often expressed warning that the “recovery” could collapse if government support is withdrawn at any time in the foreseeable future.

Also troubling is the fact that the financial sector, the practices of which have precipitated the crisis, has gone back with a vengeance to these very same activities. This is particularly true of the stock markets, the rise of which is out of all proportion to the improvement in the underlying economic data. A market panic, even a limited one, would bury whatever “recovery” there might be. What if one took place this month or next?

This leads to the second question asked above: why would the remedies currently employed not work?

The question itself generates another query: What was the focus of the measures put in place to fight the crisis? The crash originated within the financial sector, which had undergone extraordinary development over the last two decades. The remedial measures taken were, for the most part if not exclusively, aimed at rescuing the financial system from its own misdeeds, at very high cost to governments and, ultimately, taxpayers.

The key justification for this effort and expense was the assumption that the financial system in its current state was essential to the economy and therefore had to be rescued. This applied particularly to the largest financial institutions, which were the main recipients of governmental largesse, and were, unlike a number of smaller banks, duly bailed out by the state.

These large institutions were the primary culprits regarding the risky financial practices which caused the crash. These activities were, as mentioned by Lord Turner, head of the British Financial Services Authority, of questionable, if any, social value. That is, they contributed little or nothing to the overall economy.

To put it plainly, was the rescue aimed primarily at the financial system and its large banks? Was the fate of the overall economy only a secondary consideration, as well as a convenient cover for spending public money on institutions that in actuality deserved to fail?

The question is important because if the economy was secondary in the scheme, then its recovery is far less likely than if it had been the primary target, particularly with a financial system still dysfunctional and at the same time still hogging the attention and resources of government authorities.

And if that is indeed the case, we are in for a long, hot summer, and a messy, unpredictable election.

 It has become fashionable among pundits to comment on the great shift which in their eyes is taking place on the globe. This view holds that the “Atlantic World”, which includes Europe and North America, is in decline. Both wealth and power are shifting to Asia, with India and China as the main beneficiaries. We would be at the dawn of the “Asian Century”.

This hypothesis is based mainly on the disparity in economic growth rates. The “advanced” economies, including the European Community, the U.S. and Japan are mired in recession and high fiscal deficits. By contrast a number of “emerging” nations are forging ahead, acquiring both new wealth and growing political power.

This new intellectual fashion closely resembles a similar trend in the 1930’s. Then also the western democracies were experiencing economic depression, combined with social instability. By contrast the totalitarian regimes – Germany, Italy, Japan (and the USSR) – were surging. Many believed them to be the wave of the future.

Yet history proved them wrong. Last century’s totalitarian regimes self-destructed, while the U.S. and democracy have endured. Will the cycle repeat again?

The now fading “old” world order was based on Western dominance: first the colonial empires, then the rise of the U.S. as world power. Politically representative democracy reigned, as did capitalist free enterprise. When the Soviet Union lost the Cold war, the western model was expanded to the entire globe. Our elites saw the future as one world, with open markets and democratic institutions tied together by a global financial network.

This benign and hopeful (as well as naïve) vision never became reality. It would have required the global observance of the rules that had governed the development of western economies. This did not happen, for several reasons.

First, the rules applied to national entities. There was no model or experience available for globalized finance. “Financial engineering”, most of it questionable, then took over. Novelty and optimism gave rise to euphoria, followed by the inevitable crash.

Second, many “emerging” countries saw the opportunities the “open” global system offered for the practice of mercantilist policies. Baiting global corporations with artificially low production costs and the promise of vast new markets, they drew in massive influx of investment capital. With investment went jobs, skills, technology and foreign exchange accumulation.

According to globalization theory, the jobs transferred were the “inferior and unwanted” ones, to be replaced by better ones generated by innovative technologies and social evolution. But these “new” jobs were just as sensitive to cost as the “old” ones. Innovation was cheaper in China, so R&D was moved there too. Services are cheaper in India, so that is where the related jobs are going.

Initially employment losses in the U.S. were seen as a good thing. This was the “creative destruction” inherent in the functioning of “free markets”. “Old” industrial jobs were being eliminated, forcing us to move on. This of course raises the question of how much of this   “creative destruction” our economy can sustain.

The growing anger and resentment spilling into the U.S. political system suggest that the limit may have been reached.

The same can be said of economic growth supported by the predatory commercial practices embraced by the Chinese government. Such policies eventually exhaust the source they rely upon, leading to systemic shock once the transfer of wealth ends. China will not win a trade war with the United States or Europe. In fact it may not survive one, economically and/or politically.

Globalization is to have created a world of harmony and plenty. Instead it is producing massive financial imbalances and rising acrimony, leading ultimately to dislocation and dashed hopes. The growing mismatch between expectations and realities underlies the uncertainty that increasingly dominates world markets.

No “international concerted action” will remove this lack of direction and understanding. For one, there is no model for such action. And even if there was one, where is the institution and authority to implement it? If we are to return to some stability, the only reliable foundation is that provided by national governments.

A pullback from globalization is therefore necessary, so as to return to governments the power and authority that they have given up to anonymous global forces. In other words, some of the safety barriers such as tariffs, or exchange and capital controls, will need to be reinstated.

This is not isolationism or protectionism, only necessary common sense. It means a reduction of the reach of financial conglomerates and multi-national corporations. They will not like it and most probably fight any such measure. However, if there is no move in that direction, we will quickly learn that the alternatives are far worse.

 The Jackson Hole conclave of central bank chiefs came and went, leaving hardly a ruffle behind. The remarkable fact is that it had so little effect, despite the much expected speech on the U.S. economy by Mr. Bernanke of the Federal Reserve Bank.

Mr. Bernanke’s main field of study as an academic economist has been the Great Depression. As the current “Great Recession” developed the Fed’s primary concern therefore was to avoid the policy mistakes that turned the 1929 stock market crash into a disastrous ten-year downturn. Chief among these errors was the failure to provide abundant liquidity to the financial system.

Accordingly super-abundant liquidity was provided this time around, under the form of an intensive bank bailout, huge deficit spending, the creation of money, zero interest rates and a raft of financial facilities. As a result there was, initially, an economic bounce. But as this “recovery” now appears to be rapidly fading, the question bears asking: “Everything that should have been done has been done, but the effects are not up to expectations. Was something missed?”

Yes, it was. While study of the Great Depression can certainly teach us a lot, it was over 70 years ago.

Today we would not make a study of transportation on the basis of 1930 technology. At that time air transport was a minor factor. Today it is a major one.

In a similar vein, in 1930 our economy was almost entirely national, and all its components were within the reach, if not the control, of federal authorities. Today’s economy is globalized.

Global finance means that the sums moved daily around the world by private interests (many of them speculative) dwarf anything the U.S. government can muster. Foreign exchange transactions alone involve $4 trillion per day. In other words, the value of our currency is out of the government or anyone else’s control.

Global “free trade” translates into entire industries being transferred, within a few years, to whatever locations multi-national company executives may choose. With the industries go the jobs, services, investments and taxes.

In other words, whatever the government does might have a bigger impact in another country than it does in the United States, and much of the money spent will end up in China rather than Virginia or California. The same happens to jobs, whether they are existing ones that disappear abroad, or “newly created ones”, which materialize directly in foreign, low-cost locations.

The U.S. government and the Fed are pumping air into a leaky tire. Unless the leak is fixed, they can pump for years, but the tire – our economy – will stay flat.

U.S. authorities are treating the economy as if it was a constant entity, to which government spending can add, thereby creating growth. But the economy, and the wealth that goes with it, are no longer tied to the national territory and its population. Because U.S. political and economic leaders have chosen to practice an “open border” economic policy, wealth and activity have been flowing out for the past two decades. As a result, many “American” corporations have more interests abroad than they have here. They will invest, and create jobs, where their interests are.

If it is more profitable, short-term, to manufacture in China, that is where investments will be made. Profits will rise (and they have) but so will U.S. unemployment (and it has). The Fed will keep the money printing press running, and the administration will increase the deficit, and the “jobless recovery” will go on, until something gives.

If we want a real return to prosperity, we need to deal with this issue. Otherwise we will slide into another depression, with all the consequences this entails, political as well as economic.

Globalization has been presented to us as progress, the “next economic thing”, the way to world prosperity, and so on. Given the situation that the world economy is in, as well as our own, we need to reconsider.

Two observations can be made about the U.S. Congress, which many voters will agree with.

First, the approval rating of our Legislative Branch is abysmally low. Second, the legislative process is out of control.

The Republican dominance under President Bush made such a mess of things that the 2006 and 2008 elections produced that rare occurrence, a veto-proof Congress with both chambers controlled by one party. One could have hoped that this new arrangement would have produced decisive, effective legislation addressing the country’s numerous problems. Instead the Democrats produced two gargantuan bills vastly expanding the federal bureaucracy; a number of slush funds or bailout funds; and unheard of budget deficits.

The very size and complexity of the “reform bills” amply demonstrated that the current members of Congress are no longer capable of performing their main function, which is to produce meaningful and coherent legislation. During the process of assembling the “major achievements” of this Congress it became painfully obvious members were voting on bills they had neither written nor read, larded with a variety of provisions favoring special interests, and creating a web of new functions, obligations and duties the national government cannot hope to discharge with any degree of effectiveness.

Hence the statement, repeated by many prospective voters concerning their intentions for the coming elections: “Anything but an incumbent!”

Such intentions have been voiced before in our election history, and were often revealed to have more bark than bite. There were times, however, when the electorate did in fact “throw the bastards out”. This might be one of those.

If political frustration was the only factor, voter anger could be dismissed as inconsequential. But this time there is real economic hardship as well. Unemployment, stagnant wages and rising income inequality are still in full force, and the “recovery” from the Great Recession is proving more questionable every month that passes. In fact the start of an economic “double dip” may well coincide with the election campaign.

This, paradoxically, may help.

The two established parties are too entrenched to be easily gotten rid of, and each will end up with, approximately, a third of the seats. The remaining third might well end up, if things get bad enough, in the hands of the new ABI (Anything But Incumbent) crowd. A number of those will still belong, nominally at least, to the traditional parties. But the mandate they will receive from constituents will no longer be satisfied by the old methods and ideologies.

This diversity of mandates, together with the lack of any strong majority, will preclude the passage of “monster bills” such as those over health care and finance. Even a pure pork “stimulus” will not make it, because of the fiscal rectitude stance that many in Congress are now adopting. In fact the long accepted legislative approaches might now be inadequate to pass anything at all.

The only exception is what could be called the “one-liner bill”.

Congress’ inability to deal with issues does not eliminate them. The electorate will still demand that something be done. To achieve both congressional consensus and electoral support such legislation must be simple, clear, targeted and effective immediately. It must not deal with broad, complex domains but with a single, obvious problem. Once properly formulated, such “one-liner” legislation will pass, take effect and deliver visible results. From there more similar initiatives will flow, and the now broken trust of the voters in their representatives could begin to heal.

Some examples of “one-liners”:

A progressive countervailing duty or sales tax on imports from countries engaging in predatory trade practices.

In parallel, a domestic investment tax credit for corporations setting up job-producing facilities in the United States (similar to John Kennedy’s 1961 initiative)

A transaction tax on excess leverage and trading frequency to prevent more Wall Street crashes.

A full freeze on the hiring, salaries, and other benefits of federal employees.

Each such bill will chip away at our problems and move Congress away from its current dysfunctional state. Later, if emergency conditions no longer prevail, such single items can be integrated into wider frameworks.

In 1929 the booming economy of the Roaring Twenties collapsed. President Hoover and his advisers thought the market would take care of things and did nothing until the nation was mired in depression – eventually dragging down with it the rest of the world. The Democrats then took over. They believed in the power of the state and some of them were admirers of the Soviet Union, which was lifting itself out of poverty and disaster by its own bootstraps.

The Republicans thought the Roosevelt administration was full of socialists who were out to destroy the American Dream. The men who staffed the Administration despised the Republicans who had allowed the Depression to happen. Both parties hated each other’s guts, and did so because ideology was a major motivator for both. Both stuck to their positions while the Depression dragged on through the 30’s and into the 40’s.

Pearl Harbor woke them up. After December 7^th, 1941, there were still Democrats and Republicans, but above all they were now Americans, with a big job to do. The war effort took precedence over party politics, and it did not matter that much whether the person next to you at the plant or on the front line was a Republican or a Democrat. Getting the job done was the first priority.

Our situation today, as a country, is not unlike theirs. The challenges before us are substantial. Our economy is in disarray and the downturn threatens to be hard and long. We are engaged in a number of military conflicts which are eating up our armed forces and our resources, without a clear strategy and a visible road to peace. Our governments are heading into massive deficits even as their spending commitments grow out of control. And we are under attack by shadowy organizations which disregard all human rights and rules.

Facing these issues will demand hard work, clarity of vision, perseverance and, above all, common purpose and national unity. We cannot resolve them while divided into liberal and conservatives, Christians and secularists, men on one side and women on the other. We will not solve them by throwing incompatible ideologies at each other, as we tend to do now. We need to sit down, reflect, and remember we are all Americans. And then we need to learn again to put that first.

This election cycle is a critical one. As a nation, we have very serious problems. Beyond the urgent issues listed above loom other major ones – issues such as health care, immigration, energy supply and climate change, which will require a broad national consensus if we are to address them effectively. We need to face them and understand that the solutions can no longer be postponed, but must be developed now, and these solutions must correspond to objective reality as it is and not as ideologies from the right or left would have it. Furthermore, such solutions must be developed in a spirit where our personal or party ideologies, interests and preferences are subordinated to the common good and to the needs of the entire nation.

We must learn again that above all our differences we are all Americans, first and foremost, and as citizens have a higher duty to put that first, and to act accordingly.

It has been said and written that the Gulf oil spill could be Barack Obama’s Katrina.

That it most probably already is, but it could get much worse. Not “Waterloo”, but more like Napoleon’s ill-conceived Russian campaign of 1812, which cost him his army, his reputation, and, eighteen months later, his throne.

Napoleon roamed across Europe looking for enemies to defeat. If one does that long enough, one is bound to find one that can beat you. Russia, with tsar, soldier and winter each playing his part, whipped Napoleon.

President Obama has also thrived by taking adversarial positions, generously passing out blame to whoever happens to be the whipping boy of the hour: Bush, fat cat bankers, auto executives, Bush, congressional Republicans, insurance companies, Bush.

Now it is British Petroleum’s turn. And in BP’s vicinity stands the whole oil industry, “Big Oil”, as a fat target to attack and squeeze.

There is one problem with this: America needs oil.

Oil is the only source of energy we cannot go without. To generate electricity we can replace coal with gas, gas with wind, and wind with nuclear. To move our people and goods around this most mobile of nations, by truck, plane, barge or train, we have no alternative. Ninety-seven percent of our transportation runs on petroleum products, two thirds of it imported from abroad. It will take a decade or two, at the very least, to change that.

Trouble will come far sooner.

Let us simply look at Iran.

If Iran was after nuclear electricity generation, it can buy reactors, complete with fuel supply, from France, Russia or South Korea any time. Producing one’s own nuclear fuel is far more complicated and expensive. So it is logical to conclude that there at least could be an ulterior motive behind the Iranian uranium enrichment program: mainly nuclear weapons.

Israel cannot afford this possibility. It has its own nuclear arsenal, but it does not matter what happens to the enemy after the fact. Israel cannot afford a single nuclear hit, and that means that Iran may not get a single bomb.

There is a “red line date” after which Iran will have enough weapons-grade uranium to build such a device. That date is known to the Israelis with a fair degree of accuracy. They must strike before that date if they are to strike at all, and we are talking about months here, maybe a year, but before the November 2012 U.S. election in any case.

The U.S. now has some hundred thousand troops, backed by large air bases, on each side of Iran. To the south cruises the U.S. Navy. To the north is Russia, which has been neutral or cooperated with the United States in similar past circumstances. In other words, in case of a strike, Iran is a sitting duck.

But if they see their nuke program going down, they can still do a lot of damage, whether by closing the Strait of Hormuz or hitting Saudi or Iraqi processing facilities, together with assorted terrorist actions. An oil shortage is the logical outcome.

So it might be a grave error at this time to attack the oil industry, and particularly to interrupt drilling. Those 33 exploratory rigs the President has ordered idle for six months or more will not stay here. There is plenty of demand elsewhere, and once they move they will not come back.

BP might well have been greedy and careless in this case, and there should be adequate compensation. Deep water drilling is risky, and there should be rules and safeguards. But these issues are best handled in a spirit of cooperation. The oil industry has powered our economy and fueled our wars with efficiency and dispatch for well over a century. It is still needed and can perform great service.

Maybe President Obama thinks that gas at seven dollars a gallon will help his “green” agenda. We would advise him to reconsider.

You can’t keep water in a leaky bucket.

If there is a hole in the bottom, the water will run out. You cannot fetch and use water until the hole is plugged.

It is the same with jobs. One can create employment, but if jobs leak out of the country the effort is ultimately fruitless. One must prevent job destruction before attempting job creation. There are two causes, in the area of trade, for the disappearance of U.S. jobs: mercantilism and outsourcing. Here we will deal with mercantilism.

What is mercantilism? It is a policy through which a government uses trade to extract wealth from other nations and accumulate it in its own economy and treasury. This is achieved through government-imposed policies which make exports cheap, so other countries will buy them; and simultaneously making imports expensive, so that one’s own citizens will not purchase foreign goods. The difference between the value of imports and that of exports is called a trade surplus if positive, or trade deficit if negative.

Mercantilism seeks to maximize the trade surplus, which requires more goods to be produced domestically and less obtained from abroad. There are numerous ways to achieve this: currency undervaluation; high import tariffs; subsidies and other facilities for exporters; deliberate lowering of wages; removing restrictions such as environmental and workplace safety rules; disregard for patent rights; “buy national” legislation; targeted taxes and tax exemptions; and many other.

Other than some targeted duties and agricultural subsidies, the U.S. has few mercantilist policies. Its main commercial doctrine is free trade, which stands for the unencumbered circulation of goods, services and capital. Other nations, led by China, are highly mercantilist, using all the above methods to achieve a massive trade surplus and accumulate wealth within their borders. China’s trade surplus with the United States varies, but on the average it amounts to hundreds of billions per year.

This means that jobs tied to the production of goods are migrating from the U.S. to China, as well as to other countries where the costs of production have been artificially reduced through government action. These are not only “assembly-line” jobs, but all positions and careers associated with industrial production: research, engineering, product design, logistics, accounting, quality control, inventory and supply, and management. All of these are well-paid and involve skills that have been developed over generations. Once lost, such know-how can be extremely difficult to develop again. Also gone with it are product designs, technology and patents.

The U.S. has with its trade partners treaties and agreements aimed at preventing mercantilism. But these arrangements require good will from all the partners and can be circumvented if such good will is absent. In addition they require policing by international bodies requiring complex, time-consuming and expensive redress procedures, and lacking powers of effective enforcement. None of these agreements have been effective against determined mercantilist practices such as implemented by China.

Conventional redress is therefore costly, and involves lengthy, expensive and ultimately unreliable procedures. In such a situation more direct and effective measures are needed.

Current methods are in part ineffective because they focus on products. It must, for instance, be proven that automotive tires, or copper wire, or video game boxes are sold at an excessively low price. The success of the resulting investigations depends on the good will of the host country, which is unlikely to volunteer assistance against its own industries. In any case, a product-by-product approach leaves the rest of the economic field wide open to abuse. To use a sports-related analogy, it is pointless to discipline a single player when the entire team and its coaching staff are breaking the rules.

The redress policy must therefore be applicable across the board and be independent of the cooperation of the mercantilist party. It must address not only individual industries or products but the end result of mercantilism: the excessive trade surplus enjoyed by the practicing nation.

Such a policy is called a countervailing duty or an equalization tax. It is a levy, which can be paid at the border or, preferably, at the point of sale on all products originating from the mercantilist country, including those which are “recycled” through a convenient third party. It must have the following characteristics:

·         Be applicable only if the trade deficit with said country rises above a pre-determined limit, to be set by the United States.

·         Be progressive: for example, start at 5% and increase by an additional 10% every year after that. It should be conditional and subject to reduction if the trade deficit falls below the originally set limit.

·         Be payable by the importer, who is in effect the agent of the mercantilist country

·         Apply equally to all products from the designated country. This allows trade to shift over time to products where said country possesses a genuine and objective advantage.

The progressive nature of the duty provides for a period of adjustment during which trade flows can be rerouted. It is probable that once the duty is in place mercantilist policies will begin to be abandoned, as their future failure will rapidly become evident. It will also allow for investment in domestic industries to be restarted.

This duty can be established immediately by executive order or a simple act of Congress. It will therefore have instant impact, both psychological and material.