02/01/2012 11:03 AM

.SPIEGEL Interview with Francis Fukuyama

.'Where Is the Uprising from the Left?'



Political scientist Francis Fukuyama was once the darling of American neo-conservatives. In a SPIEGEL interview, the author of "The End of History" explains why he now believes that the excesses of capitalism are a threat to democracy and asks why there is no "Tea Party on the left."


SPIEGEL: Professor Fukuyama, you are best known for your essay "The End of History," in which you declared that, after the demise of the Soviet Union, liberal democracy had emerged as the triumphant global model. Now, your latest research claims that the flaws of capitalism and globalization could endanger this democratic model. How do you explain this shift?



Fukuyama: Capitalism is the wrong word to use here, because there is not a viable alternative to capitalism. What we are really talking about is just economic growth and the development of modern economic societies. A combination of factors is beginning to challenge their progress in the United States. We have had a lot of technological change that substituted for low-skill labor and made many people in Western democracies lose their jobs.



SPIEGEL: Which is why countries such as the United States or Britain wanted to turn themselves into "service-oriented" economies.



Fukuyama: We have unthinkingly embraced a certain version of globalization that assumed we had to move very quickly into this post-industrial, post-manufacturing world. Doing so, we forgot that the whole reason real socialism never took off in the US was the fact that the modern economy seemed to produce middle-class societies in which the bulk of the population could enjoy a middle-class status. They worked in industries that were abolished in our countries and transferred to countries like China.



SPIEGEL: Even if members of the middle class held on to their jobs, they saw their income stagnate or even decline, while a few of globalization's winners at the top reaped outsize rewards. The level of income inequality in advanced nations is greater than ever before. What effect does that have on our societies?



Fukuyama: It is not good for democracy. If income is relatively evenly distributed and there are not very sharp differences between rich and poor, you have a greater sense of community. You have a greater sense of trust. You do not have parts of the community that have superior access to the political system that they can use to advance their own interests ...



SPIEGEL: … all of which undermines the democratic process.



Fukuyama: What you are going to see in a democracy with a weaker middle class is much more populism, more internal conflict, an inability to resolve distributional issues in an orderly way. In the United States right now, you do have this return of populism. It should be on the left, but actually most of it is on the right. If you talk to Tea Party members about their feelings regarding the government, they are very passionate. They hate the government. They think they have been betrayed by elites.



SPIEGEL: Americans, however, are beginning to discuss the problem of social inequality much more openly.



Fukuyama: They are slowly beginning to realize it. The recent public focus on inequality and the Occupy Wall Street movement are harbingers of change in that direction. The trouble is that in the United States it is extremely difficult to mobilize people around pure class issues. President Barack Obama was ostracized as a "European socialist" when he brought up the idea of higher taxes on the rich. These class debates are historically unpopular -- except for a very brief period in the 1930s during the Great Depression.



SPIEGEL: The latest financial crisis was often compared to the Great Depression: Why did we not see another case of the left wing rising up against the rich?



Fukuyama: I am at a loss, too. Where is this uprising from the left? This is a crisis that began on Wall Street. It really was rooted in the particular American model of liberalized finance. It hurt ordinary people tremendously, and it benefited the richest part of the country -- the finance sector -- which came through the crisis very well, thanks to government bailouts. You would have thought that this would pave the way for a rise of left-wing populism as seen in the 1930s. A Tea Party on the left, so to speak.



SPIEGEL: Could the Occupy Wall Street movement fill this void on the left?



Fukuyama: I really do not take this movement seriously, because its social base is extremely narrow. It consists mostly of the same kids that were protesting in 1999 in Seattle against the World Trade Organization -- anti-capitalists. The big problem sociologically for the left in the United States is that the white working class and lower middle class, that in Europe would be reliably social democratic in their political behavior, tends to vote Republican or is easily brought into the Republican camp. Until the Occupy Wall Street people can connect up with that demographic group, there is not going to be a big left-wing populist base of support in the US.



SPIEGEL: Has the crisis simply not been deep enough to achieve that?



Fukuyama: Ironically, because the Federal Reserve and the US Treasury acted to support the financial sector, the crisis did not develop into a deep depression with unemployment up to 20 percent like in the 1930s. Back then, President Franklin D. Roosevelt could restructure the big banks. I believe that the only solution to our current problems is to restructure all these big banks, Goldman Sachs and Citigroup and Bank of America, and turn them into smaller entities that could then be allowed to go bankrupt. They would no longer be "too big to fail." But this has not happened so far.



SPIEGEL: One could also make the case that President Obama was simply not as tough as Roosevelt.



Fukuyama: Obama had a big opportunity right at the middle of the crisis. That was around the time Newsweek carried the title: "We Are All Socialists Now." Obama's team could have nationalized the banks and then sold them off piecemeal. But their whole view of what is possible and desirable is still very much shaped by the needs of these big banks.



SPIEGEL: In other words, Obama and his influential advisors, like Treasury Secretary Timothy Geithner, are themselves part of the "1 percent" that the Occupy Wall Street movement rails against.



Fukuyama: They are obviously part of the 1 percent. They socialize with these Wall Street gurus. Goldman Sachs boss Lloyd Blankfein met with Geithner many times during the crisis. Such close contact clearly influences the world view of the White House.



SPIEGEL: But would you seriously argue that Republicans are any less close to Wall Street?



Fukuyama: Oh no. Republican politicians are completely bought by Wall Street. But the real question is: Why do their working class supporters continue to vote for them? My explanation is partly this deep distrust of any form of government that goes back very far in American politics, and is today reflected in political figures like Sarah Palin, which holds against Obama primarily the fact that he went to Harvard. There is a kind of populist resentment in US politics against being ruled by elites.



SPIEGEL: Even the Tea Party movement is largely financed by billionaires who represent everything regular Tea Party members are opposed to.


'Tea Party Activists Mobilize Against Their Own Economic Interests'



Fukuyama: The Tea Party is a genuine grassroots movement, so I do not buy into these conspiracy theories that rich billionaires initiated it. When you go to one of these rallies of Ron Paul supporters, they are very passionate. They all tend to be young, and they have just got this libertarian idea in their minds that the government is really the source of all of our problems. So I think the convictions of Tea Party activists are sincere, they are not manipulated by billionaires. But it is true that they mobilize against their own economic interests and for the interests of elites they should despise. I still do not fully understand why they do that.


SPIEGEL: Why can't Obama reach these frustrated people?



Fukuyama: The president never annunciated a vision of a different kind of economic order that did not just look like a return to a kind of classic big spending, liberal Democratic formula. The Democrats have never articulated an economic philosophy that is not just the return to the 1970s, big government and so forth, or the position of the labor unions which is very hostile to globalization.



SPIEGEL: What else should he do?



Fukuyama: I actually think that the German model should be a very interesting one from an American perspective, because Germany is still the second-largest exporter, but has done a much better job in protecting its manufacturing base and its working class compared to the United States. Somebody needs to articulate a strategy in the US that will say our goal is not to maximize aggregate income. It is to protect the middle class through an engagement with the world with globalization, but one that benefits the broad mass of people. No Democrat has really been able to do this.



SPIEGEL: Do you want the American left to draw lessons from former German Chancellor Gerhard Schröder's "Agenda 2010," a controversial package of labor and welfare reforms which overturned the classic social democratic model?



Fukuyama: What the Social Democrats in Germany have done is increase the degree of flexibility in labor markets and make the German welfare state more friendly to capitalist competition. The old traditional agenda that we are just going to have more and more social protection no longer rules in Germany, and that is a good thing. Part of the problem in Europe is that similar reforms have not happened in France and Italy.



SPIEGEL: Would that protection of the middle class include a new form of global protectionism?



Fukuyama: We should never have permitted the Chinese to deindustrialize a large part of the world. The Chinese have managed to play one Western country against another, stealing their technology basically. They succeeded because everybody in the West has got this short-term view saying: "I may be clobbered by the Chinese down the road, but if I do not make my money now, somebody else will get in. So I make business with them even if they rip me off." This view is very short-sighted. We should have been much tougher with China.



SPIEGEL: Could that trend still be reversed?



Fukuyama: It is too late, at least in the United States. We have lost all crucial manufacturing industries to China.



SPIEGEL: A feeling of helplessness also prevails in Europe. Every time EU politicians try to present new solutions to the euro crisis, they fail to convince the financial players around the world. Is political leadership still possible, given the outsize power of global financial markets?



Fukuyama: The political leadership problem stems not simply from the pressure by the markets. All modern democracies have a disease, which is that the democratic process tends to be captured by well-organized groups that are not representative of the general public. This is the whole problem with Greece. The pharmacists and the doctors and the civil servants and the architects, and every other social group in that country, has organized itself into a closed corporation that controls prices while largely avoiding taxation. They make a fortune, but the national bankruptcy is bound to happen.



SPIEGEL: Unelected technocrats and advisers from outside are now being brought in to reform the Greek system. What does that mean for democracy?


Fukuyama: If I had to bet my own money on this, Greece is going to leave the euro, because ultimately any outside intervention is going to be regarded by the Greek public as a non-democratic imposition of policies that they do not want. Greeks are just never going to behave like Germans, right?



SPIEGEL: Can Europe, in its desperate attempts to rescue the euro, still be democratic?



Fukuyama: The entire European project was very elite-driven from the beginning. The evidence of this was every time a country held a referendum where they voted against signing on to further EU regulation ...



SPIEGEL: ... that referendum was simply repeated.



Fukuyama: The EU elites said: "Oh, you just got it wrong this time. We will keep voting until you get it right." Virtually every European country now has got a right-wing populist party. They are anti-EU, anti-immigrant, and it has exactly the same cause, because there is a perception that the elites in Europe do not really address their issues.



SPIEGEL: Authoritarian systems, on the other hand, appear to be getting more and more popular. When German businesspeople travel to communist China, for example, they are enamored with the system there. They rave about how quickly important decisions can be made.



Fukuyama: I hear that from American businesspeople too. The Chinese system is particularly striking when you contrast it with Europe and the United States where you currently just cannot get a decision made.



SPIEGEL: So authoritarian China will emerge as the new global model -- which would totally contradict your thesis from "The End of History" that democracy has become the default option around the world.



Fukuyama: No. China is never going to be a global model. Our current Western system is really broken in some fundamental ways, but the Chinese system is not going to work either. It is a deeply unfair and immoral system where everything can be taken away from anyone in a split second, where people die in train accidents because of a rampant lack of public oversight and transparency, where corruption rules. We are already seeing huge protests in all parts of China ...



SPIEGEL: ... which Communist Party officials fear are reminiscent of the Arab Spring.



Fukuyama: When its leadership stops delivering the current level of economic growth, it has got this huge moral vulnerability. Liberal democracy still really is the only game in town worldwide, in spite of all of its shortcomings.



SPIEGEL: Professor Fukuyama, we thank you for this interview.



Interview conducted by Hans Hoyng and Gregor Peter Schmitz


Bill Gross Explains Why "We Are Witnessing The Death Of Abundance" And Why Gold Is Becoming The Default "Store Of Value"
.
Submitted by Tyler Durden
.
on 02/01/2012 08:44 -0500


While sounding just a tad preachy in his February newsletter, Bill Gross' latest summary piece on the economy, on the Fed's forray into infinite ZIRP, into maturity transformation, and the lack thereof, on the Fed's massive blunder in treating the liquidity trap, but most importantly on what the transition from a levering to delevering global economy means, is a must read. First: on the fatal flaw in the Fed's plan: "when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street." And secondly, here is why the party is over: "Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assetsbonds, stocks, real estate and commodities alike – is now delevering because of excessiveriskand the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time." Yet most troubling is that even Gross, a long-time member of the status quo, now sees what has been obvious only to fringe blogs for years: "Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper." Let that sink in for a second, and let it further sink in what happens when $1.3 trillion Pimco decides to open a gold fund. Physical preferably...
From PIMCO's Bill Gross:
Life – and Death Proposition
  •  Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.

  •  Most short to intermediate Treasury yields are dangerously close to the zero-bound which imply limited potential room, if any, for price appreciation.

  •  We can’t put $100 trillion of credit in a system-wide mattress, but we can move in that direction by delevering and refusing to extend maturities and duration.

Where do we go when we die?
We go back to where we came from
And where was that?
I don’t know, I can’t remember
Virginia Woolf, “The Hours”


I don’t remember much of this life, and like Virginia Woolf, nothing of the herebefore. How then, could I expect to know of the hereafter? I know at least that we all exist at and of the moment and that we make up those moments as we go along. I became a grandfather for the first time a few months ago and proud son Jeff asked for some fatherly advice as to how to go about raising his baby daughter Caroline. “We all do it in our own way, Jeff, you’ll make it up as you go along,” I said. Parenting, and life itself, is one giant experiment. From those first infant steps, to adolescent peer testing, flying from and departing the parental nest, gene replication and family building of our own, maturity and acquiescence, aging, decay and inevitable death – we experiment as best we can and make it up as we go along.


That death part though, oh where do we go after we have done all the making? There was another Jeff in our family, beloved brother-in-law Jeff Stubban who was as kind a man as there ever could be. Dying within three months of an initial diagnosis of pancreatic cancer, our family sobbed uncontrollably at his bedside as his breath, his spirit, his soul, departed almost on cue while a priest recited the rosary. Where had he gone, where is he now, what will become of him and all of us? Like many grieving families we look for signs of him and in turn for clues to our own destination. A lucky penny in the street, a random mention of his beloved New Orleans, an exterior resemblance of his shiny bald head in a mingling crowd. Where are you, Jeff? Tell us you are safe so that we might meet again.


Having now matured to trust reason more than faith I offer not so much a resolution, but an alternative to the unanswerable question of Virginia Woolf and the departed souls of Jeff Stubban and billions of others. If we don’t meet againup there then perhaps we’ll meet once moredown here. After all, the one thing I know for sure is that we got here once – and because we did, we could do it again. Rest easy, dear Jeff, and welcome to this world, dear Caroline. We’ll all just have to make it up as we go along.


The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter. A multitude of liability structures dependent on a certain level of nominal GDP growth require just thatnominal GDP growth with a little bit of inflation, a little bit of growth which in combination justify embedded costs of debt or liability structures that minimize the haircutting of or defaulting on prior debt commitments. Global central bank monetary policy – whether explicitly communicated or not – is now geared to keeping nominal GDP close to historical levels as is fiscal deficit spending that substitutes for a delevering private sector.


Yet the imagination and management of the transition ushers forth a plethora of disparate policy solutions. Most observers, however, would agree that monetary and fiscal excesses carry with them explicit costs. Letting your pet retriever roam the woods might do wonders for his “animal spirits,” for instance, but he could come back infested with fleas, ticks, leeches or worse.


Fed Chairman Ben Bernanke, dog-lover or not, preannounced an awareness of the deleterious side effects of quantitative easing several years ago in a significant speech at Jackson Hole. Ever since, he has been open and honest about the drawbacks of a zero interest rate policy, but has plowed ahead and unleashed hisQE bowser” into the wild with the understanding that the negative consequences of not doing so would be far worse. At his November 2011 post-FOMC news briefing, for instance, he noted that “we are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people” – savers, pension funds, insurance companies and finance-based institutions among them. He countered though that “there is a greater good here, which is the health and recovery of the U.S. economy, and for that purpose we’ve been keeping monetary policy conditions accommodative.”


My goal in this Investment Outlook is not to pick a “doggie bone” with the Chairman. He is makin’ it up as he goes along in order to softly delever a credit-based financial system which became egregiously overlevered and assumed far too much risk long before his watch began. My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic. When interest rates approach the zero bound they may transition from historically stimulative to potentially destimulative/regressive influences. Much like the laws of physics change from the world of Newtonian large objects to the world of quantum Einsteinian dynamics, so too might low interest rates at the zero-bound reorient previously held models that justified the stimulative effects of lower and lower yields on asset prices and the real economy.


It is instructive to mention that this is not necessarily PIMCO’s view alone. Chairman Bernanke and Fed staff members have been sniffin’ this trail like the good hound dogs they are for some time now. In addition, Credit Suisse, in their “2012 Global Outlook,” devoted considerable pages to specifics of zero-based money with commonsensical historical comparisons to Japan over the past decade or so.



The following pages of this Outlook will do the same. At the heart of the theory, however, is that zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis. First of all, when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street.



What perhaps is not so often recognized is that liquidity can be trapped by the “price” of credit, in addition to its “risk.” Capitalism depends on risk-taking in several forms. Developers, homeowners, entrepreneurs of all shapes and sizes epitomize the riskiness of business building via equity and credit risk extension. But modern capitalism is dependent as well on maturity extension in credit markets. No venture, aside from one financed with 100% owners’ capital, could survive on credit or loans that matured or were callable overnight.


Buildings, utilities and homes require 20- and 30-year loan commitments to smooth and justify their returns. Because this is so, lenders require a yield premium, expressed as a positively sloped yield curve, to make the extended loan. A flat yield curve, in contrast, is a disincentive for lenders to lend unless there is sufficient downside room for yields to fall and provide bond market capital gains. This nominal or even real interest ratemargin” is why prior cyclical periods of curve flatness or even inversion have been successfully followed by economic expansions. Intermediate and long rates – even though flat and equal to a short-term policy rate – have had room to fall, and credit therefore has not been trapped by “price.”


When all yields approach the zero-bound, however, as in Japan for the past 10 years, and now in the U.S. and selectedclean dirty shirtsovereigns, then the dynamics may change. Money can become less liquid and frozen by “price” in addition to the classic liquidity trap explained by “risk.”


Even if nodding in agreement, an observer might immediately comment that today’s yield curve is anything but flat and that might be true. Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation. What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount. Duration risk and flatness at the zero-bound, to make the simple point, can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit.


Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.


Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assetsbonds, stocks, real estate and commodities alike – is now delevering because of excessiveriskand the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.