Gabriel Kolko 11/26/06

These are dismal days for those who attempt to run the affairs of the world. But how should we understand it?

It would be a basic error to look at our present situation as if it were rationally comprehensible. The limits of rational explanations are that they assume rational men and women make decisions and that they will respect the limits of their power and behave realistically. This has rarely been true anywhere historically over the past century, and politics and illusions based on ideology or wishful thinking have often been decisive. This is especially the case with the present bunch in Washington.

We are right to fear anything, particularly a war with Iran that would immediately reel out of control and have catastrophic consequences not only to the region but globally. We are also correct to see limits to the power of irrational people, for the United States is strategically weak. It loses the big wars, as in Korea, Vietnam, and now Afghanistan and Iraq-even though its tactical victories often prove to be very successful-but also ultimately destabilizing and ephemeral. Had the U.S. not overthrown the Mossadegh regime in Iran in 1954 it is very likely the mullahs would never have come to power and we would not now be considering a dangerous war there.

Although the whole is far more important than the parts, the details of each part deserve attention. Many of these aspects are known, even predictable, there are — to paraphrase Donald Rumsfeld — the “known unknowns and the unknown unknowns” — the “x-factor” that intercedes to surprise everyone. All of these problems are interrelated, interacting and potentially aggravate or inhibit each other, perhaps decisively, making our world both very difficult to understand — or to run. Putting them together is a formidable challenge to thinking people outside systems of power. It has always been this way; fascism was in large part the result of economic crisis, and World War Two was the outcome. How factors combine is a great mystery and cannot be predicted — not by US or by those ambitious souls who have the great task of making sure there is no chaos. We wish to comprehend it but it is not decisive if we don’t; for those who have responsibility to manage it, this myopia will produce the end of their world-and their privileges.

What is important to watch?

We can rule out the Left, that artifact of past history. Socialism ceased being a real option long ago, perhaps as early as 1914. Since I have just published an entire book, After Socialism, and detailed its innumerable myopias and faults, I need not say more than that it is no longer is a threat to anybody. The fakirs who lead the parties who still use “socialism” as a justification for their existence have only abolished defeats at the hands of the people from the price capitalism pays for its growing follies. That confidence- freedom from challenge by the unruly masses– is very important but it is less and less sufficient to solve the countless remaining dilemmas. The system has become increasingly vulnerable, social stability notwithstanding, since about 1990 and the formal demise of “communism”.

Assume Anarchy

The failure of socialist theory is much more than matched by the failure of capitalism because the latter has the entire responsibility for keeping the status quo functioning-and it has no intellectual basis for doing so. The crisis that exists is that capitalism has reached a most dangerous stage in destructiveness — and no opposition to it exists. This malaise involves foreign affairs and domestic affairs — vast greed at home and adventure overseas. If the foreign policy aspects are largely American-originated, the rest of the world tolerates or sometimes collaborates with it. Its downfall is inevitable, perhaps imminent. The chaos that exists will exist in a void. No powerful force exists to challenge, much less replace it, and therefore it will continue to exist — but at immense and growing human cost. Alternative visions are, for the moment at least, mostly cranky.

Ingenious and precarious schemes in the world economy today have great legitimacy and flourish in the sense that the postulates of classical economics postulated are fast becoming irrelevant. It is the era of the fast talker and buccaneer-snake-oil salesmen in suits. Nothing old-fashioned has credibility. Joseph Schumpeter and other economists worried about pirates, but they are more important today than ever before-including than during the late 19th century when they were immortalized in Charles Francis Adams Jr’s Chapters of Erie. The leitmotif is “innovation,” and many respectables are extremely worried. I argued here in Counterpunch recently (June 15 and July 26) that gloom prevails among experts responsible for overseeing national and global financial affairs, especially the Bank for International Settlements, but I grossly underestimated the extent of anxieties among those who know the most about these matters. More importantly, over the past months officials at much higher levels have also become much more articulate and concerned about the dominant trends in global finance and the fact that risks are quickly growing and are now enormous. Generally, people who think of themselves as leftists know precious little of those questions, questions that are vital to the very health of the status quo. But those most au courant with global financial trends have been sounding the alarm louder and louder.

The problem is that capitalism has become more aberrant, improvisatory, and self-destructive than ever. We are in the age of the predator and gamblers, people who want to get very rich very quickly and are wholly oblivious to the larger consequences. Power exists but the theory to describe the economy which was inherited from the 19th century bears no relationship whatsoever to the way it operates in practice, a fact more and more recognized by those who favor a system of privilege and inequality. Even some senior IMF executives now acknowledge that the theory that powerful organization cherish is based on outmoded 19th century illusions. “Reconstructing economic theory virtually from scratch” and purging economics of “neoclassical idiocies,” or that its “demonstrably false conceptual core is sustained by inertia alone,” is now the subject of very acute articles in none other than the Financial Times, the most influential and widely-read daily in the capitalist world.

As an economic system capitalism is going crazy. In late November there were $75 billion in global mergers and acquisitions in a 24-hour period-a record. Global capitalism is awash with liquidity — virtually free money — and anyone who borrows can become very rich, assuming they win. The beauty of the hedge fund is that individual risks become far smaller and one can join with others to bet big — and much more precariously. Henced, spectacular chances are now being taken: on the value of the U.S. dollar, the price of oil, real estate — and countless others gambles. In the case of Amaranth Advisors, this outfit lost about $6.5 billion at the end of September on an erroneous weather prediction and went under. At least 2,600 hedge funds were founded from the beginning of 2005 to October 2006, but 1,100 went out of business. The new financial instruments — derivatives, hedge funds, incomprehensible financial inventions of every sort-are growing at a phenomenal rate, but their common characteristic, as one Financial Times writer, John Plender, summed it up on November 20. , is that “everyone [has] become less risk adverse.” Therein lies the danger.

Hedge funds will bet on anything, natural disasters and, soon, longevity of pension fund members being only the latest examples of their addiction to taking chances. London is fast replacing New York as the center of this activity, and the capital market in general, because the regulatory regime of the government the British Labour Party established is much more favorable to this sort of activity than that Bush’s Republican minions allow — though this may change because Wall Street does not like losing business.

On September 12, 2006, the International Monetary Fund released its report on “Global Financial Stability,” and it was unprecedented in its concern that “new and complex financial instruments, such as structured credit products,” might wreak untold havoc. “Liberalization,” which the “Washington consensus” and IMF had preached and helped realize, now threatens the US dollar and much else. “The rapid growth of hedge funds and credit derivative mechanisms in recent years adds to uncertainty,” and might aggravate the “market turbulence and systemic impact” of once-benign events. Hedge funds, it warned, have already “suffered noticeable losses.”

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Gabriel Kolko is the leading historian of modern warfare. He is the author of the classic Century of War: Politics, Conflicts and Society Since 1914, Another Century of War? and The Age of War. He has also written the best history of the Vietnam War, Anatomy of a War: Vietnam, the US and the Modern Historical Experience. His latest book is After Socialism.