ECONOMICS

Economics

Economics

1. Financial Crisis

The institutional relaxation of the monetary constraint allows producers to reduce the effects of their profit squeeze and defer final settlement of their mounting payment obligations by taking on more debt. But rising debt-servicing charges in the wake of growing indebtedness add in turn to fixed costs. Their increase intensifies inflationary pressures. As prices rise rapidly in response to higher unit costs; the debt burden becomes less onerous. Debtors are now in a position to repay their loans with devalued dollars. At the core of stagflation is therefore a debt-inflation spiral (3).

During the last few years, the indebtedness in the United States has reached unexpectedly disproportionate, and risky, levels. Such indebtedness, both private and public, was financed by a huge flood of foreign capital. It was probably foolish to pretend that the globalisation could be financed through the indebtedness, and the consequences of such an idea have been terrific. At the beginning of the current year, the markets began to understand, with mounting panic, that the debt-driven consumer boom experienced by the United States in the last decade was becoming unsustainable (2).

Take the example of Enron case, the blockbuster move, however, looked like the biggest red flag Enron could hoist, and so it scared the business community more than it appeased it. Enron never had the kind of top-notch credit rating typically awarded to big banks or huge corporations like GE. As a result, the company's trading business relied to a great extent on the business world's faith in Enron management, and any dip in that faith shook the company's standing as a trader. For weeks, utilities, trading firms, manufacturers, distributors, and banks had been withdrawing their trading from Enron in a small but steady trickle, but dumping Fastow turned that retreat into a flood of lost business (2).

In this spiral, inflation serves as the mechanism that spreads private losses and risks in the wake of overproduction as well as credit overextension to everyone using the national currency. Such socialization of losses and risks moderates the otherwise violent destruction of industrial capital and the devaluation of financial assets through the devaluation of money itself. This debt-inflation spiral had its inherent limits, giving rise to a growing tension between rising credit demand by increasingly leveraged borrowers and mounting losses for lenders in the wake of accelerating inflation. Eventually creditors would respond by tightening their credit terms.

In particular, the original idea of the Treasury Secretary Henry Paulson, to incorporate a publicly-held “trust corporation” which will buy out the distressed assets of the financial institutions affected by the crisis, was criticized on the ground that the taxpayers would pay the price of the investment bankers' mistakes, giving rise to a huge “moral hazard” problem.

2. CEO Pay

The pay disparity between CEOs and U.S. workers is increasing to ridiculous levels. In 1965, CEOs made forty-four times the average factory worker's salary. Today, CEOs make 326 times the average factory worker's pay. 30 That's the ratio of the top to the average, ...