There are two very critical schools to conventional (establishment) Keynesian economic theory. One is Marxist in orientation, and could easily be understood by Leftists the world over. In fact, the oldest generation of Israeli kibbutz members could easily understand and agree with this school of thought. The second critical school is to the Right, and it opposes central banks and the manipulation of paper money. It essentially believes in an unfettered marketplace for the price of money (interest rates), and some kind of gold backing for currency. Now both of these schools, Left and Right, are predicting the imminent collapse of this worldwide system of international capitalism, establishment globalization.
Originally the vast majority of Israelis voted for Leftist political parties. When I was a young man in the 1970’s, I worked with many of these early Marxist-Zionist pioneers on a number of Kibbutzim in Israel. They were amazing, to say the least. Many worked into their eighties and age didn’t seem to slow them down. Not only were many of them up with the times, but on more than a few occasions, they explained to me not only the inner dynamics of Middle East politics but the nature of the capitalist crisis of the 1970’s.
In the 1970s, the US suffered a severe bout of what was called “stagflation”. This condition affected the entire capitalist world with either low growth, inflation or both. This crisis was almost as severe as the “Great Depression” of the 1930s. Marxists attributed “stagflation” to a tendency for capitalism to overbuild plant and equipment (overcapacity), while at the same time watching their level of profit dwindle as their products could not be realized through sale. However, the Marxists didn’t necessarily have an adequate explanation for how inflation seeped into a system of increasing unemployment. Unemployment should bring down the price of everything.
The Right had a completely different interpretation of economic events. They blamed the vast US increases in the global money supply for the inflation, and the unionized US work force for the decline in the level of corporate profit worldwide. Meanwhile, the establishment economic theory — Keynesian expansion of the money supply by manipulation of fiscal and monetary policy through national budget and central bank — suffered a severe crisis of credibility. The general public called this policy “guns and butter”. The only thing that eventually “solved” this crisis of capitalism was the movement of US wage and production costs overseas; that is, to the Third World countries of Asia and Latin America. This movement dramatically brought down the price of labor, which in turn squelched the inflation.
But the movement of US industrial jobs overseas (globalization) impacted America in two very distinct ways. First, the low costs abroad made products cheaper at home. But the price to cure the inflation was the loss of a vibrant US working class. Over a period of thirty years, unionized US labor fell from a high of nearly thirty-five percent, to today’s figure of around ten percent. America solved its stagflation on the backs of its working people nationwide. In the process, the US economy became far more financial, especially as the wage level of the industrial middle class dwindled. What became stagnant, in this new age of globalization, was US workers’ purchasing power. This stagnant income precipitated a vast increase in borrowing and the growth of debt-related businesses across America.
Banks and mortgage companies, consumer finance and mega-investment houses (super banks — “too big to fail”), real estate and real estate bonds, insurance investment, and financial corporations (of all kinds), spanned the gamut of this new American economy. Meanwhile, the US became a large debtor country with a huge trade deficit (especially with China) and a massive national debt. The US also engineered an open financial system, with few capital controls worldwide. Such an increase in the financial sector of the global economy made it prone to numerous financial bubbles, which eventually burst in an increasingly dramatic fashion. Bubbles burst across the globe in 1987, 1992, 1998, 2001 and massively in 2007-2008.
Over the course of thirty years, each time a bubble burst the US central bank artificially dropped interest rates. They did this in hopes of reigniting the economy by making borrowing easier and easier (more and more intensive quantitative easing). This monetary strategy seemed to be the only play in the US central bank’s playbook to stave off economic depression. In the process, global debt soared to vastly unsustainable heights. The Austrian School of Economics (the anti-Keynesian, solid-gold-backed money, Right-Wing) is now predicting that this massive creation of easy money — through the nearly free issuance of debt at less than one percent interest — has finally run its course and has lost its effectiveness. The US dollar has now begun to slowly collapse as the asset inflation (leading to consumer inflation) has once again reared its snake-like head. Now the central bank must raise interest rates in order to save the dollar. This has begun to cause a massive loss of faith in the US stock and bond markets. As interest rates rise, the Austrian economists are convinced that soon the entire global financial system will be near bankruptcy. Recently, the Tel Aviv markets have experienced the turmoil.
The Marxist School is in agreement with the gold-based Right. In the long run (now), both schools believe that the creation of financial bubbles has created a massive debt overload. This has begun to erode the power of both the US and its dollar as a global currency. Thereby the entire system of globalization is now at risk of extreme market volatility, leading inevitably to an economic depression. Loose monetary policy is being replaced by its opposite. Both economic schools now concur that the Keynesian, central bank, paper-money-fiat system has become a hollow financial shell. Marxists and gold-bugs alike assume that the system’s failure is a soon-to-be epoch-making event.
Labor Zionists of past generations would have planned for such an historical economic event. It would have been in their DNA. Israel, today, has long forgone its Marxist past. Instead, it has become a right-of-center trading nation geared toward information technology and digital advancement. But free trade and automation are hardly likely in a world on the precipice of economic depression. Furthermore, the future is incredibly murky, leading to uncertain geopolitical adjustments. Meanwhile, the entire Middle East is either at war or near economic chaos. The future of Israel, its economy and its potential international relations could all change within such a dramatic international flux. Soon, the world could abandon the US dollar and not have a reserve currency that it can trust. What then?
American politics is changing. The uni-polar, free trade, Liberal establishment — also known as the neocons — have become criticized from both the Left and the Right. President Donald J. Trump shocked the American establishment with his call for the renegotiation trade pacts and his threat of tough tariffs. Bernie Sanders, on the Left, is an isolationist with little regard for Israel or the American alliance system in the Middle East. He is also in favor of trade restrictions, cutting the US defense budget, and expanding (hugely) domestic fiscal spending. If there is to be an economic depression, Trump will get the blame, and Sanders’ popularity (as an authentic US socialist) could soar.
Israel will need new leadership for the new times ahead. A Center-Left leadership (without the outdated two-state solution) — yet, with new ideas on peace, economy and equality, and the future role of Judaism within a region dominated by Islam — will become a necessity. So, too, will water conservation and ecology become essential components to a viable future. The prospect of nuclear proliferation and Israel’s strategic relationship to the region and the world must be addressed by this new leadership. I certainly don’t rule out a National Unity Government as long as a new strategy for peace can be agreed upon.
Bottom line: In the near future, Israel will have to become the nation of peace plans — a plan with the Palestinians, a plan with the region, and a plan to work with all nations for the good of the earth as a whole. Remember: During the last great economic Depression of the 1930s, capitalism was only resurrected because of a horrific world war. This time, humans must change for the better. The alternative is too bitter to conceive. We have no choice but to improve history, once and for all. We Jews believe that G-d will help us. Let us begin.