A few weeks ago the Federal Reserve minutes were released, and the plain language was instantly interpreted as something very simple: that the Federal Reserve was going to end its rate raising campaign, and keep the world awash with liquidity. Oil and commodities shot up to long term highs, in some cases inflation adjusted all time peaks. Ripples flowed through the body politic, suddenly slumbering politicians were urged to do "do something" about higher gasoline prices. Even though, hamstrung by their own profligate fiscal policies and absurd invasion of Iraq, there was nothing to be done. Since then the Federal Reserve has ceased to give any guidance, and the oil markets have begun marching back up again.

Not long after Bernanke's first announcment the IMF stated that it was going to seek immediate negotiations to produce normalization of currency rates, a cryptic statement which is fraught with deeper meaning in the back drop of something else which came out of the IMF recently: namely that "globalization" could no longer be counted on to hold inflation in check. While this statement received little attention, it is, in fact, a nail hammered into the coffin of what was once the great consuming narrative of political elites around the world for the last twenty years, and of economics for the last thirty years – namely, neo-liberalism.

It is a strange sight, a line of mourners for an idea. It is an idea that, simultaneously, was beloved of elites, and loathed by the dispossessed – and ignored by the broad range of people who lived under it. Not since the divine right of kings has their been an idea which seemed so obvious to those who benefited from it, and so opaque to almost the entire rest of humanity. The paeans to neo-liberalism that have gushed forth from various pens read far more like the paeans to absolutism in The True Law of Free Monarchy, than anything else. Neo-liberalism is not, merely, globalization, or free trade, or even free movement of capital, but instead, it is a story, a story of how the world should work

Neo-liberalism, Free Trade and Globalization are often confused – because those who advocate for one often slurry their arguments into one of the others, as if one factor proved all the others. This isn't the case. Globalization is, ultimately, the realization that all of human activity is interconnected. FDR's Four Freedom's speech globalized the idea of rights, in the midst of a global struggle against the darkness. If you believe in combating global warming, then you too, are an advocate for globalization, in that there is one atmosphere, one vast ocean, and we are all connected to both. Even Free Trade and Neo-liberalism are not the same thing. It is entirely possible to have free trade, without free capital movement, in fact, the original theory of comparative advantage assumes just that, that capital is immobile and must accept the returns of where ever it is located..

But all of these words are inconsequential, because neo-liberalism is being buried. And this past weekend one of the most unexpected of attendees to its funeral threw a handful of dirt on its coffin: The International Monetary Fund. To understand why, a bit of history.

It was after the second world war that three institutions were supposed to be set up, the International Monetary Fund to stabilize currencies, the World Bank to fund development, and the International Trade Organization to harmonize trade rules and lower barriers to commerce. The United States, in all irony, torpedoed the creation of the ITO, fearing that it would act against American business. America, having the only large industrialized economy untouched by war, did not want any restrictions. One history professor of mine quipped that in 1945 there was an ITO, it was called the US Congress.

But there was the Global Agreement on Tariffs and Trade, set in motion in 1947 as a provisional organization, producing a series of "rounds", which created agreements on lowering tariff barriers and a host of other issues. But it would be the "Uruguay Round" which would create the "World Trade Organization", which was intended to be the place where trade differences were ironed out, but with the teeth to back and force agreements.

Reading the WTO treaty, it does not sound like an instrument for rampant Thatcherization, it does not have a ringing mandate for free trade at all cost, in fact, its charter mission seems to include the idea that trade rules must make room for the needs of developing as well as developed nations. Where then, if not in the WTO charter, was the heart of neo-liberalism.

The person to ask is Joseph Stiglitz, whose book "Fair Trade for All" dissects how developing nations are often given take it or leave it deals that have little to do with either economic ideas or economic realities. In the chapter "Trade can be good for development" he writes:

"But many of the developed countries' negotiators have turned this argument on its head, they suggest that the reduction of one's own tariffs is beneficial, and hence the developing countries would be helping themselves by liberalizing in the WTO, irrespective of the actions of the developed countries. On this basis they argue that the developing countries should accept almost any offer that is put on the table."

He then says that "matters are not so easy", and summarizes the argument in the chapter "Trade Liberalization and Costs of Adjustment":

"Trade Liberalization creates adjustment costs as resources move from one sector to another. This chapter has described several sources of adjustment costs (broadly defined) and concludes that adjustment to a post-Doha trading regime will be disproportionately costly and difficult for developing countries because of the loss of preference margins, the loss of revenue from trade taxes, institutional weaknesses including the absence of adequate safety nets, large implementation costs, lack of the finance required to restructure the economy, and the limited ability of poor populations to manage short-term unemployment."

And remember, this is from someone who believes trade can help development. But it takes him only to page two of his book to introduce the villain of the work: the Washington Consensus, which he notes, is a series of policies advocated particularly in the 1990's, which amounted to having developed countries open their markets unilaterally, and impose fiscal discipline and market reforms. It is in the Washington Consensus that neo-liberalism found embodiment, and institutions such as IMF, World Bank, WTO and the trade negotiation rounds were merely instruments to advancing the ideas behind this consensus.

Thus if there is a gospel to neo-liberalism, it is in the Washington Consensus as it came to be implemented.

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On pages 20 and 21, Stiglitz outlines the narrative behind neo-liberalism. In the 1980's Latin American growth foundered, and inflation, even hyper-inflation, entered the picture. At the same time the "Tiger" economies of east Asia – which promoted exporting – grew rapidly. Thus, declares the neo-liberal, it is import substitution and state intervention that causes inefficiency, inefficiency that causes government spending, and government spending that drives an economy to zero growth and high inflation. In short, what Latin America needed, was Reaganomics.

This much Stiglitz can tell us, but what his book does not talk about is the reverse side of the coin, that neo-liberalism is what scholar Jennifer Mercieca would call "a tragic narrative" of the world. Tragic in that it views the public with suspicion, and fears above all the exercise of the public will as the source of disasters. Not merely in the developing world, but in the developed world as well. The medicine offered to Latin America, was the medicine that developed countries were prescribed: slash social spending, allow people to fall through the safety net, and let the free market do everything. Guided by such voices as Milton Friedman who stamp their rhetorical feet and declare that the private sector can do anything for half the cost of the government, neo-liberal ideas fundamentally view the people as the source of the wrong turns that lead to fiscal and eventually macroëconomic catastrophe. The same yoke put on the developing world, must also be on the electorates in the developed world as well.

And it is this feature which has lead to the death of neo-liberalism as a vital force in geopolitics.

Neo-liberalism believes that left to their own devices, electorates will vote to protect their jobs and subsidies, and grow lazy and inefficient. Thus only the heavy hand of market discipline, budget discipline and monetary discipline can prevent inflation without growth, which free market fundamentalism views as the inevitable result of government intervention in the economy. Only with these weights on their back could electorates be trusted to make choices about which marginal benefits they could have: slightly lower taxes, or slightly better services. At the same time, developed countries had to place their monetary policy in the hands of the developed nations, pegging their currencies to the dollar, or even promising to have a "dollar board", where one local note could be issued for each dollar the government held.

Neo-liberalism then, imposed its tragic weight on both the developing world, and the developed world. Paradoxically, this child of free market conservative economics, Reaganomics and Thaterism brought to power Bill Clinton, Tony Blair and Gerhard Schroeder, parties of the left in the very nations that had formed the core of the conservative consensus of the 1980's.

The believers in "the third way", as it came to be called, had a burning passion for neo-liberal trade regimes, in no small part, because they believed the tragic narrative more powerfully than their political right did. They really believed that if not for free market liberalization, then the developed world would plunge into stagnation, and they really believed that if developed world electorates did not impose fiscal self-discipline, then there would be more painful cuts in services and the social safety net.

Perhaps the creepiest testimony to this is the documentary Our Brand is Crisis which follows an American political consulting firm as it aids the election of a neo-liberal Presidential candidate in Bolivia, one who passed a social security law and promised more public works and education, who was then driven from power because of his ham handed handling of the very economic crisis which was used as his main campaign theme. The firm in question was not a Republican one, but, on the contrary, one headed by Democratic guru James Carville. At the end of the film consultant Jeremy Rosner looks into the camer soulfully, and shrugs that perhaps Democracy needs more help in the beginning. A message that he could have learned from Stiglitz.

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Thus neo-liberalism is a narrative of the world that says that developing nations must restrain their impulses to nationalism and socialism, while developed nations must maintain fiscal discipline. The 1990's saw the world placed on a diet, with "do more with less" being the mantra in civilian and military circles alike. The US created a dollar shortage, which kept its own budget restrained, and other nations were forced to trade with the developed core to get the hard currency they needed to buy oil and technology. The gain was the continued constriction of inflation, and the continuation of "the Great Commodities Depression".

It also sparked a huge wave of investment – but in the wrong direction. The theory of neo-liberalism was that since developing nations were cheaper than developed ones, that free capital flows would make investment flow from developed nations to less developed ones. Developed nations would get lower prices for goods, and developed nations more and more incentive to hew closely to the market oriented export path.

Instead, money, fearful of the effects of financial crisis, fled to the US. In retrospect there is an obvious mesoëconomic reason for this. Consider the wealthy individual in a developing nation under neo-liberalism's open capital movement, dollar drought situation. If he stays in his home country, then he suffers a large risk: that there will be, through no fault of his own countries policies, a currency crisis. The stock market in his own country will plunge, and foreign investors will snap up shares quickly, taking advantage of the short term cash crunch. He will be skinned alive, and there is little he can do to stop it, because free capital movement is the cornerstone of the neo-liberal order. Elites in South Korea experienced this first hand. Instead he will put his money out of the country, which he can do, because of free capital movement, and hold only enough in country to maintain economic advantages. And if everything goes wrong, he will make sure that any IMF bail out package will be a life raft for the rest of his assets.

For people who need a demonstration of this, Russia makes an excellent case study – a vast IMF bailout did little but allow wealth to flee the country. As one colleague of mine says "Russia is a rich nation, it just happens to be a hundred guys who all live in Moscow." Think on how that city now has more billionaires living in it than New York.

But it was not the details or the peripheral nations which laid law the neo-liberal idea, but the flaw in the basic narrative itself. Neo-liberalism, remember, believes that elites are better to be trusted to come to the right decisions than volatile and easily deceived masses. In a very Leo Straussian way, it believed in marketing its ideas to the public, even if that meant a certain amount of deception of that public. In the final analysis, elites would be shown to be more disciplined than the electorates that they governed. Because that is what the system required: elites willing to live within the constrictions of a monetary order with little room to maneuver.

And in from April 2000 to somewhere in late 2002, that very thesis, of the disciplined nature of elites, was tested and found wanting.

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What ended neo-liberalism was not the protests in Seattle against the WTO, nor even a concerted political push from the left. On the contrary, parties of the right won a string of victories after the turn of the millennium, and enacted policies which have dramatically changed the trade and international financial landscape. It was the response of elites to the fears of 2000, the 9/11 attacks of 2001 and the final crash of 2002 which would unravel the underpinnings of a disciplined fiscal order. To put it bluntly, faced with economic difficulties, and a chance to seize control of a country in the heart of the Middle East, George W. Bush spent like a drunken sailor. The dollar drought was dead, and in came a dollar glut.

The world of the dollar glut reversed the polarity of the trade order. Instead of other nations begging the US and the institutions it dominated for bail outs, it was the US that counted on other nations, particularly the Asian central banks, to soak up the dollar glut to keep their own currencies from appreciating too much. Instead of relying on the cooperation of other free trade states, the US came to see its future as cooperating with mercantile states that were locked in a vicious battle with each other to supply the lowest cost labor and land.

Out went the US as the world's investment banker, and in came a United States policy that was the world's designated loser in the trade game. Whatever the theory behind the move, the result has been to shift the global trade order from a multi-lateral, to a unilateral one. No one can stop the US from simply printing dollars, without suffering the consequences.

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The sound of wind rattling through the rotten branches of neo-liberalism began before any elections had taken place. When in 1997-98 a major fiscal crisis rolled through the world and roiled markets, the response from the American Federal Reserve was to flood the world with liquidity, intending to "sanitize" the operation later when the troubles had passed. If the US had been disciplined, its Congress and President would have found a way to increase taxes, pay off more of the national debt, and thus keep people from overspending. But the motto of the age was "laissez les bons temps rouler."

The resulting bubble, for a short time, made people lose sight of the very underpinnings of value, and of ethical values in general. It seemed so clear that there would never be such an era of loose money again, and executives at Computer Associates, WorldCom, Adelphia and others engaged in freelance law bending to make sure that some of it slopped onto their own plates.

But it was the response to the popping of that bubble which was fatal to the Washington Consensus, both as an ideology, and as a pragmatic reality of government. Instead of doing the minimum required, and keeping the pressure on commodities producers, the first act of a newly seated Congress and newly sworn in executive, was to slash revenues dramatically. The ideology of "always cut taxes" trumped the ideology of "always restrain deficits." It had worked the previous fiscal crisis, why not this one?

What it led to however was a vast change in the structure of world trade and world currencies. Instead of neo-liberalism's structure of the developed center mediating between emerging nations that were seen as needing to liberalize, and the resource rich nations, which were seen as needing to be kept from political instability and strategic threat. The first invasion of Iraq was a typical neo-liberal war – restoring the balance of power, and preventing one nation with an unstable leader from becoming a threat. The new structure was that of triangular trade – between the United States, OPEC, and China acting as the point of assembly for the tiger economies that had been hammered by the financial crisis of the late 1990's and the crash of 2000-2002.

This change also brought another change – the long standing lid on gasoline prices was blown off, and China accelerated into high gear to produce its own consumer economy. While OPEC fed America with oil, China fed it with cheap goods, and both propped up its dollar. The rest of the world was dragged along in this new direction.

And a new direction it was. Neo-liberalism, remember, is a narrative that says that it is discipline that holds the world economy together. The new narrative was one of profligacy – American could have both guns and caviar, OPEC could pump at full speed, and China could run the factories as hot as possible. It was no longer about efficiency and working smarter, but about brute force. China's growth comes despite not being transparent, open, or neo-liberal. Despite its having low value add in its products, despite having terrible efficiency of GDP per barrel of oil. It is, in many respects, the 1980's and 1990's in reverse.

Under this new structure, "Old Europe" as Rumsfeld derisively called it, has suffered mightly – with high unemployment and linger recession. This despite being staunchly free trade, open, and neo-liberal. As England showed, it is all about the oil. While Germany, France and Italy felt the weight on their backs of higher energy prices and a world that was moving towards cheap goods – England and Norway, no paragons of fiscal virtue themselves, grew rapidly.

Thus neo-liberalism's end is not the end of globalization, nor the end of "free trade," or what is often called free trade, but of the layer that sits on top of this, and promises prosperity. But the next wall to crack is globalization as it has been known. Globalization rests, ultimately, on supply chains being internationalized, and each country being willing to sell at the border what is most inflation effective for that supply chain. With the seizures of the gas fields in Bolivia, and the growing import substitution policies of China, the cracks in this wall are now becoming gaping holes. With the accelerating demand for prosperity, "globalization" can no longer be counted on for restraining inflation, because now those who toil in China are going to push up the prices of resources by as much as they reduce them in the manufacturing phase. What used to be labor arbitrage that lowered resource prices, is now labor arbitrage that raises them.

Internally in the US, perhaps the most signal moment of the end of neo-liberalism comes from where it began: the regulation of gasoline prices. When in the 1970's federal gasoline price regulation caused misallocations of gasoline itself, and along with it gas lines and shortages, the free marketers interpreted this as the crucial sign that government could not regulate price in a market effectively. In Joseph Kalt's classic study The Economics and Politics of Oil Price Regulation, it was determined that billions went from domestic oil production, to consumers and refiners, and that the result was bad for the market place. MacAvoy and Breyer mad the same argument in Energy Regulation by the Federal Power Commission for natural gas shortages.

And yet now, if you listen to right wing talk radio, the increase in gasoline prices is a great threat to the American Republic. The reality is that de-regulation as a regime has not faced a gas crisis of the scale that rocked American in the late 1960's and early 1970's – and it is already losing political credibility when faced with the first waves of what is a growing stormfront. Matters have indeed, come full circle – with the very people who are the political heirs of the deregulators, marketers and anti-government philosophers, acting first in manner which disrupted the free trade world economy, and now facing growing pressure to reregulate or ameliorate the price of the very commodity that they road to power.

If this is not the end of an idea, then what is? After all, it was the libertarian icon Hayek who theorized that governments create booms by falsely creating demand for goods that does not exist. What, exactly, is Bill Frist's proposal to hand out $100 dollar checks for gasoline, than doing just this?

Thus the tragic narrative has foundered on one of its own assumptions. Tragic narratives rest, ultimately, argue that the populace is undisciplined, and will wantonly vote itself a subsidy out of the pockets of those who have been industrious and cautious. Only elites who have been insulated from this mob can think clearly, and behave with the sober discipline required. Neo-liberalism argued that if the core nations disciplined themselves – Maastricht, the treaty that forms the basis for the Euro requires that budget deficits be kept in check – then they could impose this discipline on emerging nations, forcing them to become industrial democracies, with transparent laws and institutions. This narrative did not take into account that elites are not superior beings, but merely people who have risen to power. The have fears and appetites, and are as prone to trampling like a mob when the see either a chance for great profit, or the fear of great loss.

The very people who neo-liberalism as a narrative, placed its faith in, betrayed it by making a reckless gamble on a new structure. This new structure, where multi-lateralism is trying to rein in the excesses of neo-mercantilism, is producing hope in unexpected quarters, long time bearish economist Stephen Roach says he believes the world will normalize without a currency crisis. He notes the last time he was so enthusiastically bullish, was in 1999.

We may have another funeral for an elite affection before long.