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Mission Impossible
International Economic reverberations
Date : 12/11/2020
Mission Impossible?
ByFrancis The present economic/political crises is not amenable to solutions which might have been effective in the past. We seem to be fighting today s battles with yesterday s tactics and weapons. The ultimate reason for all real crises remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit. (1) The class war will find me on the side of the educated bourgeoisie. (2) We are now at the beginning of the most serious series of financial/economic crises since the great depression of the inter-war period and the beginning of a new cycle 2000, 2008, 2020. These are no bog-standard business cycles of short, relatively painless duration, as was the case in the early 80s and 90s, it is an epochal event which will lead to fundamental political and economic reconfigurations the end of an era, no less. The ancien regime is collapsing this is hardly surprising since it has very little idea of what it is dealing with and is attempting to fight today s battles with yesterday s weapons and tactics. NOT A CRISIS A BUT SERIES OF CRISES At this stage it should be understood that this is not a crisis within the system but a series of crises of the system a systemic crisis if you will. This fact has not yet dawned on the authorities, since to pose the question in this way would be to challenge the whole system of capitalist accumulation and its viability which has been in the ascendancy for the last 30 to 40 years. THE GREAT COUNTER-REVOLUTIONThe roots of the problem are traceable to the Reagan-Thatcher counter-revolution of the early 80s and the subsequent Blair/Clinton consolidation period thereafter. The stagflation years of the 1970s gave rise to a general debilitation on the part of left-of-centre governments and policies in the developed world. As a consequence of this the radical right became increasingly assertive and eventually gained power, but, curiously enough, with little ideological baggage in train at the time. However, their on-the-job learning curve developed into a more coherent strategy in due course. There were four main targets for the Khmer Bleu: The social-democratic post war settlement, which incorporated the historic gains of millions of ordinary people the Soviet bloc the European social market model the East Asian developmental model. Initially, the counter-revolutionary movement s seemingly unstoppable momentum carried all before it. Globalisation, flexible labour markets, financialisation, de-regulation and liberalisation formed the core components of the Anglo-American model, and this paradigm seemed to be the future with the fuddy-duddy, post-war social democratic versions of capitalism becoming increasing pass . The spurt of growth which followed on from this new dispensation surged toward the millennium and beyond this change in objective conditions was now accompanied by the growth of myriad claptrap theories and theorists. Assorted mountebanks and charlatans in the academic, media and political world posited a new age of boundless capitalist expansion the new economic paradigm post-industrial knowledge economies and of course no more boom and bust . HARBINGERS OF TROUBLE. There were, however, disturbing harbingers of possible trouble in the future. The stock market crisis of 1987 house price bubble and bust of the early 1990s, the dot.com bubble of 2001, the property bubble of 2008 and, perhaps most ominously of all, the everything bubble of 2020 The appearance of bubbles was the most disturbing aspect of the system from the mid 1990s onwards. The genesis of these bubbles implied that there was a global surplus of capital feverishly searching for diminishing investment opportunities. Anything which looked promising in terms of growth and good returns on investment will attract such surplus capital or footloose hot money . Since the early and mid 90s we have seen massive surges of hot money into what have been perceived to be viable investment outlets. In the early 90s there was the forced exit by the pound and lira from the Exchange Rate Mechanism (ERM) when speculators led by ubiquitous George Soros gambled that the pound was overvalued against the Deutschmark and won the bet. Similarly the East Asian financial crisis 1992-97- occurred when hot money entered these emerging markets driving up shares, property and currency prices way beyond their value. The hot money left as quickly as it entered and left the predictable financial and economic chaos in its wake. This is exactly what happens when capital flows are not regulated. More recently (1999-2001) there was the dot.com bubble and bust. Latterly, in 2008 and most catastrophic in 2020 has been the emergence (some have suggested engineered) everything Covid-19 bubble of 2020 still in its early stages and which has ushered in the most turbulent period for capitalism in 60 yearsFINANCIALISATION AND ITS DISCONTENTSThe financialisation of the Anglo-American economies, soon to be emulated in most of the rest of the world, in particular meant that financial interests and priorities were privileged over manufacturing. In this New Economy money was to be made by financial engineering, asset-stripping, speculation, asset-price inflation, the creation and sale of exotic (and toxic) debt instruments (derivatives) which no-body really understood, least of all the punters who invested in them increasing market concentration through Mergers and Acquisitions. The policy was essentially a strategy which boiled down to separating fools from money. Making tangible items for sale on domestic and world markets, and the corollary of saving and investment were soooo yesterday. According to the newly established conventional wisdom the route to wealth was borrowing and spending by the 90s this nonsense had hardened into the conventional wisdom. Assuredly this financialisation of the economy could not have taken place without the active collusion of monetary authorities. Greenspan/Bernanke/Yellen/Powell in the US and Mervyn King, Mark Carney (a Canadian) and at the present time Andrew Bailey, in the UK, all of whom presided over a period of low to zero interest rates and easy credit. This increasing mass of bubble money eventually fed through into a property bubble. And as asset-inflation in both equities and property - took hold, more credit was made available to the punters on the basis of appreciating asset valuations. Trouble was that this money was not real money at all but just paper money or fictitious capital as Marx once called it. MARKET FAILURE WALL STREET AND MAIN STREETThis represented a massive market failure as the price of assets pulled away from the gravitational pull of their real value, this being manifested in the divide between Main Street and Wall Street burgeoning unemployment and a massively overvalued stock market boom. The price mechanism was not working since it was giving manifestly false signals as to the real value of these assets. As we now see this has resulted in a massive misallocation of resources as multiple building projects now stand idle, new shopping centres stand eerily empty, and financial institutions have toxic debt instruments on their books which destabilise their balance sheets and hence their ability to lend, even if they wanted to. And now we have the everything/corona bubble which is even more all-encompassing than the previous blowouts in 2000 and 2008. Where this latter 2020 event is going to lead is a moot point, but it already can be surmised that we are in the early stages as mass global unemployment and bankruptcies particularly of small and medium (SMEs) size business is self-evident. All of this against a political background of instability and discontent which is the political face of an economic system in turmoil The foundations initially laid down in the early 80s of this new system were basically rotten and unsustainable. The system went through a period where finance and financial capitalism during the Thatcher/Reagan ascendency was established and productive economies were down-graded as being of a secondary sector of the economy. In short, the economy was transformed from a productive to an extractive mechanism. Such debt-fuelled growth was tantamount to borrowing consumption from the future, since such debt was repayable. Real growth, as was occasioned in the post war period 1947-1973 was brought about by productivity gains, normal profit levels and strong wage increases. As the Nobel Prize winner and regular columnist for the New York Times, Paul Krugman pointed out: Over the period 1947-1973 (The Golden Age -FL) the incomes of all groups rose roughly at the same clip, more than 2.5% annually. That is to say that the good years were about equally good for everyone. However, between 1973 and 1979, as the economy was battered by slow productivity growth and oil shocks, income growth became much slower and more uneven, and the altogether new morbid emergence of stagflation rising price levels and low growth. Finally after 1979 a new pattern emerged generally slower income growth, but in particular a strong tilt in the growth pattern with incomes rising much faster at the top and of the distribution hierarchy than in the middle, and actually declining at the bottom. (3) INCOME INEQUALITYThis maldistribution of income would, in normal circumstances, have caused an ongoing stagnation in the economy. Given that an increasing portion of the national cake was going to profits, rent and interest, it followed that the portion of the cake represented by salaries and wages would decline this would give rise to excess saving since the higher income groups had a greater marginal propensity to save. This was Keynes theory of unemployment a phenomenon attributable to excess saving and the corollary of idled capital which was neither invested nor consumed. His solution was to redistribute income to ensure a greater propensity to consume and since the lower income groups tended to consume rather than save, then redistributive fiscal policy should specifically be aimed at them. However, it was apparent at the time that the economy was not stagnating, far from it. Growth rates had almost reached the golden age to which Krugman alludes. So, was Keynes wrong? American Family Circa 1934 Wage levels in the Anglo-American economies have been when inflation has been factored in - stagnant or actually falling for decades. That was, whisper it softly, the whole purpose of the neo-liberal, counter-revolution. And yet there was no fall of aggregate demand. What was the answer to this apparent conundrum? In short debt, debt, and more debt. Any demand deficiency occasioned by stagnant wage levels was compensated for by an explosion in debt and credit availability. Levels of savings in both the US and UK fell to zero and were even to become negative. But the bubble euphoria was such that the palpable unsustainability of the Anglo-American bubble economies was simply ignored. THE BIG BLOW-OUTEnter the US sub-prime crisis 2008 which detonated the explosion and subsequent collapse of this global house of cards: firstly of the financial system, where investment banking is now an historical memory, and the system of credit and lending has gone into a deep freeze mode and the knock on: secondary crisis in the real economy. We now had a conjoint financial and economic crisis, with collapsing property values, worthless financial debt instruments mortgage backed securities, collateralised debt obligations, credit default swaps involving trillions of lost dollars, rising unemployment, accelerating house repossessions, corporate bankruptcies this to be followed by currency instability as nations seek to gain trading advantage by devaluing their currencies and try to export their way out of trouble, and, add into the mix, fiscal crises as countries try to spend their way out of recession by borrowing money that they don t have. In this latter sense an inflationary crisis was on the cards and a little further down the road. And right on cue Bang, 2020 comes into sight In their desperate search for a way out of the emergency, central banks around the world have yielded to the clamour for interest rate cuts. This is the first weapon in the Keynesian armoury of counter-cyclical measures. It may work in some situations but not this one apparently. Banks are still refusing to lend at 2007 levels, and besides companies are deleveraging (liquidating their debts) and consumers who became maxed-out during the spend, spend, spend, bubble years are beginning to pay down their debts. They are wise to do so since piling on more debts to an already over-leveraged balance sheet will just store up bigger trouble for the future. A future which is now with us. Short-term US interest rates are of today 2020 less than 1%, 10 Year Treasuries are 0.64%. Now factor in inflation and these rates are actually negative in real rather than nominal terms. Who exactly is going to buy a US Treasury Bond at a minus yield! Taken together these downward pressures are going to devalue the US dollar globally. In the UK interest rate is 0.1% nominal but a minus figure in real terms, similarly yields on UK Gilts 0.19%. Again both negative in real terms. In both instances it seems that short term interest rates will fall to 0% and have no discernible effect. Central banks whose sole policy to counter the now entrenched massive market correction consists of an attempt to restore the status quo ante by reigniting the credit-property bubble will not stop the process with monetary means alone. This policy was tried in Japan after the bust of the Japanese property/equity bubble in 1989. Interest rates were reduced to zero but it made no difference. Like Japan the Anglo-American economies are now in a liquidity trap a situation where monetary loosening has reached zero or close to zero interest rates and cannot be reduced further: thus monetary policy is now ineffective, or shortly will be. MONEY, MONEY, MONEY Courtesy of ABBAIn 2008 the next big gun of US Treasury departments, active fiscal policy, was wheeled out to try to arrest the tide of deflationary collapse. To try to contextualise the level of this intervention in money terms I will quote the following figures from the US:
Here`s
how this bonanza broke down:
$29 billion for Bear Stearns
$143.8 billion for AIG (thus far, it
keeps growing)
$100 billion for Fannie Mae
$100 billion for Freddie Mac
$700 billion for Wall Street, including
Bank of America (Merrill Lynch), Citigroup, JP Morgan (WaMu), Wells Fargo
(Wachovia), Morgan Stanley, Goldman Sachs, and a lot more . On top of $45
billion for Citibank, comes a guarantee of $306 billion in bad loans.$800
billion to buy mortgages issued or backed by Fannie Mae, Freddie Mac, Ginnie
Mae and Federal Home Loan Banks.
$200 billion for the auto industry
$200 billion to buy securities tied to
student loans, car-loans, credit card debt and small business loans.
$8 billion for IndyMac
$700 billion to $1 trillion stimulus
package (from January)
$50 billion for money market funds
$138 billion for Lehman K.Marx, Das Kapital, Volume 3, p.484)Bros. (post
bankruptcy) through JP Morgan
$620 billion for general currency swaps
from the Fed
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