Friday, 28 September 2007

Burma - Can the Junta Survive?

Unfortunately, the answer is probably yes. Lenin, formulated the requirements of a political revolution as being that the existing rulers cannot continue to rule in the old way, whilst the ruled were no longer prepared to be ruled in the old way. There is certainly plenty of evidence that the latter condition applies. But the Junta has always ruled by means of its physical force, its monopoly of violence. The current situation merely is a heightened expression of that form of rule.

But, Lenin also expressed a further condition. It is not enough that the ruled are no longer prepared to be ruled in the old way, they must have the means of ending that rule, and replacing it with something else. At the moment, there is little evidence that either of these two things exist. It is the classic example, of the inadequacy of anarchistic, and pacifist politics. The references, particularly given the role of the monks in the demonstrations, to Gandhi and India are wide of the mark. They not only totally misunderstand the role of time in such tactics – passive resistance had been going on for years in India prior to Independence it could not possibly work in the space of a few days or weeks – but also misunderstands the real reason for Britain leaving India, which had little to do with Gandhi, whatever the romantic notions of bourgeois ideology might want to depict.

The reason the British left India, as with most of the other colonies was that colonialism was an inefficient means of Capital exploiting foreign labour. It had been introduced to meet the needs not of Industrial Capitalism, but of Merchant Capital, and the old feudal aristocratic classes it was tied to. Colonial countries were rent based economies, where the social surplus was extracted not particularly by the relationship of labour to Capital, but by the ability of Merchant Capital to buy low, and sell high to local producers, and by the ability of large landlords to extract surplus from a largely peasant population. It provided commercial profits to the Merchants, and rent to the landlord classes. Unlike, capitalism proper where the objective dynamic of the system is the inescapable need of Capital to expand via the extraction of surplus value, the only dynamic of Colonialism was a subjective one, the pure greed for wealth, status and power of the ruling class.

Like commercial Capital itself it had little progressive about it in terms of a dynamic leading to a necessary development of the productive forces, indeed it usually had the opposite effect, as the experience of India demonstrated, turning a once powerful and wealthy nation into a poverty stricken and dependent one. It represented the opposite of all the progressive features of industrial capitalism, and its concomitant – imperialism. Industrial capitalism seeks where possible to maximise its rate of profit through the establishment of bourgeois property laws, and the rule of law. These above all else create the conditions of stability necessary for modern Capital to invest the huge sums required for efficient profitable production. If western Capital has withdrawn from Burma – and it has withdrawn large sums over recent years – if it is to withdraw even more, then it will be for this reason, the lack of such conditions for efficient profit creation.

The demands being raised, and the hopes that day after day of aimless street protests bringing down the junta, therefore seem doomed to failure. Only concerted working class action can bring a progressive solution to the present crisis, but as yet the working class in Burma itself appears to weak, and the working class internationally too disorganised, and lacking in self confidence to achieve that. If a solution is found, therefore, it is likely to be one that merely replaces the current regime, and its harsh, but inefficient exploitation of the workers and peasants, with another perhaps more democratic, less harsh regime, but one that exploits the workers and peasants all the more effectively.

The Burmese junta, like all such regimes, exists for the simple reason that the Burmese ruling class is too weak, after centuries of colonial rule, to exercise political rule in its own name. Where capitalist classes, normally, rule through the separation of the political regime from the state power, the state power being directly controlled by the ruling class, the political regime giving the appearance of some form of pluralism or democracy, in Bonapartist regimes like Burma the political regime, and the state power are fused. The result is a regime which rests upon the dominant social class is forced ultimately, in however a distorted form, to act in accordance with the economic dynamic of the mode of production, but where the political regime through the state power achieves a high degree of autonomy from the ruling social class, to the extent of acting in ways that appear contrary to the interests of that class, appear to transform the state power and the political regime into a ruling class in its own right. But such is merely appearance, and not reality. Ultimately, it is the objective reality of which class rules which determines. The stronger the ruling social class becomes in such states, the more ultimately it is able to tighten its grip on political power, the more its interests and ideas become dominant in the state power as its members find their way by a thousand routes into the dominant positions in the state, and political regime. It is why many formerly colonial countries have been able to transform themselves into bourgeois democracies without the need predicted by many orthodox Trotskyists for “Permanent Revolution”.

But, such is not the case in Burma, where the bourgeoisie remain weak, where the economy remains dominated by rent based activities such as oil, and other raw material production largely in the ownership of foreign rather than domestic Capital. The greatest benefit for workers in Burma would in fact be not the calls for an economic boycott, but for a more rapid industrialisation of the economy. For that reason amongst others the demands for such a boycott are reactionary. They represent the petit-bourgeois angst, and lack of faith in direct working-class action that dominate the Left, even its best elements, brought on by twenty years of working class defeats and passivity, let alone the petit-bourgeois politics of the pacifists and anarchists that stand in opposition to real working-class, socialist politics.

A boycott is a form of strike. What more working-class, socialist action can there be than the strike you may retort. But there is nothing socialist about a strike – it is a typically working class method that is true, but nothing socialist about it. There was nothing socialist about the strikes of the Ulster Workers Council, nor of the London dockers in favour of Enoch Powell. There can be strikes by Capital too. In fact, what is being asked for in most economic boycotts is precisely a strike by Capital, not by the working class. A strike can be a most efficient means for workers achieving economic goals, for raising wages etc. But there is nothing socialist about this either. As Marx put it long ago the task of socialist is not an improvement in wages, but abolition of the wage system altogether.

A strike is a very blunt instrument. Although, it may achieve its economic ends by striking directly at the interests of the individual capitalist, it necessarily attacks the interests of others too, including other workers. A strike only begins to take on socialist characteristics when it recognises this, and when it goes way beyond these objectives, and methods. In 1968, whilst French workers brought industry to a standstill, they also began to go way beyond it. Faced with the need to look after the needs of the weak, the sick etc. they ensured that power remained available to hospitals etc., that coal continued to be delivered to workers homes and so on. In short workers went beyond the simple strike, the withdrawal of labour, to a political action designed to meet their needs as opposed to those of the bourgeoisie, were led to adopt not the blunt method of the strike, but the more precise method of control over the means of production.

The demands for boycott are the demands for the blunt method of the strike, not the political method of control over the means of production. They are more likely to harm the workers and peasants of Burma than to help them. If workers internationally want to help the Burmese workers and peasants the means to do that do not run through what are effectively requests to the international bourgeoisie to fight their battles, but rather require that workers themselves take action internationally against the junta, and in support of Burmese workers and peasants. Demands that multinational companies, pay their Burmese workers better wages, provide them with Trade Union rights, and proper education and training as the basis for such workers equipping themselves to fight the junta. Action to black all supplies of arms and other goods and services to the junta etc. Finally, use of the Internet and other means of communication now available to assess in conjunction with Burmese workers inside and out of the country the situation, and to begin to develop an Action programme around which the workers and Peasants can begin to organise as an alternative to simply street demonstrations, which give the junta the opportunity to decapitate the movement, and demoralise it.

Ultimately, the working class must re-learn some of its own history from the last two centuries, and learn from other forces today. In both the 19th and twentieth centuries workers and socialists enlisted in the struggles of their fellow workers in foreign lands. Not for them a call for the bourgeoisie to fight their battles, or even a hope that the bourgeoisie might do something progressive. Today we see forces from the pacifists and humanitarians on the one extreme, to the political Islamists on the other organising to send their own battalions to the front lines. Of all the social forces in the world the one that is best able to be organised, which is organised as a basis of its daily life, the most numerous social force, and the only social force capable of providing a progressive solution – the working class – is the one that is not organised for such action – except when it is workers in uniform marching into battle under the control and in the interests of imperialist Capital.

Only, when the working class internationally reorganises, re-equips and re-arms itself technically and ideologically will a socialist solution to such situations become possible. That is not an argument for supporting some other bourgeois or reactionary solution as the next best option. It is an argument for beginning the process of that re-equipping and re-organising now.

Thursday, 20 September 2007

Prepare to Dust Off The Sliding Scale

Prepare to Dust Off The Sliding Scale

The world economy is booming. One of the largest investment firms in the world Bridgewater Associates has recently completely its regular analyses, which shows that for the first time since 1969, there is not one single economy in the world in recession. The IMF has just increased its forecast for world economic growth yet again. China where the Government has been trying to slow economic growth for fear of overheating has just put in economic growth yet again of over 10%, but that is put in the shade by the world’s fastest growing economies. Azerbaijan is forecast to grow by 26% this year, as is Angola as a result of the current high price of oil, Mauritania which does not have oil, but has gold and other raw materials is forecast to grow by 18%. I have given the background in this previous discussion - Kondratieff’s Long Cycles - but I want here to look at a more limited short term consequence.

Marx analysed Capital and noticed that it moved in cycles. Economists since have given a lot of thought to what causes these cycles. What comes out of Marx’s analysis is that these cycles are not like say those that cause sun spots. Natural cycles occur because of fairly fixed physical characteristics. Although economic and other social activity has some aspects, which are analogous it is the very fact of human intervention, which means that processes are mediated, and therefore less predictable. Moreover, within the realm of capitalist economic activity there is not just one economic cycle occurring, but several, each interrelated and affected by the other. So for example, at the beginning of the 19th century when the first such cycle was identified as occurring in 1825 this seem to coincide with the time when for the first time the real effects of the Industrial Revolution manifest itself. In the preceding period the groundwork for that was laid, in the preceding century many inventions are made for example spinning machines, the steam engine etc. but it is only at the beginning of the 19th century that these begin to play a major role, and in particular it is the introduction of the powerloom, and of steam power that has significant effects. Economic historians now believe that the extent of economic growth in the last third of the 18th century was considerably overstated, and that consequently economic growth earlier in the century understated, and this further illustrates the extent to which output rose in the first part of the 19th century. The downturn in 1825, therefore, seems to be attributable to a classic overproduction, the fact that output grows so rapidly that it outstrips the market. In contrast to Say’s Law (which actually was not developed by Say) which say’s that unfettered markets automatically clear it was obvious that there came a point where goods could not be sold whatever the price. Orthodox economists would describe this in terms of diminishing marginal utility. At a certain point consumers have so much of a thing that they do not want any more of it, or no more of it at current prices, and for capitalists to sell it to them at a price they might (or might not) be tempted to buy it at, would mean that they would make a loss on the Capital they have already outlaid on producing those goods, or at least a diminished profit.

So here we have one form of cycle, one on which consumers simply reduce their consumption or slow down the rate of increase. Today capitalists try to avoid this by diversifaction of product ranges, advertising or marketing campaigns to boost flagging sales, and of course built in obsolescence as well as continually changing designs, models etc. and creating a need for new products, so that consumers throw away the old.

Alongside this cycle is another that which affects the capitalists own purchases of production goods. Marx seems to have believed this played a significant role in the periodicity of economic cycles. In particular he seems to have been interested in the work of others that had studied the extent to which, for example, a factory building would last, or that other long term productive capital such as machinery was depreciated over. Again orthodox economists include this today in their theories of crises. Say 10 number of firms replace 10% of their machines every year as they wear out, and each firm has 10 machines. Then the firm manufacturing these machines has a regular order each year for 10 machines. Now suppose that economic growth increases so that each firm now needs not only to buy a replacement machine, but to buy a new machine in order to increase output. A 10% increase in demand for each of these firms causing a 10% increase in its demand for machinery results in a 100% increase in demand for the machine manufacturer. Orthodox economists call this the “Accelerator Effect”, but combined with this is the “Multiplier Effect”. What this means is that the increase in demand for these Capital Goods then has a much bigger effect on the economy than simply this demand. The workers of the machine making company are doubled in size, the demand for materials by the company double, the profits of the company appropriated by the capitalist double perhaps too. All of these people receive incomes from this, which they go to spend, and in doing so they create a secondary effect of new demand for yet more products, and this too leads to more incomes and more spending. Calculated mathematically then if on average consumers spend 90% of their income, then, if say the initial increase in demand for new machines amounted to £1 million then a total of £10 million would be added to the economy. Of course, were the economy to go into reverse then the opposite is true. Each firm might decide that it does not need even to replace any machines if trade is slack, and then the machine manufacturer finds he has no business at all.

So a second cycle is set up depending upon the average length of time machines last. But this is more difficult. Not only are capitalists decisions on whether to buy new machines affected by them wearing out, but as seen above they also depend upon their perception of the state of demand for their products. Improving conditions might cause them to buy more, worsening conditions to buy none. There will tend then to arise a certain degree of synchronisity in these cycles because demand for machines will automatically ebb and flow with changes in the condition of the economy in general, and so capitalists will over time find that they all enter a renewal cycle for their machines around the same time. Another factor strengthens this synchronisity innovation. PC’s are a good example. Throughout, the 90’s there was a clear cycle of replacement for PC’s, and the reason was quite simple. Microsoft brought out a new version of its operating system every two years, and other software suppliers geared their products to it. In addition new chips were introduced on around the same frequency so that improved hardware enabled improved more demanding software to run, which in turn stimulated further hardware development etc. Businesses, geared their IT investment plans to this cycle of upgrades. The same is true of other types of machinery. But this also poses a further problem. A business that has recently bought a new milling machine might find itself having to junk it because a new invention makes it obsolete. If its competitors buy the new machine which is 50% more efficient, then they are forced to follow suit.

Thirdly, there is the credit cycle. The credit cycle goes through basically four different phases. At the beginning of an economic expansion the demand for credit rises because industrial capitalists need more money in order to expand their production, and the more they sell the more money they are outstanding until it is paid for. This increased demand for credit may not result in higher interest rates, though, because the increase in economic activity also results in more money entering circulation, and consequently an increase in money capital accumulated, particularly as in this early part of the expansion the first beneficiaries are likely to be capitalists who, using the inventions developed in the previous phase which increase productivity, as well as having access to a pool of available labour from the reserve army, see their profits rise significantly through both higher sales, and higher selling prices with constrained costs. In the second phase the demand for credit is reduced as the economic expansion slows, and a period of stability sets in. In the third phase economic slowdown begins. Consumers begin to reduce their purchases and begin to think about saving in case of future problems. Capitalists no longer see the need to buy more machines other than is required for replacements, and with input prices having risen as reserves of labour and materials were used up profits become squeezed. The demand for money and credit falls, resulting in lower interest rates. During this period capitalists may begin to look for more lucrative profits elsewhere such as in Stock Market speculation as cheap money makes this a more attractive proposition. Marx refers to this happening with the Railway Mania in the 19th century, but similar things happened during the 1920’s leading up to the Crash of 29, and the same thing happened in 2000. In the fourth phase economic activity begins to fall – and the diverting of financial resources from productive activity to speculation can be a cause of that. People begin to pay their bills later or default, firms desperate for sales offer extended credit terms etc. The demand for money and credit rises to finance this extension, and late payment causing interest rates to rise again briefly before collapsing as economic activity collapses.

In modern economies because the state intervenes heavily in the economy through monetary policy this credit cycle is modified. If the state considers that economic activity is declining it can artificially increase credit by reducing interest rates thereby encouraging consumers to reduce saving and increase consumption, and encouraging capitalist to increase investment. Similarly, as in the US, UK, and Europe at the moment, and shortly in Japan the State can increase interest rates to slow down economic expansion. But the extent to which this is effective depends. If the economy is on a serious downward, and deflationary spiral reducing interests rates may be ineffective. Keynes described it as like pushing on a string. If I’ve just lost my job I’m unlikely to be tempted by the many adverts telling me they will lend me money to buy a new car despite my economic position, CCJ’s and other bad credit record. If I’m a capitalist and can’t sell the warehouse full of stuff I’ve produced I’m not likely to borrow money to expand my production. Japan had interest rates at zero for a decade, but couldn’t get people to increase their consumption because with falling prices in the shops there was an incentive to keep your money in the bank, and buy what you needed later when it would be cheaper.

All of these cycles interact with one another giving the overall short term economic cycles observable under capitalism. A crises within capitalism can be sparked within any of these three areas, but as Marx points out the real source of the crisis is always located within the sphere of production, and stems from the separation within capitalism of production from consumption, a separation that exists under no other previous mode of production.

But as Kondratieff argues these short term cycles also play into a longer term cycle. That can be broken down as follows, I think. Rather like Marx’s argument about the length of time that factories last there is a similar argument in relation to raw materials. Mines and quarries tend to be rather large investments based around long pay back timescales. They are not like a Mars Bar plant where you can fairly quickly increase or reduce production. If you have invested several tens of million pounds in a new copper mine you expect it to keep producing at pretty much the same rate for the next 20 years or so, you can’t afford to have all that capital sitting being only partially employed so you keep producing, and if need be reduce the selling price, you hedge the future price against such falls through the commodity futures market etc. But for the same reason capitalists tend not to rush out and make such large investments of capital unless they believe that it is going to be profitable to do so. It takes 7 years to get a copper mine up and running, for example. So it is easy to see why a fairly long cycle should exist for such raw materials. What tends to happen is that a splurge of exploration happens when as now economic growth begins to accelerate, because this economic growth occurs at a time when all the existing mines and quarries have taken out all the easy stuff, their equipment has started to become a bit long in the tooth and out of date, and so not only can they not easily meet the increased demand, but doing so is expensive compared to a new mine with better reserves, and using more up to date equipment. But the exploration takes several years, and once found it then takes another 7 years before production begins. In the meantime, demand continues to increase as economic growth accelerates and raw material prices rise.

In the Kondratieff piece referred to earlier I argued that the world entered a new K upswing in 1999. I would point to the fact that everyday for the last year commodity prices have been hitting new all-time highs. Large increases in share prices are normally restricted to small companies that grow quickly, but in the last year some of the biggest companies in the world such as Rio Tinto, Anglo-American, BHP Billiton have seen their share price more or less double. It is these huge increases in commodity prices which is fuelling the economic growth of countries like Azerbaijan, Angola, and Mauritius referred to at the beginning. The same is true of many of the other countries rich in resources in Latin America, and the Caspian basin. Kazakhstan has been turned into almost a modern equivalent of the Californian gold rush as companies fall over themselves to start up oil production, gold and copper mines etc.

The second aspect is that during the down leg of the K cycle there is more incentive to develop new ideas. But rather like the exploration and development of new mines etc. such new ideas take time to formulate and develop. These new ideas get taken up as economic growth accelerates in the upswing both as new types of consumer products, and as new methods of production. So although the microchip was developed mainly during the 1980’s and 90’s as a baseline technology it is only in recent years that that technology has really begun to be adopted widely with PC’s being a consumable, the Internet developing as a new means of communication and basis for production and consumption, and the integration of these various technologies in mobile platforms etc. A similar explosion of biotechnology applications is also likely on the basis of the baseline technologies developed there. But these technologies have the opposite effect to that of raw materials. These new technologies enable a large increase in output at lower unit costs. In part this counteracts the increased costs of raw materials inputs.

Finally, there is labour. Over the period of the downswing Capital has more of the whip hand than it normally does. It has more reason to resist the demands of labour faced with falling rates of profit, and more severe, and more frequent recessions. In itself these press down on labour. So for example at the beginning of the downswing Capital and its state begins to press down more heavily on labour as happened in the Miners Strikes of the early 70’s, and the subsequent pay policies and public spending cuts through to Thatcher’s all out class war first against the steel workers then against the Miners. Once pushed back Capital then not only reduces the ability of Labour to fight back, but undermines its bargaining power, increases the reserve army not just in its permanent form, but through temporary and casual working etc. Wages and conditions are pushed back. As the economic expansion of the upswing begins this demoralised and weakened condition is not easily shaken off. Confidence has to be restored, organisation rebuilt, new leaders developed. It takes time, and with new more productive technology the demand for labour may not rise quickly, and may rise in new unorganised industries. Indeed each Kondratieff upswing has tended to see the emergence of a new economic powerhouse that challenges and replaces the former dominant economy – in the present case China appears to be fulfilling that role, and that may require the development of a whole new Labour Movement.

I think all of these elements can be identified in the present conjuncture, and that should give confidence to Marxists that once more the conditions are developing for militant working class struggles. How these struggles manifest themselves will differ. In China wages are rising by 10% plus per year, and there are clear signs that Chinese workers are beginning to become more organised. The same is true of workers in South Korea and other rapidly growing Asian economies. Under these conditions workers struggles are likely to take on increasingly an offensive nature. Yet in the US, the UK and Europe despite signs of economic growth it is anaemic compared to China and elsewhere. The reason is that these economies are hugely inefficient compared to China which combines the latest technology, with low wage labour. Consequently, we see Delphi declaring bankruptcy with GM looking to be not too far behind.


In Britain we see Peugeot closing Ryton etc. Britain and the US also have a problem with huge levels of public and private debt which has been run up as an alternative to their economies cratering during the downturn, but it now acts as a drag on recovery. As with the PCE in France, it is quite likely that workers struggles in these old economies are likely to have more of a defensive nature, but as the victory of the workers and students in France demonstrates, and following on from the victory against the neo-liberal EU Constitution, which no doubt also helped develop confidence for this current victory against neo-liberalism, there is an air of change beginning to sweep into the Labour Movement even in Europe. In the US too, the demonstrations against the regime’s attempts to bring in new Immigration Laws shows that within the lower depths things are beginning to stir.

Soon the nature of the struggles will noticeably change from being defensive to offensive struggles, and Marxists and Trade Union militants must be prepared to reorient to that situation, or there is a danger of being left behind the class. It will begin to manifest itself in another aspect of the Kondratieff cycle. During the last 20 years western governments have pumped huge amounts of liquidity into the economic system to reduce the effects of recession. As Marx points out when economies are growing rapidly they require increased amounts of money to be put in circulation in order to enable goods to circulate. When real money – gold – was used there was a self-correcting mechanism which threw out excess currency from circulation. But since economies have used fiat currencies in place of gold this mechanism no longer exists. Consequently, any increase in the amount of money tokens (paper money and coins) or credit over and above what is required for circulation leads to a devaluation of these tokens, and thereby inflation.

See Gold and Money

This inflation has not been manifest because of two things. Firstly, the prices of consumer goods have been kept down because of imports from China, and other low cost producers which have sucked up a large amount of this excess liquidity, and is then recycled into Chinese Foreign reserves and loans back particularly to the US, hence the huge trade deficit of the US and UK. Secondly, the liquidity has gone into financial and other assets – in particular creating a house price bubble in the US and UK. However, there will come a point where the current economic expansion, having used up the readily available labour and other resources, and faced with demands from labour for wage increases, as the demand supply balance for labour tips more in favour of labour, will lead to pressure for higher prices. The Chinese Stalinists are already fearful of the imbalance between the cities and countryside, and are trying in the latest 5 year plan to direct resources to the country. One project is to drive a huge motorway through to Western China, both as a means of facilitating the transport of raw materials from Kazakhstan and other Central Asian countries, but also to stimulate economic development along its route into Central China. The rapidly rising living standards of Chinese workers are already fuelling a consumer boom, and increasingly the Stalinists will be forced to divert an increasing proportion of output to meet domestic consumer needs rather than the needs of western consumers. Combined with the likelihood in the next year or so of a revaluation of the Yuan the consequence is going to be a significant rise in consumer goods prices.

In short the next year or so is likely to see the return of inflation, and the current rise in the price of gold is a frontrunner of that. Inflation will make the current debates over pensions even more crucial because inflation quickly erodes the incomes of those on fixed earnings such as pensions. But inflation fulfils a special function for capitalism. It is the means by which it cons workers into falling real wages its means of achieving what Schumpeter and Mises euphemistically called “forced saving” i.e. the workers are forced to save by enabling the capitalist to make bigger profits.

Trotskyists developed the slogan “For a Sliding Scale of Wages” to respond to this kind of attack. It has been little used for the last 20 years or so both because workers have been too weak to enforce it, and because at least for the last decade or so inflation has been low. But during the 1970’s workers in Britain had a sliding scale of wages, ironically introduced by Ted Heath, and workers in Italy had the Scala Mobile for a long time, which protected them to some extent from inflation.

But its important also to understand the arguments behind the demand. The most obvious argument is that it sets out clearly a refusal of workers to pay for any aspects of the bosses system, and problems encountered by it. But during the inflation of the 1970’s and early 80’s there was another argument to be had. The argument that wages caused inflation. It is important for Marxists to nail that argument as completely wrong.

Marx sets out the argument in a pamphlet – “Wages, Price and Profit” in a polemic against Weston. Marx’s argument is straightforward, and one that can be argued even in the terms of orthodox economics. His more detailed explanation is given in the link above on Gold.

Marx says suppose that wages rise, what is the sequence of events that follows from this? The first thing is that workers have more money to spend, and so spend more on wage goods. This increased demand for wage goods might then cause a rise in their price. At the same time the capitalists employing these workers will in paying out more wages suffer a fall in profits so that they will have less money to spend. Because these capitalists have less money to spend their demand for luxury goods and capital goods will fall, which will cause the prices of these goods to fall also. But the higher prices of wage goods means that the producers of these goods will make higher profits, whilst the producers of luxury goods and capital goods will make lower profits because of their lower prices. Seeing this capitalists producing luxury goods and capital goods will switch production into the more profitable production of wage goods. The increase in the supply of wage goods will then reduce their prices, and the reduced supply of luxury goods and capital goods will increase their prices until such time is this adjustment brings about an equilibrium of supply and demand, and equal rates of profit in each of the three sectors.

Consequently, as Marx demonstrates an increase in wages does not cause inflation it merely causes a redistribution of value between workers and capitalists with a consequent reallocation of capital away from the production of the things capitalists spend their profits on, and towards the things workers spend their wages on.

It flows from this that if wage increases are not the cause of inflation then workers should not suffer as a result of inflation. It is necessary to ensure as a minimum that a sliding scale of wages is implemented so that any increase in prices calculated by committees of workers is automatically built into an increase in wages at the end of each month. Workers can then negotiate improvements in their pay over and above that as usual. But workers need also to demand such monthly indexation of pensions and benefits on behalf of those that cannot take action to ensure this themselves.

Gold - Why Its Price is Soaring

You may have noticed in the press or on TV that the price of gold has been rocketing up, and now stands at prices last seen 25 years ago. When the price of gold moves up sharply like this, it is an indication tht deep within the bowels of the capitalist economy something is stirring, and its usually not something good. The last time gold rocketed like this, for example, coincided with the high inflation of the 1970's, and the onset of the worst crisis since the end of the second world war, the slump of 1974-5. That slump and inflation continued until the beginning of the 1980's when the crisis of capitalism was resolved in the interest of capital and at the expense of labour by the class war politics of Thatcher and Reagan, which smashed labour organisation in order to drive down wages and conditions in order to push up profits. From 1982 until 2000 Stock Markets entered a long secular bull market on the back of that victory for Capital. At the same time Gold went into a steady decline, having reached a peak of over $800 an ounce it fell to a low point of $250 an ounce in 1999. From that point it has more than doubled, whilst Stock Markets have crashed and then stagnated. Gold's rise is most marked in terms of its dollar price, and as I will try to explain this is largely the explanation behind what is going on, but in the last year or so the price of gold has risen in sterling and euro terms too, by around 30%. What then is going on.

In order to explain it you need to understand something about the nature of what money is, and gold's specific role. I am giving a more detailed account of Marx's Theory of Money in a separate post below, but for now let me try to give the very short version.

Marx explains that the exchange value of commodities is determined by the amount of labour required on average for their production. On this basis you can work out that if a pair of shoes contains 10 hours of labour, whereeas a coat contains 20 hours of labour then 1 coat will exchange for 2 pairs of shoes. In a society where people barter this is fine. If you have a coat to exchange and want shoes you find someone who has shoes and wants a coat. But this is cumbersome. The more people trade the more a better solution is needed. Hence money. If you can find a commodity that everybody wants, which everyone will accept because they can use it to buy other things they want then you can price all commodities in this one commodity. For example, at one point when salt was very valuable salt acted as money. But most societies have used precious metals because, using Marx's method of determining value they tend to be very valuable because it takes a lot of labour to find them, establishing mines, get them out of the ground, smelt them etc. They are also durable, and capable of being divided up into various weights that can be used to denominate different amounts of value. Hence, gold, copper and silver have tended to be the most commonly used metals - copper for lower denominations, silver for more intermediate values, and gold for the most expensive purchases. Of these gold as the most valuable became predominant, and the values of silver and copper coins became functions of the value of gold.

For a long time actual coins made from these metals were used as money. This had many drawbacks. Gold smiths and usurers werre the most common possessors of gold hoards, and they would charge a premium over the value of their gold in order to release it to be minted into coins. Moreover, gold coins could be "clipped" in other words people would snip bits of the coin in order to accumulate gold whilst using the coin at its full value to buy things. Government's too in issuing coins could issue coins which had a face value equivalent say to a quarter of an ounce of gold (for a sovereign), but which actually contained less than that. In addition as trade increased rapidly during the 19th century using physical money was cumbersome. Capitalsist began to use instead Bills of exchange in their internal dealing with one another. For example if A sells £1,000 worth of cotton to B then rather than requiring B to give him £1,000 of gold currency straight away a Bill of exchange is raised. This is like an IOU which states that B owes A £1,000. A can use this Bill to purchase goods from C, by simply passing it to C so that B now owes the money to C not A. Quickly, Discount Houses arose that would accept these Bills and pay the owner of them money up front, in return for a discount. These became Merchant Banks. It is a small step from there to replace the actual mettalic currency in its higher denominations with the logical extensions of these Bills, paper money. All that this paper money does is to promise to pay the bearer a sum of gold. If this paper money is then issued by someone whose authority guarantees that this gold can be handed over - for example - the State - then this paper money becomes as good as gold.
However, between nations gold continued to reign supreme. There was little point in a French farmer being paid in English pound notes. So, if England bought £10 million pounds worth of goods from France, and rance bought £15 million of goods from England, then France owed England £5 million pounds, which would be settled by a transfer of gold from France to Engalnd.

But, then things moved on from there. Because, Britain became the biggest industrial country in the world during the 19th century, and its Empire stretched around the globe, many things that were bought and sold internationally were priced in pounds. Nations could and needed to accumulate pound notes in order to buy things. As long as the value of the pound remained fixed to the value of other currencies by them all being fixed to the price of gold then pound notes could act internationally as well as within Britain as money that was as good as gold. That was what happened, currencies were fixed to the value of gold according to the Gold Standard, and the pound became an international currency alongside gold - it became the so called reserve currency.

That continued until WWII. In the First World War Britain almost bankrupted itself by diverting a large proportion of its production into war production rather than wealth producing production. In order to pay for its production it suspended the gold standard and printed pound notes to cover its expenses. The pound notes continued to be accepted because of sterling's role as reserve currency, but the effect was to increase the number of these notes in circulation in relation to gold, and therefore to reduce the value of each note. At the same time the US was becoming the world's premier industrial power. The introduction of mass production techniques, combined with the introduction of electric power in place of steam led to huge increases in US production. Moreover, because the US stayed out of the war at the beginning it could use this production potential to meet the needs of European countriesw including Britain, whose production capacity was being wasted on military expenditure. As one of the jokes on Dad's Army went - the only thing Americans charged in the First World War was the interest on the money they lent to buy their goods.

Typical of the way capitalism operates in a contradictory manner, even the huge icnrease in US productive power at this time, which you would think should have provided increasing wealth led to disaster. The US began to export more and more goods abroad, compared to what it imported. In order to pay for these goods, therefore, other countries had to send gold to the US. Now the Gold Standard was supposed to provide a self-regulating mechanism to prevent these imbalances from getting seriously out of whack. Countries that sent gold out of the country had to increase their interest rates which cut their money supply reigned back consumption and activity, which reduced the amount they imported. Countries like the US which received gold did the opposite. But the US was already booming, and lower interest rates caused the boom to expand even more. BUt the more the expansion took place the fewer opportunities for profit there were. The rate of profit began to fall, so just as they had done during the 19th century capitalists began to look for places to invest their money where they could get higher returns - they began to speculate. On the back of that came the Stock Market boom of the 1920's. But, just as such speculation in the Railway Mania had resulted in catastrophe in the 19th century, so it did in 1929 with the Stock Market crash, and the massive poverty and unemployment, and waste of resources that followed with the Depression of the 1930's.
An almost identical thing happened with the crash of 2000. Massive increase in production brought about by new technology. Large increase in money supply, low iinterest rates brought in on aoccasion to offset potential panics - the Asian currency crisis, latin American currency crisis, Russian rouble crisis, Millennium Bug fears etc., and ridiculous speculation in Internet companies whose share pricres rocketed despite most of them never having a chance of making any money.

From the edn of WW2 the US occupied the role Britain had done. The dollar became the world reserve currency. In the 1970's France said it wanted to be paid in gold not dollar's because they resented the fact that the US could pay for its imports by simply prinitng dollars, which it did to pay for its expenses in the Vietnam war. Nixon abolished the dollar's link to gold, made it illegal for US citizens to hold gold, and thereby set the basis for the US to use its position to basically buy goods with increasingly devalued currency. The US since then has gone from being the world's largest creditor to the world's largest debtor. US citizens spend kmore than they save, the US government has a budghet deficit bigger than any the world has ever seen, and it pays for all this by pruinting more dollars. From what I have said before it can be seen that the only way for the dollar to go then is down. But in fact although the dollar has fallen against gold, and against sterling and the euro its value has not fallen that much. Why? Because of its continued role. To buy oil you must acquire dollars because oil is priced and sold in dollars, though Iraq changed that just before it was invaded and Iran is promising the same now. Moreovr, other countries such as China which sell a lot to the US buy US securities such as shares and Government bonds so that the US has money to buy Chinese goods and keep Chinese factories epanding.

In addition worried about potential recession and with their economies pretty stagnant already other countries like Britain, Europe and Japan have kept interest rates low and printed money in order to try to keep consumers spending and factories working (though increasingly that spending keeps Chinese factries rather than European factories working. So with the value of all currencies being devalued as governments print more of them, the only money that can go up in value is real money - gold. If the crisis gets worse, and more money is printed - gold will go much higher. To get to its previous high in real terms it will have to go to $3,000, and some gold investors think it could go as high as $5,000 or even $7,000 an ounce - the latter would match its perentage icnrease in the late 70's early 80's.

Globalisation provides tremendous opportunities for Capital. Bringin huge new areas of the world fully into the capitalist world economy, that is bringing them within the framework of a set of property rules which guarantee the ability for capital to operate and make profits, establishes vast new markets for the sale of commodities, and more importantly for Capital whole new workfoces that can be subjected to Capital and produce profit.

But at the same time it creates some significant problems. Despite the fact that it now operates on a global scale, and searches out the most profitable locations in which to establish production, Capital remains significantly tied to the nation state (though in Europe and to some extent in Asia this is becoming more tied to an economic bloc as for example the EU takes on more of the functions of a nation state). Partly this is because for very large companies a large part of their operations remains in their homeland, and the connections they have built up over generations to guarantee their ability to continue making profits are connections most closely held with their domestic state. This poses some problems.

Take a large British company like BP. Its operations are spread across the globe, but its ties are most closely with the British State. Indeed some would argue that largely behind the decision to invade Iraq was cocnern on the part of Britain to ensure the interests of companies like BP were protected - not just in Iraq but within the region. Anything that weakens the British State, let alone which might challenge the existence of that state, or might see a change of regime threatens BP. Capital as a whole has an interest in preventing instability in the main economic centres, Capital most closely associeated with those centres has an even greater interest.

But the emergence of new dynamic centres of production in Asia, and Eastern Europe has the potential for creating such instability. Capital is forced by its very nature to seek out these more profitable locations, but in doing so it de-industrialises its own heartlands. The argument has always been that this would not be a problem because as more mature products became products made in developing countries, so labour and capital would move into new higher value production at home. But, countries like China and India with huge highly educated workforces are able not to just to become the centres for production of mature products, but are increasingly the centres for high value added production too.

The effect is most pronounced in the US, but Britain has similar characteristics. Increasingly, the US has moved out of factory production. It continues to be a major source of food because of its huge, fertile areas, and large capital intensive farms. It is probably the world's premier producer of high value products, through companies such as Microsoft, Intel etc. But the employment opportunities in these industries are very limited, partly because they are high value added industries that rely on a relatively small number of very highly trained and specialised people. The rest of its production it has in great swathes moved to low wage countries, or worse still for the US has been foced out of by new companies based in these countries that have simply undercut it and driven it out of business.

Yet unemployment is relatively low in the US - this has to be considered carefully, however, besides the fact that US unemployment statistics hide a large amount of unemployment because huge numbers of workers that no longer receive benefit, and have given up the hope of a job no longer register, the way the US collates the data is fraudulent. It assumes that large numbers of people are self employed, and it is not infrequent that this figure has to be periodically adjusted by around half-million or so people. One of the reasons that unemployment is low is that large numbers of people have been employed in both retailing, and in service industries.
But this is not self sustaining. In order to pay for the goods you import you have to export other goods. Some "goods" produced in service industries can be exported and be very profitable such as those related to the Financial Services industry. But many of the people employed in service industries are not of this type, they are people employed at McDonalds, or hotels, etc. These are things which are very difficult to export or to earn foreign currency income from. The biggest retailer in the US is Wal-Mart, and it demonstrates the problem America has. 70% of everything sold in Wal-Mart comes from China.

So a large number of US workers are employed selling things to other US workers, but the things they sell are made outside the US. The US does not produce the goods to sell as exports to pay for these goods so it has to borrow the money, or print the money. As I said above it does both. The US has effectively been robbing the world blind for more than 30 years by using the role of the dollar as reserve world currency. It buys things, and prints more dollars to pay for them. The effect is that countries selling to he US get paid back in money that is continually being depreciated as more of it is printed.

The Chinese were wise to this, and prevented it by pegging the renminbi to the dollar. So as more dollars are printed and the dollar falls so the RMB falls too. This has caused great consternation in the US. The US has the gall to accuse the Chinese of currency manipulation because they refuse to accept devalued US currency in exchange for their goods. This has caused a problem for the US because its largest trade deficit is with China. So the US has to borrow money. The Chinese are happy to oblige because China is icnreasingly buying up the US by the backdoor, and at the same time by lending to the US the US keeps buying Chinese goods, keeping Chinese workers employed, and making profits for Chinese companies.

But those workers still employed in manufacturing in the US have been finding over the last 20 years that their wages have been falling in real terms. Their companies cannot compete with companies based in China paying workers a 30th of what US workers receive, and are forced to cut or hold down prices, and wages, and increasingly to lay workers off, cut health insurance, pension contributions etc. GM which until recently was the world's biggest car marker is in this position as I have detailed in previous posts. It looks almost certain to go bust. Ford is slashing jobs and will probably follow suit.

But US workers have made up for stagnant and falling wages by other means, which have in turn been caused by the vast sums of money printed by the government. After the Stock Market crash of 2000, the money sloshing around in the economy had to go somewhere. Much as in Britain it found its way into property. House prices began to rise sharply. Seeing their house increase in price US workers thought they had become better off, and were like their UK counterparts encouraged to borrow against their house to finance their consumption. They have done so with vigour, running up huge debts which have enabled them to keep consuming even while their wages were falling - hence as I said above they now spend more than they earn.

The US government rather like the British government and European governments have every reason to encourage such behaviour. The last thing they want is for the whole thing to come tumbling down even as it did in 1974, let alone as it did in the 1930's. In fact given the larger scale of production, and the enlarged sphere of activity for Capital worldwide a major crisis now, would probably be worse than the 1930's. That would cause huge problems for Capital. It relies on the ideological superstructure in which continually rising living standards are a central plank. Large scale mass unemployment lasting for a prolonged period would undermine the ideology of consumer driven capitalism, leading inevitably to large scale civil unrest.

In Europe things are slightly different because governments have maintained higher levels of social welfare than in Britain or the US, and so higher levels of unemployment for example in France and Germany have not caused unrest - though the riots last year in France show how easily that could change if economic crisis erupted.

For some time now financial markets have been worried that at some point the Chinese, Japanese, the OPEC states etc. that finance US consumption will decide enough is enough, will fear a sharp drop in the dollar which would seriously devalue the worth of their US assets, and that they will begin at least to slow down their lending to the US, or worse might begin to withdraw some of it - which they have so far avoided because to do so would cause the very collapse they fear. But a number of these countries as well as Russia which is piling up large foreign earnings with the rise in oil prices, have announced they will begin to diversify their reserves, buying amongst other things gold. Iran is creating an oil market based in Tehran which will price oil in Euros, and will challenge the New York Mercantile Exchange (NYMEX) as a centre for the trading of oil. China is buying gold and euros, and is using some of its dollar reserves to buy commodities such as coffee, copper, zinc, iron, etc. on the commodities exchanges as well as doing deals with countries in Latin America and Asia for long term contracts for these goods.

None of this is good for the US in particular, but on a lesser scale nor is it good for Britain or Europe. If the US and Britain (which also has a huge Trade Deficit, and massive private indebtedness) find that people no longer wish to lend them money then either they will be forced to print large amounts of paper curency which will trash the value of their currency and lead to massive inflation, or they will be forced to send their economies into a large retrenchment, with skyrocketing interest rates to deter spending and increase saving, in the hope that they can export the surplus production to pay off their debts. Europe in general which runs a trade surplus is in a less serious position, but if the US let alone the US and Britain, went down the latter course Europe would find not only that its exports fell catastrophically, but that it was competing with a flood of British and US exports too. In short either scenario leads to a huge world crisis. Within that context and the risk of each country trying to rescue itself by printing more and more money (the new US Fed Chief, Ben Bernanke, famously said that in order to stave off depression and deflation in the US they could crank up the printing presses and throw dollar bills out of helicopters) the risk would be not just of the kind of 20% plus inflation of the 1970's, but of the kind of hyperinflation of Germany in the 1920's.

Under those circumstances, the value of real money - gold - shoots to astronomic levels. Savvy investors such as Warren Buffet and George Soros are already banking on the dollar falling severely. Just over a year ago some of the so called Gold Bugs - the super rich who made billions in the late 70's when Gold went up from $30 to $800 dollars an ounce decided that they saw all the same circumstances now as then, and began to buy gold in large quantities.

In the 1920's the Roaring 20's seemed to convey the message that everyone could be rich. Capitalism seemed to be producing never ending wealth. Overnight it turned into the opposite. Capitalism is cock a hoop at the moment after he fall of Stalinism, but a look beneath the surface shows that all of the contradictions that Marx analysed 150 years ago continue to mount and become heightened. The capitalists might not share that analysis, but significant sections of their more far sighted members iknow that all is not well. That is why gold is going up, and is likely to continue to go up, and up, and up.....

Wednesday, 19 September 2007

Buy Gold and Baked Beans

The fright within the ranks of the upper echelons of the capitalist system is now palpable. Having resorted to desperate measures over the last 20 years of Government intervention into the economy in order to bring about some semblance of stability in order that the big capitalists in the West could continue to make profits in economies that were increasingly uncompetitive, having created in the process an even greater source of instability through the accumulation of unsustainable levels of public and private debt, the chickens came home to roost, and as yet only the first few have landed. But in line with the philosophy of neo-liberalism, which masquerades as a philosophy of free trade whilst intervening on a massive scale to guarantee big capital, the state is once again stepping in to save them from the consequences. At least that is the intention. The outcome is likely to be different.

From a situation where only a few weeks ago economists were looking at the prospect of rising interest rates throughout the world economy to combat an incipient inflation arising from the past excess of liquidity pumped into the system, a situation in which the Bank of England was refusing to add resources into the system to lessen the problems of the credit crunch, we have gone to the Federal Reserve cutting its Discount and fed Funds rate by 50 basis points, whilst the Bank of England announced that it was putting another £10 billion into the system available for banks to lend in three month interbank funds, as opposed to the overnight funds it has until now insisted it will only provide.

But this totally misunderstands the nature of the current crisis. The crisis is NOT a crisis of liquidity. At this point of both the Long Wave, and of the business cycle liquidity is usually abundant. Increased real economic activity calls forth an increase of money in order to circulate the extra commodities being produced and traded. A proportion of this money is saved, accumulated as profits and thence money capital. A look at the Balance Sheets of capitalist enterprises around the world shows this analysis made by Marx, to be absolutely accurate yet again. Companies around the world have burgeoning cash balances, those in Asia more than most. The problem most certainly is not one of liquidity, indeed the problem is one that has been caused initially by liquidity, too much liquidity that then encouraged reckless speculation. Again a phenomenon analysed by Marx at the previous stage of the cycle.

Pumping more liquidity into the system at the present time, might for a very short time give the appearance of a solution, but it will no more do so than does giving another dose of heroin, cure an addict. The problem is not liquidity, it is that the reckless speculation created by the previous excess of liquidity has placed on to the books of financial institutions assets which are in practice next to worthless. The economy at this level is a macrocosm of the economy over the last few years at a microeconomic level.

Anyone that watches daytime TV cannot be amazed at the relentless advertising by companies that want to get you to borrow money from them. They don’t care what the money is for, they don’t care if you can pay it back, they don’t care if you have CCJ’s, been declared bankrupt or whatever, and even Carol Vauderman recommends that you roll up your debt into an even longer term debt with one of the companies. That has also been the attitude at a macroeconomic level. But when it becomes apparent that the person you lent the money to not only cannot, and will not pay it back, but that the assets you thought you could repossess, such as their house or car actually have no value, or less value than the money they owe, then the whole deal begins to turn sour. Even if those that lend you the money in order to lend out to these poor schmucks becomes more readily available, even if the interest rate you can borrow this money at falls significantly you still aren’t going to lend it to people that won’t pay it back, and whose assets are worthless.

That is the situation the banks and financial institutions are in now. They won’t lend to each other because they don’t know how much each other is worth, don’t know if they will lose any money they lend to one another. The Bank of England can offer to lend as much money as it likes at whatever interest rates it likes, but it will not change that reality. Only if the Bank or the state were to buy up those worthless assets would that change, meaning that the state had bankrolled reckless speculation, the so called moral hazard now frequently mentioned. The end result is likely to be some of that, but also the buying up of Western financial institutions at knock down prices to account for these worthless assets, by those that have the funds to do it i.e. the Chinese and Russian Stalinists sitting on huge cash piles.

But, not only will this policy fail to address the immediate problem, but it likely will create a much greater problem, if not immediately then in the not too distant future. Economies based on paper currencies are not the same as economies based on real money – gold, silver or some other money commodity. As Marx put it, gold circulates because it has value, paper money has value because it circulates. But the more of that paper put into circulation the less that value is. An economy that grows by normal means, automatically draws more real money into the economy in order to deal with the increase in the circulation of the commodities thrown on to the market. But, an economy that is based on paper money can turn this process upside down. Under certain circumstances as the Monetarists point out an economy with underused resources can by the injection of liquidity bring forth an economic expansion, and an increase in the value of commodities in circulation thereby soaking up the increased liquidity. But, capitalism is an anarchic system. There is no guarantee that the increased liquidity will do this. It can just as easily go to buy imported goods where they are cheaper, or into speculation on stock markets where capitalists believe that they can make bigger profits than by productive use of their capital, or it can go to feed a bubble in house prices. Some may feed increased consumption and production of domestically produced goods and services, but there will always be some leakage of a smaller or lesser amount.

Economies that are small and weak soon find that the consequence of such policies is inflation, and a rapidly weakening currency. But large economies, especially one such as the US whose currency acts as world money can for a long time buck this trend. No one today would take paper currency from Zimbabwe and attribute to it the same value it had last week let alone last year. But the dollar defies that law of economics – or at least it has until now. The reality is that in the US – and the same is true for the UK on a smaller scale – larger volumes of commodities HAVE been circulating within its economy, but these commodities have been ones often produced in China or other Asian economies, not ones produced in the US. It is not the increased value of commodities in circulation that has brought forth increased money tokens, but increased money tokens that have brought forth the increased circulation. The result has been over the last twenty years a ballooning trade deficit, and government deficit, financed like the person with no job, CCJ’s, by borrowing.

Over the last few years the commencement of a new Long Wave uptrend has begun in the world economy to reverse the trends of the last 20 years. Rapid world economic growth has fuelled soaring raw material and food prices, in Italy recently there were demonstrations over the soaring price of pasta due to wheat and corn going into more profitable bio-diesel. And in those countries at the forefront of the economic advance in this new phase such as China, and India real wages have been rising fast, bringing forth now developing home markets in these countries as alternatives to selling to the West. In short, the basis for inflation has arisen as costs rise, and capitalists seek to maintain their profits through increased money supply. Kept in check for a time by the huge increases in productivity that the development of the last 20-30 have made possible, and by the exploitation of large reserves of previously untapped peasant labour, and labour previously taken out of the circuit of Capital in Eastern Europe, the strains on the system were becoming evident, bringing forth a series of interest rate rises in the developed world. The current crisis against all the logic of what was needed from a capitalist perspective, has forced a reversal of that policy.

In reality what the Federal reserve did on Tuesday evening was to announce that it was prepared to destroy the dollar to deal with the present problem. But, that decision has caused the Bank of England effectively into having to adopt the same position. The ECB which has been holding out is likely to follow suit. But if all paper currencies get ditched, then what. Only real money can benefit, which is why Gold has soared to new 27 year highs in the last few days.

What the capitalist states have announced through their instrument of choice when it comes to economic intervention, the Central Banks, is that yet again workers will be required to pay the cost of the current crisis, first by bail-outs of failed banks, but more importantly by a massive rise in inflation. IN the 1920’s in Germany in similar circumstances the paper currency became worthless. People carried their wages home in wheel barrows, which by the time they got home would only buy a loaf of bread. IN those conditions only real assets, tangible things are worth anything. Gold as the store of value goes astronomically high – as another example at the end of the 1970’s Gold went in less than a decade from $30 an ounce to $800 an ounce. In Germany at that time the best things to own were your own house so that your rent or mortgage payments didn’t double every few days, and plenty of tinned food, which could be used as currency to buy other goods.

As a footnote if you have your money in a small bank or other institution, beware. On Newsnight last night the Chairman of the FSA, Sir Callum McCarthy, when questioned said that the Government’s guarantee to depositors did not extend to all banks. It only extended to those banks, whose failure presented a systemic risk. Yet another example of the true face of neo-liberalism – state intervention on behalf of the big capitalists at the expense not just of workers, nor even the petit-bourgeois, but of the small capitalists too.

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Monday, 17 September 2007

Northern Rock(ed)

The crisis at Northern Rock should come as no surprise, to anyone that has been reading my blogs and comments over the last couple of years. It is part of the slow motion train wreck I have been saying was almost inevitable as a result of the huge accumulation of debt promoted, and forced upon western economies, in particular the US and UK. That policy of credit fuelled expansion, and the bail out of Northern Rock – likely to be only the first of a series of bail-outs some much bigger than this one – exposes the myth of neo-liberalism that it was about free markets and non-intervention – a myth also bought even by some on the left see Dave Broder’s comment here as part of a wider discussion, and my subsequent response. The reality is, as I said in my response there, the capitalist state has been intervening on unprecedented levels over the last 20 years, and without it, western capitalism would have undergone a severe crisis, perhaps worse than the 1930’s.

What is the background? Marx was one of the first to analyse the fact that capitalism moves in cycles. He identified some of the causes of these cycles linked to investment, and credit for instance. This work on cycles is linked to, but not identical to his analysis of capitalist crises. Later economists such as Schumpeter borrowed much from Marx’s work to analyse cycles further. Schumpeter also borrowed from the work of the Russian economist and statistician Kondratiev, who in the 1920’s used Marx’s method (though Kondratiev was not a Marxist) to develop an analysis of long waves of development lasting between 40 and 60 years peak to peak.

I have given a detailed account of Kondratiev’s work, and the Long Wave theory here. There is little dispute that these long waves can be statistically identified. There is dispute over the causes. Using Kondratiev’s analysis, the end of the downward cycle which began between 1914-20, which tied in with the revolutionary upsurge at the turn of the conjuncture, and the subsequent defeats during the downturn through the 1920’s and 30’s, the new upturn should have begun around 1945, but is usually seen to have started in 1949, and, as predicted, lasted until the late 60’s early 1970’s. Indeed the crisis beginning in 1974 and detailed in Mandel’s book “The Second Slump” can be identified as a classic example of this turn and conjuncture.

Capitalist states throughout the world responded with Keynesian demand management policies, pumping liquidity into the system, which not only stoked inflation, but also failed to work, leading instead to stagflation. Faced with this crisis, capitalism did what it always does in such situations – it placed the weight of the crisis on to the working class. In Britain, Thatcher, and, in the US, Reagan turned up the heat in the class war. In Britain, unemployment in the 80’s, soared to levels higher, in absolute terms, than during the 1930’s, and unemployment, in the US, soared too. In Britain, Thatcher paid for the higher unemployment by squandering the riches of North Sea oil, in order to destroy union power, and drive down wages, in order to push up the rate of profit. In the US, Reagan achieved a similar victory, by using the position of the Dollar as the world’s reserve currency, in order to force other countries to shoulder some of the costs. Although the new Fed Chairman Paul Volcker slashed money supply, and raised interest rates to historically high levels, the Dollar tumbled against the Mark.

But having secured the necessary victories over organised labour, both Britain and the US, seeing mounting social chaos, and witnessing problems for their own capitalist class, began to turn their attention to stabilisation of the system. Another factor played into the scheme. In the late 80’s, Stalinism was losing its grip throughout those areas in which it once had political influence, in Asia in particular. Capital, in search of new investment opportunities, was looking for even cheaper labour to exploit, and these new economies opened up to it, in what we now call globalisation. If anyone had a theory, which closely reflected the process unfolding at the time, it was the view expressed, at the beginning of the century, by Karl Kautsky in his theory of super-imperialism.

Capitalism was presented with new opportunities, but serious threats. In this new world, capital flowed to these emerging economies, which grew rapidly, but, in so doing, it put even greater pressure on the old manufacturing industries in the West. A process known at the time as de-industrialisation. But, in the late 80’s, and throughout the 90’s, the West, and the UK and US in particular, responded by hugely increasing the service sector of the economy, both in the public and private sector. This had a number of consequences. Firstly, many of the jobs created in the sector were low paid, low status jobs – though a relatively few such as those in the Financial Services sector were not, on the contrary they were highly lucrative. Secondly, although some of these new jobs produced services, which were exported, many did not. This was important. Services that were exported produced earnings, which paid for the growing volume of imported manufactures, those which were not exported could only be bought effectively by credit.

What then emerged was a huge shell game. The US and UK, in particular - other European capitalist states have not been so guilty, and have persisted with higher levels of unemployment and lower growth for longer - simply began to print money i.e. to increase credit which was used to pay for imports. At the same time, the easy credit resulting from this monetary policy encouraged consumers to spend more of their money, and save less of it. In the US, savings rates have been negative for some time, i.e. people spend more than they earn. That was part of the intention, because without the demand this created, unemployment would have soared. In the 1970’s this policy had led to inflation, and stagflation. But, in the late 80’s and nineties, it did not. Inflation, as Marx pointed out, is not the result of an increase in costs. Higher wages, or even higher oil prices, do not cause inflation. Inflation is caused by an increase in the value of money put into circulation greater than the increase in the value of commodities put into circulation. Inflation arises when the capitalist state increases the money supply in this way as a means of defrauding the working class, of covering its increased costs at the workers expense.

But, in the late 80’s, and during the 90’s, the volume of commodities thrown into circulation rose astronomically as a result of the economic revolution in Asia. Moreover, although credit expanded in the West, in China and other Asian countries huge surpluses of savings mounted up, balancing out the excess spending in the West. Capitalism, however, is a system which functions by means of the continual resolution of contradictions. The US is the clearest example. On the one hand, US workers having suffered through de-industrialisation, and their living standards and ability to fight, undermined by Reagan’s class war offensive, saw real wages fall from the 1980’s until today. US workers today work on average two weeks more, per year, than they did 30 years ago, mostly in overtime. In order to maintain their standard of living, they used up any savings they had, and made up the rest with borrowing. This was facilitated and encouraged, from the late 80’s onwards, by increasingly low real, and then nominal rates of interest. With consumer prices kept low through the importation of increasing volumes of cheap Chinese manufactures, the incipient inflation that the increase in money supply should have created, found its way into other areas of the economy, primarily into asset classes such as, first, the Stock Market, creating the Stock Market bubble of the late 90’s, and subsequently, after it burst, into property.

But, as the property market began to bubble up, the consequence was to provide consumers with an asset against which they could borrow even more money. Lenders, seeing increasing numbers of people wanting to get in on this apparently never ending upward cycle, wanted to lend to anyone that wanted to borrow. Indeed those who were least able to pay back any borrowings were the most profitable, because they could be fleeced for higher interest rates on their subprime loans, and if they failed to pay, their now higher priced home could simply be repossessed. The only problem such lenders faced was how, with less and less savings by US citizens, were they to raise the necessary funds to be able to lend out the increasing amounts of money? The answer, in the deregulated financial markets instituted during the 90’s, was simple. They bundled loans to thousands of borrowers up into packages, which could then be sold to a variety of other financial institutions such as Hedge Funds. The Hedge Funds then sold these packages via their own Funds to investors all over the world, investors, which included other banks, financial institutions and pension funds. But these institutions also bundled their own loans up similarly, and sold them on to other institutions. Literally trillions of dollars in loans then circulated around the world’s financial markets, in ways which even the bankers and central bankers themselves admitted they did not fully understand. But this meant a problem. If you buy units in a Unit Trust, you can, to some degree, assess whether the fund is value or not, by assessing the value of the companies into which the Unit Trust invests. But how can you assess the value of a fund, when you do not know the value of the assets in which that fund is invested? Ultimately, the value of these funds was determined, not on any rational basis, but purely on the basis of supply and demand for the Fund, and on the assessment of the credit rating of the institution selling the Fund by the various Credit Rating agencies such as Standard and Poor’s and Moody's. 

But, two years ago, the writing was on the wall that this house of cards was going to tumble. The US had been increasing its indebtedness to other countries by increasing amounts. The indebtedness was reaching a stage that was at a tipping point. A stage where the debt interest repayments would become so large that the US would have to devote a large part of its exports just to meeting them – the position many Third World countries have faced in the past. But, another change had occurred too. The downward leg of the Kondratiev Long Wave had ended around the end of the 90’s. Its turn, announced by the debt blow-off of the Asian and Rouble crises, the beginning of the upward leg announced by the rise in the price of gold, and subsequently, as economic growth, around the world, began to escalate, of all primary products, and in China, and other Asian economies, by growing labour militancy, and increasing real wages.

Now, continued credit expansion in the US threatened to pass straight through into inflation, and the signs of that began to emerge in US Consumer and Producer Price data. The Federal Reserve, seeing demand for labour in the US also begin to increase, and capacity constraints start to emerge, began raising interests rates by a quarter of a percentage point each meeting for 18 meetings.

The consequence ultimately was inevitable. There is a saying amongst speculators that a bubble can only last as long as there is some bigger fool waiting to buy. Eventually, a point is reached when there is no fool left willing to buy an asset at the highest price. From that point on, things unwind quickly. Prices of houses in the US began to fall. Those that had borrowed money they had little prospect of repaying, now, as borrowers in Britain had experienced a decade earlier, found that their house was worth less than the money they had borrowed. The premise of the lenders that they could always get their money back by repossession, was now invalid, and the value, therefore, of all the funds that had been sold to investors and financial institutions, around the world, also now had to be valued according to the value of the underlying assets. The problem was that nobody had any idea what that value was!

The result was that all these financial institutions, banks, building societies, insurance companies and pension funds, now had assets, in the form of commercial paper, which could not be valued. As the creditworthiness of all these institutions is based upon these assets, no one knew whether any of these institutions was viable or not, whether it could pay all of its bills, if it needed to sell all its assets, or a large part of them. This meant that no financial institution was prepared to lend to another, not knowing whether it might get its money back or not. This short term borrowing is what makes financial markets operate. The London Interbank Overnight Rate, or LIBOR as its known, went through the roof, raising real interest rates for all financial institutions, raising their costs, and ultimately the cost for all their borrowers. Effectively, credit became frozen, as everyone wanted real hard cash and hoarded what cash they had themselves – in many ways, it's rather like the banking crisis of 1847 described by Marx in Volume III of Capital, which led to an economic crisis too. The difference is that that crisis was caused by the bad practice of the Bank of England, which was constrained by the Bank Act of 1844, which had been introduced on the basis of Ricardo’s Theory of Money, which, as Marx explained, misunderstood the nature of gold as money as opposed to commodity. That too coincided with the conjuncture of the end of a Kondratieff down-leg around 1843, and the beginning of a new 25 year upswing.

It is within this context that the crisis at Northern Rock has to be understood. It adopted the same kind of practices that its US counterparts used, though apparently not in terms of lending to subprime borrowers. It was dependent not on attracting savers – in fact, have you noticed that nearly all Building Societies have lots of information about borrowing, but very little about saving – but on borrowing on financial markets. When those markets froze, and the rates at which other institutions were prepared to lend rocketed, Northern Rock’s business model crumpled. The idea that this can be a short term problem is facile. A credit crunch of this nature is likely to take up to two years to resolve, and, given the unprecedented level of lending that has occurred over the last decade or so, the severity of it is likely to outweigh previous examples. It is rare, during such crises, for at least one major financial institution not to go to the wall.

But predictions of this crisis leading to an economic crisis, let alone a crisis similar to the Great Depression are unlikely. The world economy is well into a long wave expansion. The US may experience a severe slow down, even a recession, but the world economy is likely to continue its expansion for at least another 18-20 years, driven by developments in Asia, as well as Eastern Europe, much of Western Europe excluding the UK, and Latin America.

The greatest irony is that the resolution of the current financial crisis is likely to be brought about not by capitalism but by Stalinism. The Stalinists in China and Russia are sitting on huge reserves, in China as a result of exports of manufactured goods, in Russia exports of oil and gas. Neither will want to see an economic crisis in the West cause problems for their own economies resulting from a reduction in trade and exports. The Chinese Stalinists, like their Russian counterparts, having developed the economy by resort to the market, and foreign capital are increasingly drawing control back into the hands of the state more closely, and using the state to buy controlling stakes even in the private companies that have driven the economy forward in recent years. The Chinese Stalinists have created a huge fund, for the sole purpose of intervening in capital markets through the buying up of shares, and commercial paper. Nearly 20 years after capitalism thought it had buried Stalinism, it is likely to be rescued from its current plight by that very same Stalinism.

See Also:

Friday, 7 September 2007

A Little Technical Difficulty

Unfortunately, I have been, and remain very busy at home so I have not been keeping abreast of developments relating to the deletion of my account and posts from the AWL website. However, I have to say that I am somewhat mazed at the claims now being made.

I received an e-mail from Martin Thomas the other day, which said the AWL still did not know what had happened to my account and posts, and derided the idea that what had transpired was in any way "censorship". For the first time this week I have just had chance to look at the posts on the AWL website, and saw the extension of this idea presented by Martin.

I have been approached by the CPGB to give an interview about events, but refused because I have no intention of aiding any particular organisation in some Leninist tribal warfare. But as a Marxist I have a duty to tell the truth even where that truth reflects badly on comrades I hold in high esteem.

The facts are these. I posted several posts in relation to the debate between Glotzer and Mandel over Israel. The Mandel post was not deleted. In order to avoid a "long" post in relation to Glotzer I posted 3 separate (not six as martin claims) posts in the Glotzer thread. Those posts can be viewed on my blog here. In what way were these posts precluding as opposed to encouraging debate?

These three posts were deleted. I posted a very short complaint about this deletion in another thread. The complaint was also deleted. I had not made copies of them because they were short. I had to think them out again and repost them. The second time I posted them not only were they deleted, but the thread was closed to comments - so much for wanting to stimulate debate!!!!

I then submitted several complaints about this further deletion into a number of threads in the hope that they would at least be seen before they were deleted. In a long standing discussion with Martina Daycoi where I had posted a complaint about the deletions I also posted the three offending items, and at the same time posted them into my blog here, along with my complaint about them being deleted - "Liberty Bah Humbug".

It was several days before I tried to access the AWL website again, and found that my account and posts had been deleted. I registered again as "Red Devil" making no secret of who I was. I posted several further complaints as Red Devil in various threads some of which again were deleted, including one pointing out that an old debate did not make sense because it contained replies to my posts which were no longer there.

A little technical difficulty? I don't think so!