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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