The Credit Crunch
It normally takes two years for a Credit Crunch to unwind. The current one is already 16 months old. On the one hand there has been an unprecedented amount of money thrown at resolving the current crisis, and the Capitalist State has stepped in to effectively nationalise the world’s largest banks and finance houses. The State has taken on responsibility for ensuring that all risk related to lending is socialised. However, the current crisis is itself unprecedented in scope and scale. In addition to the problems arising from sub-prime mortgages, remains the question of other sub-prime lending, on Credit Cards etc., and of non-sub-prime loans, which could default in the event of an economic slowdown. In addition, as the Lehman’s collapse demonstrated the big problem arises with counter-party risk. The result of the huge explosion of derivatives is that no one knows who the counter-party is! Whilst, in theory, the trillions of dollars of those derivatives are netted off – basically for every derivative buyer there is a derivative seller, for every winner a loser – in reality things are not so simple. Firstly, the extent of leverage means that even the winners may not be winners if the losers cannot pay up, and if a large finance house is a loser like Lehman’s the time taken to unwind all of its positions to identify all of the counter parties to these trades etc. is likely to be too long a time in a fast-moving maelstrom of panic. The problem that could arise given the scale is that the same causes of breakdown of trust and relations between Banks, which led to the Crunch could simply be transferred to the relations between States now acting as banks. We have already seen that to some extent. It was seen over the actions of the Dutch, Belgian and Luxembourg governments over Fortis. It was seen in the scramble for advantage when Ireland stepped in to guarantee all Bank deposits, threatening a stampede out of deposits in other EU countries. Most classically, it has been seen in the conflict between Britain and Iceland over deposits in Icelandic banks, and which was reminiscent of the 1970’s Cod War. It is certainly the case that some of these banks such as UBS of Switzerland have Balance Sheets bigger than the GDP of their host nations.
If this problem does begin to materialise – and it is clear even now that the huge sums put in by States will have to be increased – there are essentially only three solutions. The first is the Libertarian/Free Market solution, which I saw presented on TV the other day by Peter Schiff. It is essentially for the State to withdraw and allow the market to have its way. The argument is that the Banks that brought this on themselves by their actions will go bust – those that make this argument never consider that the biggest losers will not be the bankers who made the decisions, but will be the workers who lose their jobs, but who never had any say in the decisions that caused the crisis – and those Capitalists – in Banking or otherwise – who acted responsibly will do well and pick up the pieces. The Capitalist State will never adopt that position under current conditions. Were this at the beginning of a Long Wave downturn it might have no choice, and would prepare to promote fascism as it did in the 1930’s, to beat down the inevitable social eruption. For now, it has no need of so risky a strategy. Rather, it will either simply pump even more money into resolving the problem – a few years ago Ben Bernanke earned himself the nickname “Helicopter Ben”, because he argued that the fed could defeat deflation by simpling printing dollars and dropping them from helicopters – or else it will seek to encourage the trillions of dollars held in various Sovereign Wealth Funds to come in and re-capitalise the collapsing financial system.
No Good Options For Capital
Both options have serious problems. In the main, Governments do not increase money supply by actually printing money. They achieve it by increasing the potential of the system to create Credit. In a severe Credit Crunch this option can be restricted precisely because the Banks and finance houses cannot be persuaded to create more credit – the analogy of “pushing on a string”. That problem is to some extent removed if those banks are State owned and controlled. But, if the problem becomes one of these State Banks themselves owing money to other State owned banks in other countries then, if the problem becomes severe it does become tempting to actually just crank up the printing press and pay these debts in devalued currency. That was what happened in the 1920’s in the Weimar Republic as a means of Germany repaying its commitments under the Treaty of Versailles. The consequence then, and now in Zimbabwe, of such a strategy is inevitable – hyperinflation.
Even without such a catastrophic likelihood, it is clear that the huge amounts of liquidity pumped into the world economy during this period will result in much higher levels of inflation – there is around a two year lag between changes in Money Supply and the effect on prices. Even before the crisis took its latest turn a month or so ago, inflation was rising and capital was worrying about workers looking to defend wages against rising prices. If even higher inflation for a more prolonged period, manifests itself then an increasingly militant and confident working class will demand wage rises to keep pace. In order to avoid this problem, the better solution for Capital is to mobilise the trillions of dollars sitting in SWF’s around the globe, built up in economies with high savings rates, and which have prospered from a growing world economy as they have exported more than they have imported. But, there are problems with this too. Firstly, some of these SWF’s have already had their fingers burned. They already invested large amounts in US financial institutions and saw their investment collapse. In addition, the US over recent years has stepped in to block some foreign investments where it felt that they threatened US National or Strategic interest. Finally, in a situation where economic growth is slowing some SWF’s appear to be intent on ensuring they give precedence to putting money into their own economy and institutions.
Given the complexity of all these derivatives, and the extent of counter-party risk its impossible to say how bad this situation could become. It seems likely, however, that some floor might have been put under the financial system. My guess is that further capitalisation will be required and will come from a combination of further State funding, together with funding from the SWF’s backed by State guarantees. Given the almost complete collapse of the price of Bank Shares – RBS, which is not only the second largest UK Bank, but also the fifth largest US Bank, has seen its share price fall by 90% - and the continuing ability of these companies to generate huge volumes of cash flow – its likely that in the next few months they will begin to attract investors. Already, people like Warren Buffett – who has a personal wealth of around $40 billion – have begun to buy bank shares, and Buffett’s mantra has always been only to buy shares in companies that represent long-term value.
In short, its likely that the worst of the financial crisis is over, but the consequence will be that the US has been fundamentally weakened, if not mortally wounded. The biggest investors in hard US assets – the purchase of actual companies, Banks etc. – will be those like the China, OPEC and Russia, sitting on huge dollar reserves. Those dollar reserves will diminish in home currency value as the dollar falls – an inevitable consequence of the huge increase in Supply of dollars pumped into the market – but those dollars can be used to buy up those dollar denominated assets effectively neutralising that effect. Not only does this present political and strategic problems for the US, but it will also suffer the problem other economies have in the past – a Capital transfer out of the Country as profits are paid out to foreign owners. Already, the huge extent of the US’s indebtedness has left it on the verge of a tipping point whereby its economic growth was barely sufficient to keep pace with its foreign debt financing.
A couple of years ago George Soros said that the dollar would lose its role as world reserve currency within 5 years. That is not likely to occur until the present crisis is resolved, but it now seems inevitable. Already, China is saying that the US and the dollar’s role cannot continue after this crisis. It is likely that China will move its peg from the dollar to a basket of currencies as a first stage in that process. Its possible that OPEC could begin to price oil in Euros or the Gold Dinar.
The Responses
In short, there are no good solutions, particularly for US Capitalism – already on CNN and other news channels questions such as, “Is this the end of Capitalism?” are being raised (to which the answer is clearly no) – only less bad solutions. Marxists would no more call for the Capitalist State to save the system than would the Libertarians, but where the Libertarians simply want to punish one group of Capitalists who they believe acted irresponsibly and in cahoots with what they see as a socialistic State (!), and want workers to simply suck it up for a crisis not of their making, whilst another group of Libertarian minded Capitalists make a killing, the Marxist says workers have no interest in saving the system that oppresses them, especially by strengthening the Capitalist State! The Marxist, though, has no interest in promoting the idea that workers should just suck it up. The Marxist argues that the experience shows why they need to replace Capitalism, why they can place no faith in the Capitalist state bringing that about – a State which continually says it has no money for health care, education etc. but can find trillions to bail out its ruling class – and whythey should use the crisis as an opportunity to take over the means of production for themselves. The Libertarian cannot understand why Capitalism requires the State to intervene, because they have a narrow view of what Capitalism is, one still rooted in the 18th Century, a view which fails to recognise that Capitalism is not based on the principles that applied then of the free market and small state, but is based on Monopoly Capital, and its close integration with a large, interventionist, bureaucratic State. The Neo-Cons, and Neo-Liberals understand that perfectly well.
The neo-Marxist, or perhaps they should be labelled “kitsch” Marxists, also have some grasp of that. But, with a statist ideology, rooted not in Marxism, but Lasalleanism, they end up with effectively the same position as the neo-Liberals. They see State intervention as good, as in some way a concession to Socialism, and therefore, to be promoted. Of course, as marx and Engels argued, State ownership is objectively considered, historically progressive, just as capitalism is historically progressive compared to feudalism, or Monopoly is progressive compared to small-scale ownership. It represents the same kind of logical development from the monopolisation, cartelisation, and trustification of the means of production inherent in Capitalism, and therefore, its more mature form. But everything is relative. Bourgeois democracy is progressive compared with feudal absolutism, but it is reactionary compared to workers democracy. Marxists defend Bourgeois democracy against a return to feudal absolutism, but do so by the methods of and by promoting workers democracy. Marxists do not call for State property to be turned back to private property and defend it against such a move, but do so on the basis of exposing the limited nature of State capitalism, of its reactionary nature compared with direct workers ownership, argue for its conversion to Workers property, the establishment of Co-operatives etc. Marxists should oppose to this programme of statisation of these financial companies their takeover by the workers – both as workers and customers – the extension of existing Co-operative and mutual enterprises into these spheres – the Co-op Bank and CIS, Unity Trust, The Mutual Building Societies, Credit Unions etc. – and for the mobilisation of the Labour movement to ensure that these Co-operative and mutual enterprises are brought under meaningful workers control and democracy.
A couple of months ago, when I warned this financial crisis was about to break, I based my warning on the fact that there had been a rapid fall in the price of oil, which appeared to have been caused not because of any fundamental or psychological change in the oil market, but because of forced selling by financial institutions, who were having to sell profitable positions in order to boost their cash holdings. At the time, Bill Jeffries of permanent Revolution, dismissed this warning saying that the oil price drop was not unusual. (some of the background discussion can be found here, and the actual discussion on the oil price is part of the discussion here
The Economic Fallout
The warning and my reason for giving it has been proved more correct than I believed at the time. In fact, in the last few weeks we have seen not just the price of oil, but the price of other commodities, as well as other assets e.g. the share prices of mining and energy companies etc. fall even more dramatically. The price of oil has fallen more than 50%. Xstrata, a broad based mining company has seen its share price fall from a high of over £46 to less than £8. The common argument for these falls is fear of a serious world recession or even Depression. This is nonsense. The reason for these price falls is, as legendary Commodities Trader, Jim Rogers, said on CNBC the other day, forced selling by financial institutions, hedge funds and other investors and speculators. At around $100 a barrel the demand and supply of oil appeared to be in short-run equilibrium. The spike in the price to $147 was partly a risk premium based on a justified fear of an attack on Iran – I commented a year ago that some oild traders believed an insufficient risk premium was included in the price for such an eventuality – and was a reflection of the fact that some financial institutions were piling into what appeared to be a one-way bet, and that some hedge-funds recognised that in the medium term Peak Oil means that the oil price is going to $200 and above. The fall to below $70 is a reflection of the degree of forced selling. When that stops oil prices are likely to head back towards $100 in the near future, absent of course an Israeli attack on Iran as the forerunner to US involvement that would just happen to benefit McCain’s chances ahead of the election. In real terms oil is still below its 1970’s levels. Despite all the broo ha ha the main economies are not YET in recession. China’s growth has fallen to 9%, but in part that is the result of natural disasters earlier in the year, and of the Olympics. Despite the references to 1929 and the Depression there is no evidence that the World economy is headed even for the kind of recession seen in the 1980’s let alone the 1930’s. In the US there is talk of a $300 billion Keynesian stimulus package, China is stimulating its economy by both Monetary and fiscal policy, Japan too, Britain will scrap the Golden Rule, and Europe will scrap the Stabilisation pact to allow a massive Keynesian stimulus. The recession is likely to be restricted to some of the largest ddebt-ridden economies. The IMF still sees World growth at 4%, ahead of the 2.5% required for a world recession. The main demand for raw materials, foodstuffs etc. is coming from China, India and other Asian economies, which look set to continue growing strongly. As the FT commented in its World economy Supplement of 10th October, any fall in Commodity prices is likely to be limited and short-lived.
There are, however, likely to be some significant price falls. Traders often speak of reversion to the mean. In other words, if prices rise rapidly they are likely to fall significantly until they return to the mean or trend level. The last 20 years of massive injection of liquidity has resulted in huge bubbles in the prices of some assets – share prices, property. The Dow Jones is still hugely expensive compared with its long-run relation to Gold. Traditionally, Price-Earnings ratios fall to around 8 in a serious recession, but remain in the mid-teens for many markets. Despite recent falls, property prices in many parts of the US, UK and other countries like Spain, where there has been speculation – and where the structure of the housing market makes such price rises possible, compared to say Germany where it has been absent – remain at high levels. If there is any comparison with the 1930’s it is that these inflated prices may well suffer a severe deflation – the more so if a recession is most marked in these debt-ridden economies – which for related reasons outlined earlier is likely. In the 1930’s the property prices fell in the US to around 10c on the dollar. Its quite possible that there could be a fall of around 50% in property and share prices from current levels (I wrote this a couple of weeks ago since when share prices have already fallen dramatically). However, the consequence of the liquidity injections already undertaken, and those to come will lead to a large inflation in a year to two years time – probably as high as 20% - as that liquidity feeds through, and economic activity resumes strongly. This will bring about a re-establishment between these asset prices and commodity prices – reversion to the mean – a relation which has been thrown off completely as a result of the bubble in assets, and the effective deflation of the prices of commodities over the last 20 years. Gold is likely, by the same token, to rise to between $2,000 - $3,000 an ounce before hitting a peak in 2010 – that is a real terms peak. Gold hit a real terms peak in 1960 (compared with the prices of all other commodities), but peaked in nominal terms in 1980 as a result of prolonged inflation, and the other factors I outlined earlier.
From a Marxist perspective there is another consequence of this. In the last 30 years the resultant structure of economies in the UK, US in particular, has meant that Finance Capital has been almost hegemonic. There has been gloating not just on the left, at the rapid fall of the City spivs, and comments about the fact that the best and brightest might in future look for jobs in industry or science. As Marx and Engels elaborated, classes are not homogenous. As Marx demonstrated, the Capitalist class itself is wracked with division, not just because of market competition, but because Money Capitalists, Merchant Capitalists and Industrial Capitalists compete over the division of the Surplus value created in the latter sphere, and although all Capitalists have a common interest against the working class, they have diverging interests over the division of the spoils of their collective exploitation of the workers. One of the characteristics of the last period has been the degree to which, particularly large companies, have built up sizeable cash positions on their balance Sheets, and that some of these companies, and others such as TESCO, Sainsburys etc., have ventured into the sphere of Money Capital. It is important for Marxists to analyse these divisions within the Capitalist class, divisions which will heighten as a result of the current crisis.
Resumption of the Boom
It is possible that the severity of the financial crisis could cause a severe recession, but not a Depression which implies a prolonged period of economic downturn. If that happens it is likely to be uneven. Some economies will grow strongly, and new trade relations will develop on the basis of that changed pattern of economic activity. Any recession is likely to be short, and followed by very rapid growth.
There are a number of things with this boom which are different from previous Long Wave booms. For one thing, the World economy is now much greater in its scope than in previous booms. The market is bigger, and Exchange Value dominates more extensively. Although, technology always plays an important role in ever new boom there are some differences this time. Computer technology is now so advanced that it plays itself a role in speeding up technological advance. It plays into the very process of innovation e.g. the role played by computers in the Genome Project. All sciences are now becoming susceptible to mathematical modelling. Everything is becoming digitised so that even sciences such as biology can be dealt with by mathematical techniques, and anything that can be digitised and subjected to mathematics can be modelled and analysed rapidly using computer technology. The other consequence of this is that what have in the past been separate scientific disciplines are being integrated in a way that was not previously possible. Computer technology and biotechnology are being merged in a way that not only allows the very fabric of life to be manipulated, but also allows computers to be developed on the same kind of basis as organisms. Nanotechnology is already allowing the manipulation of matter at an atomic level. This is a qualitative change in the productive forces which has not been adequately theorised, and so neither has its consequences for the productive and social relations.
This means that this Long Wave Boom, irrespective of the consequences of the current crisis, will be much more explosive and extensive than previous booms, including the post-war boom. Similarly, the consequences arising out of the end of the boom - sometime between 2020 and 2030 – will be that much greater, particularly given a world in which there is no hegemonic power – as there was for example in the 19th Century in the form of Britain, or in the period after 1974 in the form of the US – so the danger of imperialist conflict is that much greater – in 1974 the second superpower, the USSR, was not Capitalist and so was not driven by the same imperialist drive that Capitalist economies are subject to. This background explains much of the current manoeuvring and strategising by the major powers. It should be of concern to the whole of humanity not just to Marxists, but it is only Marxists that can provide humanity with the solution to the catastrophe the world may face.
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