Aftershock?

Last night’s extended Newsnight Aftershock looked at the world 1 year after the collapse of Lehman Brothers. It began by asking the question, “How has the world changed?” The answer despite all the hyperbole is – surprisingly little!

The Credit Crunch, that began in the Summer of 2007, and saw the collapse of Northern Rock, prompted some preventive action by Capitalist states. It was not enough, and a year later the increasing restrictions on Credit in the interbank markets broke out in full fury. The collapse of Lehman Brothers was not, as some have suggested, the cause of what happened next, but was merely a dramatic symptom of the underlying crisis. The financial crisis, that ensued, has been the worst, probably, in history. But, its necessary to separate out that Financial Crisis from the Economic Crisis. Given the ferocity of the Financial Crisis, that was like a heart attack, starving the economic body of blood, it was bound to have consequences, for the real economy, as well as the fictitious economy of financial markets. In fact, the economic consequences did not materialise as quickly as might have been expected. World trade and economic growth continued to rise even after the financial crisis erupted at the end of Summer 2008, as I wrote in my blog at the time - Where We Are , and, in large part, that was due to the reality of the new world economic order, in which the increasingly important players are in Asia i.e. those economies that had huge savings ratios, and which have continued to grow over the last year.

The real effect was not felt until the Fourth Quarter of last year, when fear of a collapse of world capitalism, engendered by media doom mongering, amongst other factors, combined with the consequences of the complete shutting off of credit, to finance transactions, led firms to cancel orders, and run down inventories, causing a necessary knock-on effect to manufacturers and primary producers who, in turn, laid off workers or suspended production, as in the case of car producers. Such a sudden cessation of economic activity was bound to have serious repercussions, and the figures for economic activity, for those two quarters, were grisly, representing an annual decline equal to that experienced during the Great Depression of the 1930’s. But, as I had written last year 1929 And All That this was not the 1930’s! The crash of 1929 came at the end of a decade of slow growth in Europe as part of the onset of the Long Wave downturn. The Great Depression of the 1930’s was the continuation of that Long Wave downtrend. But, the financial crisis of 2008 came 9 years into a new Long Wave upswing, probably the most powerful long wave upswing that human history has seen so far! It is the conditions created by that conjuncture, which have produced the vast reservoirs of Surplus Value within the Capitalist Economy – which can only be viewed as a Global Economy – which have been tapped to finance the huge amounts of Keynesian stimulus over the last year, conditions which did not exist during the 1930’s or the 1980’s Depressions. The consequence has been that the sharp reduction, in economic activity, was short-lived, compared to other recessions, historically. At the very least the sharp contraction stopped dead, at best it was reversed into a resumption of economic growth, as the run down of inventories at least ceased even if restocking has not yet taken hold. Gordon Brown and others are, however, still correct in saying that the economic system cannot stand a withdrawal of that stimulus as the Tories propose, which is one reason that despite all the talk about swingeing cuts in Public Spending after the election it is not likely to happen. Far more likely, as I have written elsewhere Paying For The Crisis , is that the problem will be resolved via a large dose of inflation, which is inevitable given the vast amounts of liquidity pumped into the system, which will simply reduce the real level of debt.

Consequences

But, as I said above, the actual consequences of the crisis, one year on, are remarkably small. According to the unemployment statistics for the UK out today, the rise in unemployment was less than had been expected. I doubt that it is going to reach the 3 million figure that many commentators have been citing, though it is likely to continue to rise for a few months yet. I was talking to a Transport Manager from the local ANC Depot at the gym on Monday, and he said they are really busy and setting on new workers. That is significant because transport is always a good indicator of economic activity. Even in the Internet age, goods have to be distributed from producers to consumers. Car plants have resumed production, and latest figures now show a shortage of Supply, which is one reason, alongside the number of second-hand cars taken off the road, through the scrappage scheme, for why second hand car prices have risen sharply. Even if the car workers themselves have not come off the unemployment statistics, the resumption of work means that thousands of small and medium size suppliers to those plants now have orders again, which is likely to result in increasing employment.

The ILO unemployment figure, which is the most significant, puts the rate at just over 7%, that is everyone currently without a job for whatever reason, and seeking work. But, in fact that number includes perhaps 2-3%, of people who are simply frictionally unemployed, that is moving between jobs. Even during the 1930’s as Hobsbawm points out the average period of unemployment was only around four months. It was only in areas of high levels of long-term, structural unemployment, such as the North-East, where very high levels of long-term unemployment persisted. Again that is significant. If you have built your spending patterns around a given level of income, which ceases, and ceases for a prolonged period, that will significantly change your spending habits. If, however, you are only out of work for a few months the change will be less significant. Moreover, as I pointed out in a previous post The Truth About The Economy for that component of that 7%, amounting again to perhaps 2%, which does constitute the long-term unemployed and unemployable, what sociologists have called the underclass, or the lumpen-proletariat in Marx’s terminology, whose spending patterns were already based on the amounts of Benefits they receive, then again the crisis is not going to have had any effect. We are left then with, perhaps a remaining 2-3% of people, whose spending patterns will have been significantly altered as a result of the crisis. Of course, as I said in the above blog, one of the consequences of the ageing population, and the large percentage of pensioners, is also that such people, whose spending patterns are based on these long-term income streams, will be largely unaffected by the crisis.

As an economist it makes far more sense to concentrate on the 97%, who are unaffected than on the 3% who are. And, in fact, for that 97%, the consequences have not necessarily at all been negative. The average mortgage is around £100,000. The slashing of mortgage rates, as a result of the crisis, has meant that many such people have seen their annual mortgage repayments fall by between £5,000 and £7,000 depending upon the mortgage type. Even taking the lower figure, and an average wage of £25,000 p.a., that saving is the equivalent of a 20% pay increase!

Although, undoubtedly, one consequence of the crisis has been that some groups of workers have suffered pay cuts, the figures out today also showed that, on average, wages rose by more than 1%. Given that, measured by RPI, prices have fallen, then this means, on average, real rises in incomes. Whereas, prior to the crisis, the housing bubble meant that many first time buyers could not afford to buy, the fall in house prices now makes many more houses affordable to first time buyers, and if you already own a house and were thinking of moving up to a more expensive house then that too has become much more affordable. The consequent savings alongside the savings resulting from lower prices in general, and lower mortgage costs, means that, for those in work, the last year has actually seen a significant improvement in disposable income! Its no wonder that personal indebtedness has fallen, whilst Retail Sales have remained far more resilient than many had predicted.

And, as I have set out elsewhere, another consequence of the savings on Mortgage payments, and the consequent reduction in personal indebtedness, most particularly in Credit Card debt, provides another explanation for that resilience in Retail sales. With credit card interest payments of between 20 and 30%, anyone, who runs up credit card debt, is handing over, every month, huge amounts of money, from their income, not to actually buy goods and services, but simply to finance those interest payments. In fact, its symptomatic of what the previous 30 years has been about. Productive Capital was saved, from large sections of it disappearing, as a result of the Long Wave downturn, as a result of future demand being brought forward by the use of Credit. The price that Productive Capital paid, for that, was a huge increase in the proportion of Surplus Value handed over to Money Capital in the form of interest payments from consumers. Take someone who has saved £5,000 on their mortgage payments, and who has a £10,000 outstanding debt on their credit card. The annual interest payment on that is then, say £3,000 – money that otherwise could have gone to buying goods. If they now use that £5,000 mortgage saving to pay down half that credit card debt they save a further £1,500 in interest payments. In other words, if they now finance their current expenditure out of income, rather than out of credit, they have £1,500 extra to spend on goods and services than they had previously. It is this switch from paying interest to Money Capitalists to paying for goods and services out of income, and the savings on those interest payments arising out of the paying down of debt that I think explains the resilience of retail sales figures.

Credit

Yet, asked about the consequences of this shift from Credit spending to spending out of income, the former head of Lloyds Bank commented on Newsnight that it would mean people going back to Black and White tellies!!! This is absolute nonsense. Consumer credit began, in the 1920’s, in the US, as a means of enabling consumers to buy the vast quantities of mass produced goods being churned out by US factories, some of which like motor cars, even middle class families would not have been able to buy immediately out of income. It took off, in the 1950’s, in Britain, for similar reasons. But credit for the majority of people has never assumed the kinds of proportions it has in the last 30 years. In fact, for many people, of my generation, whose parents lived through the Depression, the simple motto was, “If you can’t afford it, don’t buy it.”

Credit does not create new demand, or wealth, it only shifts its place in time. It enables consumption now at the expense of reduced consumption in the future – because, as demonstrated above, if you are paying interest, that is money not available for consumption. And, in fact, the miracle of compound interest means this has considerable effects. Take my own case, I have never relied on credit or borrowing to buy anything, including housing. I bought my first house for cash when I was 23, and my wife was 21. It cost £5,500. That certainly wasn’t due to either of us having high salaries or being given money. At the time we began saving to buy the house, I was being paid just over £25 a week. My wife, at 18, had just started work as a Mainframe Computer Operator, and was paid even less. By the time we bought the house, I was getting just over £40 a week. But, having studied Economics at Day Release, I understood some basic economic principles. For three years we lived in a cold, damp flat. We lived on my wife’s wage and saved mine, which meant some weeks we lived on beans on toast, we had no telly, no car, we bought clothes from Jumble Sales, we picked blackberries and made our own Jam, which I took on sandwiches, for my lunch, and many other such activities to save every penny. We walked everywhere, including, when I went to Day Release, I used to walk first to work, then, later in the day, walk 5 miles to College, and then 8 miles back home at night. It saved what, today, would be money paid out, for the same exercise, to go to the Gym. Every Month we bought Premium Bonds to the extent that after 6 months we were winning something every month.

It took 3 years to save the £5,500 pounds, including the interest payments and Premium Bond winnings. (To put that in context comparing my wages then, and average wages today, it is the equivalent of saving around £80,000. Coincidentally, the price of a Town House like the one we bought in the same road today is also around £80,000, which shows how little in 30 years the relation between house prices and incomes have changed.) I’d decided I would not go to University until we actually owned a house, so that, whatever happened, we would have somewhere to live that we couldn’t be thrown out of. Yet another consequence of that mentality I inherited from my parents’ experience, of the 1930’s, about dealing with insecurity, and which I’d experienced myself, leaving school in 1970, when unemployment was already rising. See A Tribute To My Parents . However, the consequence was that having bought the house for cash – which also enabled me to bargain the price down – we had no mortgage payments to make. Instead of suffering at the hands of compound interest, we were able to benefit from it, by simply continuing the lifestyle we had adopted of living on one wage and saving the other, something that was useful during those periods, when we in any case only had one wage. Compare that with someone who buys a house on a mortgage. During that period the average mortgage rate was around 10%. With a 20-year mortgage, in fact, it’s like buying not just one house but three! The mortgage payments amount, over that time, to twice the actual cost of the house. The consequences of compound interest then in saving that money rather than paying it out are fairly obvious.

And, in fact, that is precisely the kind of thing we see, today, in China. Despite low wages, it is common, for young couples, in China, to live on one wage and save the other. This is one reason that China has such a high savings ratio. Yet, that has not at all led to a constriction of consumer demand! On the contrary, consumer demand in China is soaring. There are now more cars sold in China than in the US. And, this kind of balanced growth, whereby consumption is financed out of current income, rather than credit, and with high savings rates, to finance investment, is far more sustainable than the kind of growth, experienced in the US and UK, over the last 20 years. Again, its one reason that, during the crisis, China continued to grow at high rates.

If anything has changed, significantly, it is that a convergence towards that kind of economic activity has, and is, occurring as part of a rebalancing and resolution, of the crisis of disproportionality I have spoken of before. It is precisely the extent of the underlying economic strength, created by the Long Wave boom, that enables these contradictions and disproportions to be resolved without it descending into a catastrophic crisis of the kind many predicted, and some continue to predict.

The other thing that has changed, as part of that, is a change in the balance of power within Capital itself. It was the weakness of Productive Capital in the West, beginning from the late 60’s, and escalating rapidly, during the de-industrialisation process of the 1980’s and 90’s, which facilitated the rise of Money Capital. It was the use of Friedmanite Monetary policy, which pumped huge amounts of liquidity into the system, from the late 80’s onwards, to facilitate the growth of credit, in order to revive and sustain consumer demand, that led to the development of asset bubbles, that, in turn, stimulated the growth of a range of financial products to be sold to consumers, and, as a result of the huge drain of Surplus Value towards Money Capital, referred to earlier, set the scene for the rise of the financial sector as an increasingly important sector of the Capitalist economy in London, and in the US.

Marxists have to remember that although Capital confronts Labour as a class relation, Capital, no more than Labour, is homogenous. The interests of Money Capital and Productive Capital are contradictory. Money Capital has had a good run, and, the fact that Capitalist States are continuing to provide almost free money, to Banks, means that, these institutions, remain very profitable organisations – which is why RBS shares have risen almost 6 fold in the last 6 months – but, the balance of power has shifted, back towards Productive Capital. Already, other sections of Capital – for example TESCO and Sainsbury have both moved into banking – are encroaching on Money Capital’s turf. Government’s will no doubt, in coming years, make large Capital Gains, when they sell their Bank shares, but the buyers of those shares could well be, not just the foreign Sovereign Wealth Funds from China, Russia and the Middle East, but also large transnational companies with large balance sheets.

It was interesting, on Newsnight, that Hedge Fund Manager, Hugh Hendry, himself commented that one positive consequence might well be that the next generations of students, coming out of Universities, will not head, straight away, for the City, for jobs shifting pieces of paper about, but might now take up employment in areas of the economy producing goods. That, in itself, I think, is an indication of how that material change is already being absorbed into the consciousness of sections of the ruling class.

Alternatives

But, as Paul Mason pointed out, one consequence of the crisis has NOT been the development of any cogent alternative to the neo-liberalism of the last 30 years. The Left has been more concerned with issues such as environmentalism, and other such issues where it has thought that the petit-bourgeois and studentist milieu offered it the best possibility of recruiting new, young members to replenish the dwindling numbers of its, increasingly, marginalized organisations. In that respect, it’s in China and Russia and other Stalinist, or formerly Stalinist, states that the main effect has been felt with the gloss of Market Capitalism, as an alternative, increasingly tarnished. But in truth, in neither China nor Russia was there ever an adoption of Market Capitalism. In both, Stalinist ruling cliques remained in power, in both the State retained overall economic control, and used it, to achieve its objectives, by pulling those levers of power, to direct the operations of firms operating in a controlled market.

Yet, there seems no great movement in those states for a return to full blown State control either. Certainly, there is no mass upsurge of support in Britain or most of Europe for a return to statism and dirigist policies. In the US, Obama’s popular support is dwindling in the face of opposition from workers and the middle class to the idea of the US state having control of their healthcare. No wonder; workers’ experience of state run industries in the West is little better than the experience in the East. The rise of statist policies in relation to the banks can have done nothing to suggest to workers that ownership by the Capitalist State is in any sense in their interests.

An alternative is required, but a return to those failed models of the past with which the Left has tried, and necessarily failed, to convince the workers are definitely not it.