The Debt Crisis - Part 2

Its sometimes said, by people on the Left, that all Capitalists want to see Government spending reduced because that means that taxes can be cut, and according to Marx all taxes are a deduction from Surplus Value.

But, this is a misreading of Marx. For Marx, as he makes clear in the Critique of the Gotha Programme, taxes are the basis of funding for the administration of the State, and nothing more. They are the means by which Capital pays for the overheads of its rule. He says,

“Taxes are the economic basis of the government machinery and of nothing else.”

It is no surprise, Marx says then that the “Liverpool financial reformers — bourgeois headed by Gladstone's brother — are putting forward the same demand as the program”, for a single progressive Income Tax. A portion of Surplus Value does indeed go in taxes for this purpose. It represents the “faux frais” of production of Capitalism as a system. But, this is far from the case in relation to other forms of Government Expenditure. What is Surplus Value? It is the Exchange Value of the unpaid part of workers' labour. That is, it is the Exchange Value of that part of workers' output over and above what is required to reproduce their Labour Power i.e. the Value of Labour Power, which constitutes Variable Capital. But, in a modern economy, particularly, a part of this cost of reproducing Labour Power does consist of commodities, which are frequently provided by the State Capitalist.

Education and Healthcare, along with Social Care, the provision of Leisure facilities, childcare, and even an element of things such as roads, railways, airports etc. are just as necessary commodities in the reproduction of Labour Power as are food, clothing and shelter. These costs, the allocation of social labour-time to produce these commodities, therefore, come under the heading of Variable Capital, they form a part of the value of Labour Power, and consequently never do form a part of Surplus Value. The fact, that payment for these commodities produced and distributed by State Capitalism, frequently takes the form of “taxes” is besides the point, that is mere appearance, once again hiding the actual reality.

Indeed, it does not matter whether payment for all of these things is done on an individual basis by workers paying at the point of purchase – as they do with opticians or dental charges etc. - or by private health insurance, and tuition fees, or via some form of social insurance, or through taxes. For Capital, the only real issue here is one of economic efficiency i.e. which of these different methods, ensures that a sufficient quantity and quality of healthcare, education etc. is provided at the least cost. Only if the actual cost of providing these things by the State was higher than it need be would the difference be a deduction from Surplus Value. That is why, as well as for historical reasons the methods chosen are different in different economies, but also why these methods are constantly reviewed. The way Capitalism usually ensures that commodities are produced so as to raise quality, whilst using the minimum necessary social labour-time is by competition.

Its why we have seen huge improvements in the range and quality of goods and services available, whilst the prices of those goods and services have continually fallen. But, an effective State Monopoly of provision, undermines this method of ensuring efficient production. That is not to say that State provision is necessarily less efficient. In the US, for instance, socialised healthcare provided via Medicare is around ten times more efficient than via private insurance. That is simply due to the innate efficiency of a single, nationally administered insurance scheme. The actual provision of healthcare itself continues to be provided, as in the socialised healthcare systems of most of Europe, via private or co-operatively run hospitals etc. This is the reason that the Democrats, representing the interests of Big Capital, which has been suffering in international competition, due to the high costs it incurs, through the health insurance schemes, it pays for for its workers, has been trying to introduce health insurance reforms.

In China, with vast reserves of Labour Power, there is less need for a State run Health syste, so workers are left to provide for themselves. The US too has been able to rely on large numbers of immigrants to swell the ranks of its labour force, and has been able to draw in the high skilled labour it required from other countries, through a brain drain. Within Britain itself we see how this plays out even through a State run socialised Health, Education, and Social Care system. In more deprived areas, the standard of education and healthcare is lower than in more affluent areas. That is not entirely due to some Government conspiracy in the allocation of funds, but flows from the mechanisms of Capitalism itself. In more deprived areas, there is a lower tax base, and so Local Authorities have less money to spend on various services, but higher needs for that spending to meet. In addition, GP's, prefer to work in more affluent areas, which has resulted in shortages in more deprived areas. But, this fits the needs of Capital. In more deprived areas, there is less demand for highly skilled or educated workers, so low education levels are less of a problem. They also suffer higher unemployment, so there is less need for good quality healthcare, because a reserve army of unskilled labour always exists for Capital to draw on. The opposite is true in more affluent areas. It is also why, the worst areas of provision are for the elderly, who no longer serve a purpose for Capital, and who indeed, represent for it, a drain on resources.

But, the fact that Capital is forced to pay the costs of inefficient state provision out of Surplus Value is not a reason for jubilation by workers either. The Surplus Value used for this purpose is essentially wasted. It could otherwise have been used for accumulation, thereby increasing economic growth and the demand for labour power, bringing with it higher wages, and living standards.

If Capital, as opposed to individual politicians, seeks to socialise in one instance, or to privatise provision in another, it is not for ideological reasons, but for reasons of reducing the Value of Labour Power, by improving the efficiency of the provision of an important element in the reproduction of Labour Power. Individual politicians, of course, may indeed be driven purely by ideological considerations, and by purely electoral concerns of seeking to align themselves with the views of those whose votes they seek to garner. When Capital sought to overturn the Corn Laws in the middle of the 19th Century, it was partly motivated by a desire to break the power of the politically dominant Landlord Class, but its prime concern was to reduce the price of food, thereby reducing the Value of Labour Power, facilitating an increase in relative Surplus Value. Its motivation in trying to raise the efficiency of provision of healthcare, and other such services is driven by the same concern.

But, things look different from the perspective of small capital, and the perspective of the Middle Classes. Small Capital does not have the same concerns as Big Capital.

Because it does not employ labour-power on the vast scale that Big Capital does, it is less bothered by the need to retain workers. In fact, to the extent that Big Capital pays to train workers, small Capital benefits when a recession or some other change, which means that those workers are made redundant, and it can pick them up ready trained. For similar reasons it is less concerned about the need for a healthy workforce. If workers are ill, they can be sacked and replaced. For similar reasons, the small Capitalist will see no role for interfering Trades Unions, because the small size of the workforce means that workers can be negotiated with individually, and thereby more easily controlled. The small capitalist is largely concerned with meeting the needs of local markets, and so the impact of global economics appears remote to their daily concerns. They are driven by the need to keep wages low, extract Absolute Surplus Value and minimise their costs, of which the payment of tax, appears to be just one additional unnecessary burden.

For, the Big Capitalist, success, and the receipt of income is more readily seen as having nothing to do with individual ability. If you happen to be born to billionaire parents, you do not have to be a genius, your money can buy such for you. All you have to do is sit back on your yacht, sipping champagne, and watch the additional millions roll in through dividends, yields, and Capital Gains. For the small capitalist and the Middle Classes, things look different. For them, success appears to be solely down to individual merit, and character. That is why the most important things appear to be access to a good education etc.

But, within this perspective the more that is deducted in taxes appears to be a reduction in the disposable income available to live in an area with good schools, to pay for school fees, and so on. Moreover, although the payment for commodities like education and healthcare, provided by the State Capitalist, are not deductions from Capital, from Surplus Value, that does not mean that these costs are deducted evenly from Labour either. Indeed, Welfarism has been described by some Marxists as amounting to “Socialism In One Class”, because in reality what it does is to take money from one section of the working class and redistribute it at great cost to other sections of the working class. As, this Fabian, redistributive Socialism, has necessarily sought to do this by taking larger amounts from the middle class, and the better off workers, and redistribute it to the worst off workers and the under class, it has necessarily provoked hostility from the Middle Classes, and from the better off workers, thereby providing a ready made electoral base for right-wing, populist parties such as the Tories, and the Republicans.

And the ideological representation for this view is provided by Neo-Classical and Austrian economics. For the former, in particular, the existence of Monopoly and oligopoly is a deviation from the norm. Read the ideologues of the latter, such as Mises and Hayek, and it is clear that for them, Big Capital, the existence of huge corporations is as much anathema as is the role of the State.

In fact, they frequently see the existence of these companies as in some way being a reflection of the role of the State in distorting the market, in preventing bankruptcies etc. (See Chapter IV, of Hayek's "The Road To Serfdom") Not surprisingly, many of them favoured allowing the Banks to simply collapse, along with the big motor monopolies such as GM. Thatcher who came to power with the help of a clique around Hayek, and based here early policies on his ideas, before shifting to the ideas of Monetarism, to restart the economy, via loose money, was emblematic of this given her own origins as a shopkeeper's daughter.

But, politics has its own dynamics.

Just as the sabre rattling by Galtieri and Thatcher in 1982, was originally intended as merely that, and a means of distracting restless populations in their respective countries from mounting economic and social chaos, and yet inexorably led to war, so the rhetoric of the Tories in relation to the deficit has trapped them in a position where they have little room for a Plan B. Having whipped up a similar mood in the US, and created the Tea Party Monster, the Republicans are trapped in a similar cul de sac.

According to the latest news, whilst writing this, it looks as though the Republicans in the Senate may have a deal with the Democrats, but it is not at all clear that any such deal will get the approval of Republicans in the House of Representatives, given the role of the Tea Party, and the threat they have made of removing any Republican Congressmen thought not to be Conservative enough.

It is more than possible then that the world could stumble into chaos. But, it is far from certain. The deadline for the debt ceiling has continually been pushed back. It was supposed to have been this time last week, in order to allow the necessary legislation to pass. Now it seems right up to Tuesday is possible. And, in fact, long before the US stopped paying interest on its debts, it would be able to stop paying other domestic bills, continuing to pay certain other bills out of its massive revenues. There have undoubtedly been many arrangements made behind the scenes to ensure that things can be stretched out for some considerable time, and on CNBC last week, it was suggested that the US has considerable assets that it could sell quickly to raise money.

It could, for instance, sell some of the huge store of Gold it has sitting in various depositories around the country such as Fort Knox. Some commenters even jokingly talked about selling Alaska back to the Russians, or Louisiana back to the French.

Even if the US does resolve the issue of raising the debt ceiling there remains the question of whether the ratings agencies will downgrade its debt from its current Triple A status. That is likely to be a matter of putting pressure on legislators to come to a resolution. But, it could happen. Ironically, the main losers from that will not be the US. The huge Bond Funds around the world have to put their vast investments somewhere, and currently the US is the only place where that can go. Whether it is downgraded or not, the fact will remain that the possibility of the US actually rather than technically defaulting will remain close to zero. However, Bond Funds are based on degrees of risk. So they are sold as high, medium or low risk. They all contain a proportion of each category, but the risk is based on the average for the Fund as a whole. As a result, a downgrade of US debt will have the effect of making all such funds higher risk. For the low, and medium risk Funds, into which most Pension Funds etc. invest their money, the consequence will be that, because most of the money will be invested in US debt, the higher risk debt will have to be ditched in order to restore the average risk profile of the Fund.

That means that countries such as Spain, Italy, and so on, will see their debt being sold from these funds with a consequent effect on the price of their Bonds, and on interest rates.

But, the biggest threat continues to come not from the US – assuming that a deal over the debt ceiling is reached some time soon – but from Europe. As stated at the beginning, the fudge over Greece has not resolved the situation. Now Italy has seen the Yield on its 10 year Bonds rise to nearly 6%, whilst that for Spain is already over 6%. Somewhere between 6% and 7%, is where the interest charges become unsustainable, and countries need to seek a bail-out.

With, a stagnant economy due to the austerity measures already introduced, with unemployment at 20% - 40% for youth unemployment – and rising, with more than 1.5 million unsold properties, and a banking system still based on a fiction of what those properties are actually worth, and with those Spanish Banks now being downgraded themselves, Spain is a disaster waiting to happen. When that happens, the option of fudge to kick the can down the road will disappear. Europe will have to decide whether to give up on its project – not just of the Euro, but of creating a European market and state – or to take the bull by the horns and do what is necessary.

I recently calculated that to solve the problem in Greece would require around €750 billion over 10 years. To recapitalise all of the banks in Europe, to restructure Capital across the Eurozone so that it becomes globally competitive on a similar basis to Germany would require anything from ten to twenty times that amount. In other words, it would require a modern day Marshall Plan. Such a course is not at all impossible to achieve given the political will. It could go hand in hand with a similar Plan for MENA that would draw it in as a new Southern periphery of Europe. The question is whether the political will exists to do that, and whether the political realities of Europe can be overcome to bring it about.

But, let me be clear. Should the worst happen, should the US not resolve the issue of the debt ceiling, should a default in Europe lead to a new global Credit Crunch, should the political dynamics of right-wing populism in the US and Europe, prevent the scrapping of the current policies being pursued by the “right-wing nutters”, “Tea Party Taliban” and so on and lead to a serious crisis, this will not be the same as the Great Depression of the 1920's and 30's. It will not be so, because this is not the 1920's or 30's. The Depression then arose under conditions of a Long Wave decline. Even a Depression today – 25% fall in GDP, 20% unemployment, and falls in output lasting up to 40 months – would not have the same consequences.

That is because today, we are in a Long Wave Boom. A global Depression would be serious for those who lost their jobs, their houses and so on. But, even in the 1930's in Britain, the average period of unemployment was only seven months – which masked the fact that in those areas where Capital most needed to be restructured away from old no longer competitive industries such as the North East, unemployment and poverty was chronic and long lasting – and during that period whole new industries were created in motors, electronics, chemicals etc., which paid higher wages, and also went along with the building of new housing in those areas etc.

As I pointed out in my blog A Momentous Change, the consequence of a Depression within the context of a Long Wave Boom, would be to bring about a fast but brutal restructuring of Capital. Living standards would fall precipitously, unemployment would rise sharply, and many businesses would go bust, particularly in areas such as retail. Asset prices such as shares (meaning also Pension Funds) and house prices would fall by as much as 90%, as they did in Japan in 1987, and as they did during the 1930's. But, this crisis would then create the conditions for a much higher rate of profit.

Coming suddenly and under conditions where the working class is weak, disorganised and largely leaderless it would not likely create conditions under which workers could seriously challenge Capital. On this basis, Capitalism would as it has done many times in the past resolve the contradictions that beset it. It would do so at great cost both to workers, and to the very productive forces upon which development is based. But, the conditions of the Long Wave Boom, would likely make the ascent from this collapse spectacular, particularly considering the huge potential that the new productive forces, which would replace those destroyed, now possess.

But, such a prospect, despite the ultimate benefits it would present to workers would still represent a defeat for the working-class. It would be one more unnecessary crisis endured. It would be one more crisis resolved at the expense of workers, and at the expense of the destruction of productive power that we could have utilised. It will be one more crisis that Capitalism will have shown it can recover from, and for which we had no adequate response. As stated earlier there is no reason why Big Capital should want to experience such a crisis either. The task of restructuring can be undertaken far more effectively, and safely over the longer term, by continuing to finance it through debt. But, we cannot simply depend upon Big Capital imposing its will on the politicians. We have to take responsibility for our future ourselves.

During, the Financial Crisis of 2009/9, there were very few Co-operative or Mutual Banks that got into trouble. Indeed, the International Co-operative Alliance, wrote to the G20

“At the same time, those same world’s citizens know that there is an alternative secure, stable and sustainable model of business owned and controlled by 800 million people worldwide. It is true to its global values and principles of self-help, sustainability, community ownership and control, democratic participation, fairness and transparency.

It is a model of business that is not at the mercy of stock markets because it relies instead on member funds for its value; and is not subject to executive manipulation and greed because it is controlled by local people for local people. It is a business where the profits are not just distributed to its shareholders,but are returned to those who trade with the business, thus keeping the wealth generated by local businesses in the local community for the good of the local environment and families.

This is the co-operative sector of the global economy which employs 100 million people worldwide. It is no coincidence that the world’s most successful and stable economies generally also happen to have the world’s most co-operative economies.

It is also no coincidence, that those co-operative businesses that have stayed faithful to cooperative values and principles, are the same businesses that in recent weeks have benefited from the flight of deposits and bank accounts from the failing and collapsing investment houses and banks – an acknowledgement of the continuing trust with which they are endowed by the general public.”

A co-operative sector of the economy cannot insulate itself from the vagaries of a Capitalist market environment. But, a Workers State also cannot insulate itself from the global Capitalist economy that would surround it. That would not be a reason for not attempting to establish such a Workers State, to use it as a bulwark, a resource for workers to use as part of the global class struggle, and a shining beacon on a hill, towards they could set their own sights. Our answer to the contradictions facing Capitalism, now and in the future, is to develop our own workers alternative. Services that the Capitalist State attempts to close down, we should occupy and operate as Co-ops under democratic Workers Control.

We should do the same with any enterprises that Capital closes, where necessary organising the production of alternative products. We should ensure that all worker owned Co-operative property is integrated throughout the globe, in order that we can begin to co-ordinate production and investment, the better to be able to act counter-cyclically to capitalist crises. And, we should build our own political forces to defend andpromote the interests of this worker owned, co-operative property, enlisting the support of the Trades Unions for that purpose, and in return providing financial and physical support to those Trades Unions when they are in dispute with private capitalist employers.

We cannot wait for a Political Revolution like 1917 to save us from the crises that are an inherent aspect of Capitalism. We have to build the socialist future ourselves now, and in doing so we will better create the conditions for that revolution itself.

Back To Part 1

The Debt Crisis - Part 1

Two debt crises threaten global, economic catastrophe. The debt crisis in Greece has not been resolved by the fudge engaged in last week, and which could still unravel due to opposition from some EU countries such as Finland. Even if it does not, the same causes of that in Greece, extend to other economies such as Portugal, Italy and Spain, and already the Capital markets have turned their attention to these countries, pushing down the price of their Bonds, and, therefore, the yield up with a consequent effect on other interest rates. The credit ratings agencies are looking at reducing their ratings on six of Spain's biggest banks.

Meanwhile, the world's largest economy continues to perform its own comic opera, over the Debt Ceiling, which if it were to continue could see the US begin, at some point to technically default on its debt payments. But, in reality, what we see is another manifestation of what Marx talked about, when he referred to the difference between appearance and reality. Although these crises have the appearance of economic crises, they are in reality political crises.

On Friday, Obama spoke about the US's problem arising from not having a “Triple A Political System”. Vince Cable has spoken about the crisis being due to a few “right-wing nutters”, whilst even some sections of the British press have spoken about the crisis being the result of the “Tea Party Taliban”.

But, in fact, what we see is a reflection of those same political forces in Europe, not least in Britain. It is rather ironic that Cable should use this description, because the policies being pursued by the Tea Party are almost identical to the policies being pursued by Cable and the Liberal-Tory Government! If Britain's debt and deficit is sufficient to cause Cable and his Government to insist on the need for severe austerity measures, then how much more must they feel the Tea Party is justified in its stand, given that the UK debt and deficit is puny compared to the massive debt and deficit of the US? And, indeed, in the UK, there are now Tory MP's who have proposed learning from the Tea Party, and who are proposing to introduce a similar piece of legislation in Britain that would set a debt ceiling here too. Meanwhile, former Tory Chancellor, Norman Lamont, has come out to express the views of many Tory backwoodsmen, in arguing for the need to immediately cut the 50p Income Tax Rate. In Europe, the same political forces that are causing these policies to be raised within the Republicans and the Tories, are leading to similar demands for austerity, and fiscal conservatism amongst equivalent right-wing populist parties, especially when that populism can be raised in the form of demands for other countries to adopt them.

In Europe, that right-wing populism is combined with a jockeying for position, and influence within Europe itself, as Germany and France seek to drive towards the long-term goal of a federal Europe, in which the Franco-German axis will be central.

It is not economics which is behind these crises, but politics. Why, is it manifest in this way? Tories, Right-wing Republicans, and Tea Partiers do not represent the interests of Big Capital, which ultimately is the dominant section of Capital as a whole. From the end of the 19th Century, as Engels pointed out, the interests of Big Capital were for the promotion of long-term economic and social stability.

That is why they began, at that time, to introduce a variety of social legislation such as the Factory Acts, the introduction of Environmental Health legislation and so on. It is why they went from hostility to Trades Unions to an accommodation with them, because the Trades Unions could act as a rational means of conducting negotiations, and of controlling workforces via the intermediary of the TU bureaucracy. It is why they began to introduce various pieces of social legislation in respect of National Insurance schemes, which also undermined the moves that workers were themselves making in that direction, and which would have given them a greater degree of independence, and self-government from the Capitalist State. It was represented politically by Bismark in Germany, who introduced many of these measures early on.

It was represented by the Liberals in Britain, who at the beginning of the twentieth century began to advocate the idea of such social insurance and protection. It was represented by Henry Ford in the US, who recognising the need for this kind of approach, sharply increased the wages of his workers, and introduced a range of social welfare provisions for them so as to tie the workers to the company, stopping the wastage represented by workers moving elsewhere, and bringing about a significant increase in those workers productivity.

This idea of the importance of looking after the hierarchy of needs, as Maslow theorised it, was quickly recognised by Capitalists. At a macro-economic level that lesson was not lost either, as they introduced a range of institutions, such as Central Banks, whose role was in large part to help regulate the Capitalist economy in the interests of Big Capital, including the use of Monetary policy to avoid the biggest danger to Oligopolies – falling nominal market prices. Later, after WWII, these measures, adopted on a national scale to meet the needs of, still largely nationally based, Big Capital, were extended on an international scale to meet the needs of Big Multinational Capital, which increasingly separated itself from the ties and limitations of the nation state, and saw its future represented in the global system of states i.e. modern Imperialism. It resulted in institutions such as the IMF, World Bank, WTO, and so on, whose function is to attempt to regulate Capital on a global scale.

The drive for the last 100 years for Big Capital has been to try to reduce risk. These national and international bodies are part of the armoury, it has introduced to achieve that function. But, it has also introduced other non-state means of reducing risk, or at least that was the intention. One of the major risk factors for capital is not knowing what future prices will be. A shift in prices of inputs, or in the price you can obtain for your output, is the difference between profit and loss for Big Capitalist companies producing on a huge scale, with small unit profit margins.

Futures markets for agricultural products had existed for a long time. The extension of such Futures Markets were an obvious solution to the problem of uncertainty over future prices for Capital. It meant that, for example, airline companies could by the fuel they required in a year or two's time, at a fixed price thereby avoiding the damage that could be done by a sudden, perhaps temporary rise in oil prices. It meant that producers of many commodities such as iron ore, copper etc. could also sell their commodities at guaranteed fixed prices, rather than risk some unforeseen event driving those prices down. But, as Financial Capital followed the logic of capitalist development, and increasingly became separated from production, so the illusion created by the economics of the neo-classical and Austrian schools, that surplus arises in the act of exchange and not production, seemed to be realised. Money Capital was advanced, and without it needing to engage in any apparent productive activity, it appeared to return in an expanded form. The mere act of speculation appeared to create profit, once again seeming to confirm the Neo-classical/Austrian argument that profit is the reward for risk. But, of course, it was once more a matter of appearance contradicting reality. Risk does not create profits. Surplus does not arise from exchange, but from production. And, when reality asserted itself, the result was the Financial Crisis of 2008. In part, what we see today is a crisis, in which these conflicting interests between Productive and Financial Capital are playing themselves out.

The political forces that have historically represented those interests, of Big Productive Capital, are social-democratic in nature. That social-democratic consensus has extended across parties drawing together the left-wing of the Tories, for instance with the right and centre of the Labour Party – Buttskillism.

Even under Thatcher, the “Wets” constituted a continuation of that trend. But, the same has been true, particularly in other European countries. In the US, it is the Democrats, who most clearly represent this coalition of interests.

Of course, interests do not convert directly into ideas, or ideology. If that were the case then all workers would be socialists and our task would be easy. Engels makes this clear in his Letter to Bloch, where he says,

“...history is made in such a way that the final result always arises from conflicts between many individual wills, of which each in turn has been made what it is by a host of particular conditions of life. Thus there are innumerable intersecting forces, an infinite series of parallelograms of forces which give rise to one resultant — the historical event.”

All of these forces press on the individuals, for instance, who have the job of managing the enterprises owned by Big Capital. That is in addition to the conflicts of interest within different sections of this Big Capital itself. Many executives, are people who have themselves risen up from the ranks of small capital, and even from the Middle Class. Their own personal experiences and connections with other individuals, such as those involved in Conservative politics etc. will influence their own activity, and expressed views and allegiances, perhaps even more so than will, at any moment, their function as looking after the needs of that Big Capital.

Similarly, there will be small capitalists whose own immediate interests are threatened by Government policy; the small contractor who sees all of his Public Sector contracts disappearing, or the shopkeeper who sees trade decline sharply as the effects of the VAT rise, of rising unemployment – particularly in areas dependent on Public Sector employment – etc. and so on, will have reason, at least to question that policy. Yet, all will find it hard to stand out against the carefully constructed consensus, around which this section of society has been mobilised as an electoral coalition.

That consensus is built around the idea that the deficit must be tackled, and that means cuts. Yet, that consensus is new. The Tories did not hold that view until shortly before the Election. Even months earlier they had been promising to match Labour's Public Expenditure plans. The Liberals opposed the view not just before the election, but during it, and even during the Coalition negotiations.

In the US, it was Bush and the Republicans who had massively increased Public Spending and the deficit. Those who wish to argue that these parties are now pursuing these policies in the interests of Capital have to explain then why, so recently, these parties were arguing the exact opposite!

The consensus has developed out of a dialectical dynamic of its own. The Tories needed a narrative to separate them from Labour and the Liberals. The deficit was it. The facts speak against them. In fact, the average deficit as a percentage of GDP was higher under Thatcher and Major than it was under Blair and Brown. The real increase in the deficit arose in 2008, when it rose more than in the previous seven years combined, and that was clearly a direct response to the Financial Crisis, and subsequent recession. The Liberal-Tories claims on interest rates are also belied by the facts. After last year's Budget, Yields on the 10 Year Gilt rose! The Government has spectacularly failed to meet its deficit reduction target, and yet, Bond Yields are now falling radically. The US Budget deficit and debt makes that in the UK look puny, and yet, despite continued fiscal expansion in the US, Bond Yields are lower than in the UK. Japan, which has a massive budget deficit, has Bond Yields of just over 1%!

But, the Liberal-Tory position is not based on economic facts, or the need to deal with economic realities. It is driven by politics, as indeed, is the policy of the Republicans in the US, and of the various right-wing populists in Europe. All of these parties chose the narrative of the deficit, and the need for austerity, because it appealed to their natural constituency. Having chosen it, the Tory press chimed in with it, because its readership form that same constituency, and the need to sell papers, so as to make profits, drives its editorial stance. That constituency is the large swathe of the population made up of small capitalists, the middle classes, and backward sections of workers driven by its own narrow-mindedness and self-interest. Having tied themselves into that narrative, and compounded it with ridiculous comparisons of Britain with Greece, they are now locked into it.

The same is true in the US, where the pushing of these views for purely populist, electoral reasons, as a means of opposing Obama, and the Democrats, fuelled a similar media frenzy via Fox News, and other similar media outlets, which then unleashed the Tea Party, which in turn is now exerting a right-wing choke hold across the throat of the Republicans.

The extent of that was shown on Friday. The Republican Speaker of the House of Representatives, John Boehner, had put forward a Bill that proposed a series of Budget Cuts, and an extension of the debt ceiling. He could not even get all the Republicans to support it. Despite the fact that it faced opposition from Democrats, and some Republicans in the Senate, he amended the Bill, not to win over Democrats, but to win over the handful of Tea Partiers, by introducing the requirement of a Balanced Budget amendment to the US Constitution, which even Republicans like John McCain had said was wishful thinking.

What is the economic basis of these positions? For Big Capital, the maintenance of economic and social stability remains paramount. A global crash is not in its interests. It has vast amounts of capital invested in countries across the globe. Large sections of it will be destroyed. Large scale social disruption is also not in its interests, yet that is the likely consequence of such a crash. The Arab Spring has now spread to Israel, with large-scale protests, across its cities, by Israelis against Government policies. Those protests could easily spread to Southern Europe, where already mounting protests against austerity, rising living costs, and unemployment are taking place.

Where across MENA the protests have been about replacing bourgeois Bonapartist regimes with bourgeois democratic regimes, in Southern Europe, the protests would necessarily take on the nature of a social upheaval challenging the rule of Capital itself.

For Big Capital, which over the last 100 years has invested considerable sums and effort into ways of minimising risk, such a gamble is not worth it. It has a range of fiscal and monetary tools to manage such crises. It was seeing them used effectively by Governments after 2008. The chart for the progress of UK GDP shows the picture clearly. It showed a classic “V” shaped recovery as a result of Labour's fiscal expansion.

There was every reason to believe that a continuation of those policies would see the recovery become entrenched. But, from the time that the Liberal-Tories began talking down the economy, and certainly after the introduction of their austerity Budget, it is clear that the economy has turned sharply downwards once again, and is heading rapidly towards a renewed recession. The same was true in the US. The main reason its recovery stalled was the fact that Republican dominated State Governments introduced austerity measures, which counteracted the fiscal stimulus.

Despite all of the hyperbole, surrounding the question of debt, the fact remains that Capital has unprecedented levels of resources available for dealing with the crisis. Not only are the financial resources, available in Sovereign Wealth Funds, owned by Surplus Countries, around the globe, more than adequate to deal with the deficits in the debtor countries, but even within the debtor countries themselves, such as the US, the large enterprises themselves have huge amounts of cash available on their Balance Sheets.

Microsoft alone has $40 billion of cash sitting on its Balance Sheet. It is always worth mobilising these resources, from the standpoint of Big Capital, to avoid the consequences of a damaging crisis, if the result is to create the conditions for a continuation of growth, within which those expended resources can be recouped. That is always the case within the context of a Long Wave Boom, and since 1999, we have been in a new Long Wave Boom.

Forward To Part 2

Northern Soul Classics - Let Love Come Between Us - James & Bobby Purify

More toons from those tapes from the Summer of '72. This time from James & Bobby Purify.

Special Factors?

The ONS, has just released the GDP figures for Q2. It shows that growth fell from the 0.5% figure for Q1, to just 0.2%. In other words, in the last nine months, which is the period from when the Liberal-Tories introduced their austerity Budget, growth has been just 0.2%!!! Given that there is a 0.2% margin of error on the figures, that means that in reality the economy has not grown at all. Were it not for the growth that was continuing from the measures introduced by Labour, the economy would not have grown even in the last year. The real picture of that can be seen by looking at the graph of how growth hyas proceeded under Labour and under the Liberal-Tories.

According to the ONS, had it not been for the special factors such as thye Royal Wedding, and the effects of the Japanese Tsunami the figure would have been 0.5% higher for the quarter at 0.7%. That quite honestly is not believable. The effects of the Japanese Tsunami on production in Britain can only have been minimal, because Britain's manufacturing sector as a whole accounts for only 12% of GDP, and the other parts of the economy, in services would not have been affected at all.

As for the Royal Wedding,we were being told beforehand that it would act as a significant stimulus to the economy, because of all the crap memoribilia that would be produced around it. Now we are being told it actually cost the economy up to 0.5% of total production!!!

Given that UK GDP is £1.4 trillion, then if the Royal Wedding cost the country 0.5% of that I think we should be sending the Royals a very big big for them to pay!!!

In fact, every economist and business representative interviewed has poured scorn on the idea that these special factors could have had such a large negative effect. Even Ruth Lea, who can hardly be described as a Left-wing critic of the Government, called the 0.7% figure "bizarre".

Not only is there little to suggest these effects could have had that size of effect - essentially 2.5 times the effect that three months other economic activity had - but all of the survey data points in exactly the opposite direction.

The survey data shows that in the last three months, business and consumer confidence has continued to fall, and is continuing to fall. Inflation is pressing down on disposable incomes, as wages are frozen. Businesses faced with falling sales are cutting back their own spending. The Japanese tsunami, and the Royal Wedding are not responsible for the increasing number of shops that are closing on every high street.

If you want to knwo what is happening to the economy it is necessary to look at that actual survey data of how the trend is developing, and the graph above shows that trend in its reflection in GDP, it is a steadily downward trend dating from when the Liberal-Tories began to talk down the economy, and frighten people with their proposals for austerity.

In fact, the reason the economy is tanking, and is set to get much worse as the real effects of the Liberal-Tory spending cuts come into effect, is precisely those policies of austerity and cutting. In fact, the same policies that Vince Cable described as those of "right-wing nutters", when he was referring to their application in the US!!

Apparently, even Cameron has been running scared of just how much damage his Chancellor is doing to the economy, the same Chancellor who it seems from reports has already done him considerable damage, as it was him that advised Cameron to take on Andy Coulson.

Yet, Osbourne having lashed himself to the mast is standing firm, in sending the economy onwards towards the storm, and the reefs that lie just below the water. And, given their atatcks on much of the State apparatus, they are heading for the storm with a mutinous crew.

Business has joined Labour in demanding selective VAT cuts, and other economists are calling for a cut in Income Tax to stimulate demand. Cable is arguing for more Quantitative Easing. But, these measures are doomed to failure.

The dynamic which the Liberal-Tory economic policy has set in motion is one of decline and retrenchment. If you think you are about to lose your job, if you see your wages falling in real terms, the sensible course of action is to batten down the hatches, put money to one side for whatever might come. A cut in VAT, will, under those conditions mean that people take advantage of a temporarily lower price, and put the savings to one side, to be used should an emergency arise. The same is true with an Income Tax cut, the extra money in your pocket will go into the bank, even at such low interest rates, just in case its needed. And, Quantitative easing is only any use, if there is demand for the money that is printed.

There is no shortage of money circulating in the economy. In fact, there is so much of it compared with the demand for it, that interest rates are at record low levels, and large chunks of it sits in Banks, and on the Balance Sheets of large companies unused. Simply printing more of it, will not mean more gets circulated, it will just mean more gets hoarded, or gets shipped overseas to pay for imports of Chinese goods. Keynes describes this phenomena as "pushing on a string".

If you want the additional money to circulate to create additional demand, then its first necessary to create an amount of additional demand, by increasing Government Expenditure. Then, as the economy begins to grow, and confidence is restored, money in people's pockets causes them to be more prepared to spend than to save. The Liberal-Tory policies are bound to result in the exact opposite no matter how much money they print.

Can the Liberal-Tories change course? Well they have been forced to do U-Turns on pretty much all the rest of their policies due to their inherent incompetence, and the fact that they appear to have created a climate of sullen resentment, and opposition within the ranks of the Permanent State Bureaucracy, which is not surprising when those very people are being told they may lose their job, they will definitely see their pay cut, and will have to pay more into their pension, work longer, and get less pension when they retire. Divisions in the ranks of the Tories has now seen Health Minister, Andrew Lansley, whose Health Service reforms were roundly attacked by other Ministers, come out and attack the proposals for cutting Pensions in the NHS. You scratch my back, and I'll scratch yours, which is the usual method by which decision making occurs in Cabinets and other bureaucracies, also works in reverse. But, the austerity measures are central to the Liberal-Tory narrative. If they reversed course now, their raison d'etre would disappear, and an election could not be far away.

Its possible that, under those conditions, Labour could win an election on a programme of bringing growth back to the economy, and such a programme could also win the support of important sections of Capital, worried at the damage that the austerity measures in the UK, and Europe is doing. Social-Democracy has always been the real ideological representation of the interests of Big Capital, whereas the Conservative policies of the Tory Right, or the Republicans in the US have always been more closely a reflection of the interests of small capital, of the petit-bourgeoisie, and more backward sections of society. The undermining of the Murdoch Empire, which has also championed that set of ideas in Britain, the US, and elsewhere, could be the beginning of a turn away against them, and a reassertion of the interests of Big Capital.

Right-Wing Nutters

On the BBC Andrew Marr Show, yesterday, Business Secretary, Vince Cable, said that the problems, over settling the issue of the US Debt Ceiling, were down to the actions of a few right-wing nutters. He is, of course right. The situation in the US is ridiculous. Unlike every other developed economy, where Governments decide on Budgets, which are then approved or rejected by Legislatures, but which then proceed to raise the necessary revenues through taxation or borrowing, the US has a law, which limits the amount of debt that the country can take on.



Given, the immensity of the Financial Crisis of 2008, and the expenditures that were undertaken first by Bush, and then by Obama to deal with it, and with the subsequent recession, that debt ceiling has now been reached, and it should have been a fairly straightforward matter of simply passing a resolution to increase it.

However, in the weird politics of the US, what we now have is a situation, that is not that uncommon, of a Republican dominated Congress holding a Democratic President and Senate to ransom.

In the past it has been vice versa with Democrats blocking proposals from Republican Presidents. Indeed, it is not the first time that such a financial stalemate has occurred. There have been previous occasions when the US Government has ground to a halt, because it had not passed a Budget, and had no legal authority to spend.

To be clear, this is not at all like the problems facing Greece, or other Eurozone economies, whose problem is that they simply cannot afford to pay their bills, and required bailing-out. The US can pay its bills, and is never likely not to be able to pay its bills - as in the past, it can, like Britain, or any other country that has control over its currency, simply print more of it. The problem is only that the Republicans have decided to risk the economy, not just of the US, but of the world, for purely party political reasons.

It is not even that they object to raising the debt ceiling, though some members of the Tea Party, do, but that they have decided to refuse to agree to it being raised, unless Obama, and the Democrats agree to Spending Cuts, and only limited tax rises. Meanwhile, Obama and the Democrats, having already agreed to most of the Spending Cuts the Republicans are demanding, also want to raise taxes on the rich, marginally, by removing some of the Tax concessions that Bush brought in. The Republicans are opposing any tax increases on the rich.

Last week it looked certain that a deal had been reached, based on the proposals of the so called Gang of Six. Now it looks like that has failed. In truth, the markets do not seem too troubled by these events. The dollar has continued to rise against most other currencies, as it has been doing for several months. Bond investors, who are keen to put their money where at least it will be safe, continue to see the US as a safe haven, which has resulted in the yield on the US 10 year Treasury falling way below 3%, and continuing to fall.

Whatever, the Credit Rating Agencies might threaten about reducing the US's AAA credit rating, it clear that the Bond Vigilantes, such as Ed Yardeni, are still not ready to stop buying US Bonds. That could change quickly if no deal is reached soon, and the US stops spending money, including its repayment of interest, resulting in a technical default. In reality that probably will not happen for several reasons. Firstly, its likely that the brinkmanship will see one side or the other blink - probably the Democrats. Secondly, even if the US did stop paying interest, the markets know that this would be only a temporary situation lasting maybe a few days, or at most weeks. It would then resume payment. This is not like Greece, where private Bondholders, have just seen on average 21% of their money disappear.

But, the arguments are not even over that much. The deficit reduction proposals amount to $4 trillion over 10 years, to be made up approximately of $3 trillion in spending cuts, and $1 trillion in tax rises. That might seem like an awful lot of money, but everything is relative. The US, even under Bush, engaged in a fiscal expansion of $750 billion, just in response to the Financial Crisis, that was used for bailing out the Banks. It engaged in further fiscal expansion to bail-out the big car companies. Last year, Obama introduced a fiscal expansion of $2 trillion just for this year, which went on tax cuts for low wage families, and in extending Unemployment and Welfare Benefits for the long-term unemployed.

Put in that context, and the context of the massive size of the US economy $4 trillion over 10 years, is pretty small potatoes. In fact, what has characterised the US completely, from the UK and other European states, in the last year or so, has been the extent to which it has continued to employ Keynesian fiscal stimulus, despite the massive size of its debt.

Its interesting then that Cable should depict the problem as one deriving from a few "right-wing nutters". He is absolutely correct to characterise it that way, but he seems to fail to recognise that these right-wing nutters are, in fact, pursuing precisely the same kind of economically illiterate policies that he and the Liberal-Tory Government are pursuing here!!!

Indeed, the Tea Partiers, and other right-wing Republicans in the US, use as their example in arguing for their policies, precisely the actions of Cable and his Government in the UK.

Here, those policies, as they have in Ireland, Greece, Portugal, Spain, Italy, and elsewhere they have been used, have tanked the economic recovery, sending economies back into a recession they may have difficulty recovering from. In the UK, its likely that the next GDP figures will show the UK having negative growth once again, or at best being stagnant. In the US, the Keynesian policies, of fiscal expansion, have dragged the economy out of recession. Prior to the election of a number of right-wing Republicans, the economy was, in fact, starting to grow quite strongly. But, those forces have undermined the expansion by cutting local and State budgets. The US continues to grow, but more slowly.

That is not to say that the implementation of Keynesian policies can always resolve the problems of a capitalist economy. It can't, Capitalism is a system in which crises are inherent. But, that is not to say that there are not times, like now, during a Long Wave Boom, when Keynesian stimulus CAN work to cut short recessions. As Mandel sets out in "The Second Slump", there were numerous such recessions during the previous Long Wave boom, and all of them were cut short by the use of Keyensian stimulus.

Now as then, there is, in fact, more than enough Surplus Value available within the global economy to finance such a solution. As Marxists, we do not advocate Keynesian solutions to the problems of Capitalism, but nor are we indifferent to the solutions that Governments choose to those problems. Governments are frequently driven by ideological dogma, based on the kinds of policies they think they need to adopt to be elected, or to satisfy their membership base, rather than on any rational policy designed to deal with the problem, or even to meet the needs of the dominant sections of Capital. We have to reserve the right to point out that such solutions are available even within the context of Capitalism.

Northern Soul Classics - These Things Will Keep Me Loving You - Velvelettes

A piece of classic Summer Time Northern from Motown. This time from the Velvelettes

Also check out the second video, which is not such good sound quality, but is a live TV appearance.

Greek Fudge

As most economists have been saying was inevitable, for some time, Greece has defaulted on its debt. But, as has been forecast, for some time, it was not an unplanned default of the kind that would have plunged credit markets into chaos. Indeed, the EU Ministers have gone out of their way to say that it is not a default at all, whilst the ECB President, Jean Claude-Trichet, who was opposed to any deal that involved any kind of default, was non-committal, as to whether it was or not, preferring to leave that decision up to the international credit rating agencies.

In fact, those agencies have made their view clear in previous weeks that any change in the terms of repaying Greece's existing debt, would be a default. That poses problems for the ECB, which has said that in the event of such a default, it could not accept Greek Bonds as collateral against loans. But, that, like the rest of the package, is likely to be fudged.

The Eurozone is to lend Greece a further €109 billion, some of which is to come from a so called Private Sector Initiative (PSI). In addition, the interest rate charged to Greece for the money it has been lent by the EU is to be reduced from 6% to 3.5%, and similarly that rate is to be applied to the EU bail-out loans to Ireland and Portugal. In addition, Greece is to be given 30 years to pay the money back. According to the BBC, the terms of the deal, according to the Institute of International Finance ,constitute a 21% haircut on their loans by Greece's lenders. At best this is just sticking another plaster on a gangrenous wound.

We will have to see what the further consequence of the default are. For one thing, we do not know what the effect will be in relation to all of the Credit Default Swaps (CDS) issued against Greek Debt. A CDS was initially intended to be a a way in which a lender could insure themselves against a default on the loans they make. It meant that if the borrower defaulted the lender could be recompensed by the Financial Institution, which insured them against their loss.

Because, these losses could potentially be large, the Financial Institutions issuing the CDS's, usually packaged them up into bundles, of varying degrees of risk, and then sold these on to other investors, so that they themselves were insured against, or had removed the risk from themselves to others. This, of course, was also the same kind of process that was engaged in with Mortgage Backed Securities, which packaged up sub-prime mortgages into similar packages which were then sold on.

The problem with the derivatives based on MBS's was shown by the sub-prime crisis. If the underlying loan is unsound, because the borrower cannot repay, and if the value of the underlying asset against which the loan was made – a house – is grossly inflated, and rapidly falling in value, then those who are ultimately left holding the baby, in terms of needing to pay out, can be themselves bankrupted. Given that these products were sold extensively, and that no one really knew who was holding the risk – what is known as counter-party risk – then banks and financial institutions stopped lending, keen to ensure they hoarded their own cash in case it was needed, and not wanting to lend it to others for fear they might be about to go bust.

The problem with derivatives based on CDS's is not just that, but as with many more of the exotic products developed in Financial Markets over the last 30 years, it was not just those making the loans who could take out the insurance. In short, it became possible for anyone to buy a CDS, as a gamble that Greece or some other economy might default. It was literally that a gamble, just like betting that there will be a White Christmas. So, the amount of CDS issued could be way more than the total amount of debt issued. And all of those will have bundled up and sold to other Financial Institutions, Pension Funds etc.

But, however, it is dressed up, Greece HAS defaulted. If you had made a bet that it would, you will want to be paid out for making a correct bet, and that means someone has to pay. Of course, the extent of the default is limited, and these kinds of bets are usually laid on the basis of spread betting.

So, in the same way that you can lay a spread bet that England will lose by so many runs in the Test Match against India, and you bet per point of loss, so that the bigger the loss the more you get, so you can lay a spread bet of the amount of default. The limited nature of the default will mean that the extent of exposure will be limited, so this is not likely to lead to any bankruptcies or severe credit event, but in reality we don't know until people start making claims, and others have to start paying out on them.

Either way, this is no solution for the problems of Greece, and the Eurozone. It means that Greece is given more breathing space, which means the EU is given more breathing space to come up with a proper solution. It means the burden of debt for Greece is marginally lessened but only very marginally, reducing its ratio of debt to GDP from about 160% to 140%, but it does not address the fundamental issues. In reality, the Greek debt, as well as the Portuguese and Irish debt needs to be simply written off as a start. That means that the rich Northern European nations, primarily Germany have to pay the bill. That is essentially what they are doing here, but doing so in a piecemeal, and inefficient manner.

It is inefficient, because it does nothing to deal with the underlying problem facing Greece, and facing other EU countries themselves such as Portugal and Spain, but also to a considerable degree even larger economies such as the UK. That is the basic issue of a lack of sufficient, globally competitive, industries to enable them to pay their way in the world, whilst maintaining existing living standards. Greece is just the most stark example of that problem facing much of the EU. Ireland, in fact, does not have that problem to such an extent. In the last few decades, Ireland has been able to restructure a lot of its economy, pulling in many global high-tech companies, and that provided the basis for many Irish people repatriating, which in turn stimulated its housing boom.

Ireland's real problem was that it used the access to cheap credit to finance that housing boom, which also financed rapidly rising property prices, and credit fuelled consumption. If Ireland's debt burden, built up as a result of that, was scrapped, and consequently, if the massive austerity measures, introduced to pay for it, and which are crippling the economies potential for growth, were no longer necessary, then Ireland could begin to grow sustainably pretty quickly.

But, that is not the case in Greece. It is not the case in Portugal, and it is largely not the case in Spain and Italy. The current bail-out, therefore, does nothing to deal with the underlying problem in Greece, of a structural deficit of around €15 billion a year. Even if all of the Greek debt, currently estimated at around €340 billion, were wiped clean, there would still be this €15 billion to deal with. Ultimately, that can only be dealt with, if Greece were to restructure its economy so that it developed new industries and sources of income that were able to compete globally. The only other solution to that, would be for a large reduction in Greek living standards, but that would have further complications in that it would mean a reduction in the quality, of Greek Labour Power, making it even less competitive, and would also mean that in the short term, Greek Capital itself would find it harder to realise Surplus Value, due to a reduction in workers consumption, and that would make accumulation even harder.

The real solution then lies in restructuring, and that is a lengthy process requiring at least ten years. So, in addition to wiping clean the €340 billion of debt, to which has to be added that now owed as a result of the bail-outs, amounting to perhaps another €200 billion, it would be necessary to finance that on going annual deficit of €15 billion for up to 10 years i.e. a further €150 billion. But, even that would basically only maintain the status quo. For restructuring, large amounts of additional investment are required, which could only under current conditions be provided externally. I estimate that for an effective restructuring something around 10% of GDP p.a. would need to be set aside for investment to bring about such a restructuring.

Some of that would need to go to Public sector investment in schools, education, training and so on; some would need to go to rebuilding infrastructure, and creating an infrastructure fit for the 21st century, such as the laying down of high speed broadband, or the creation of an efficient wi-fi network providing high speed broadband access; some would need to go to recapitalise Greek Banks, which would probably have to be nationalised as part of such a process; and some would need to go into creating new industries where Greece could be competitive. Most of the latter would probably come from private sector investment, but that will only materialise if companies and investors believe that the economy is basically sound and underwritten. Assuming half of this investment came from the private sector, it means that Public investment would need to be around €10 billion p.a. for 10 years, or a further €100 billion. That means the total cost to the Eurozone of solving the Greek situation would be around €750 billion over ten years.

That is not at all impossible to achieve, but it is way above the current amount available in the EFSF and EFSM mechanisms created to deal with such bail-outs. Moreover, that is just to deal with the fairly minor economy of Greece. When we come to look at the issue of a similar resolution of the problems of Portugal, and more specifically, Spain, Italy, Belgium and others, then the figures become considerably larger.

It can be seen why what is required is being described as some form of Marshall Plan, and it can be seen why what is required to pay for it, is not some tinkering about with a few billion here and there, or short term financing by the ECB, but is the establishment of some form of fiscal union, and the issuing of EU Bonds. That is why even the Tories are now saying that Europe should proceed with further integration, a development which when it occurs, will pose problems for a still Eurosceptic party, which heads a country that will find itself increasingly excluded from the important decision making within such a European state.