Sunday, 31 July 2011

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

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