The Economy Of Analysis - Part 13

In an article in Weekly Worker, on August 11th, Jim Creegan repeats the usual line about policy being driven by the need to protect Plutocrats.

He does at least concede the possibility that he may have been wrong previously when he asserted that it was the Tea Party who now represented the real interests of US Capital. In the article, he focusses on Obamacare to make his point. But, his argument his undermined by the fact that he goes on to admit that the main driver, of the rising budget deficit in, the US, is the rising cost of health and social care.

He correctly states that it costs twice as much in the US as in the far more comprehensive healthcare systems of other advanced countries. But, he fails to point out that these lower cost, more comprehensive systems are precisely the kind of socialised systems that Obamacare was a move towards, and which sections of Big Capital had been demanding, in order to reduce their costs! So, how can opposition to such systems, and a move towards them in the US be explained in terms of the interests of US Capital?

Like the SP, in the UK, he is in thrall to the Fabian idea of higher taxes without considering what Marx said about why they could not work – it means reducing Surplus Value available for accumulation, thereby slowing growth and employment for a start.

It would be wrong to criticise him for saying Obama put forward no new stimulus, because Obama didn't announce his new stimulus package until after Jim's article appeared, but, he forgets that Obama had introduced a $2 Trillion stimulus last year. It also shows the problem of framing your analysis in terms of some “Capital Logic” demanding austerity, because it means you are wrong footed when Governments change course. When they do so only a week after you have made such a definitive statement it makes you look daft, and undermines Marxist analysis in the eyes of workers.

Even within the same article, Jim is forced to accept that the deal between Democrats and Republicans, “kicks the deficit reduction can some distance down the road.” But, he's wrong to say that this implies even more draconian cuts later. The reason the can has been kicked sufficiently further down the road, is to make it more likely that the deficit can be dealt with by a combination of higher inflation, higher growth, modest tax rises, and spending cuts.

Jim is right to say that there is basic agreement between Democrats and Republicans but not in the way he suggests.

Bush massively increased spending and the deficit – as had Reagan before - and Geithner says everything must be done now to deal with the crisis, and the deficit can be addressed later. He's right to say that the difference was driven by an appetite for narrow political advantage.

In the same ediction of the paper, Eddie Ford, says that austerity is the ideological orthodoxy from Washington to London, but that isn't true. The US from 2009 on has been implementing stimulus, and continues to do so. The proposals for Cuts are proposals for some time never in the future, and the US has been trying in vain to get the EU to follow suit for the last 18 months. In fact, as Paul Mason has pointed out, such a strategy had been agreed at the Pittsburgh Summit.

It has been ditched by EU politicians who adopted austerity as their mantra for the same reasons the Tories – and later Liberals – did in Britain, and that the Republicans, particularly under the lash of the Tea Party did in the US i.e. that “narrow party political advantage” that Jim Creegan had referenced. The consequences of that are now materialising, and they are searching for ways of ditching it, whilst saving face.

Eddie talks of Gold being a safe haven “for now”, though its not clear what he means by this. The Marxist analysis has always been that Gold represents the real Money Commodity, and has intrinsic Exchange Value.

Fiat paper currencies, and Credit, like the metal tokens that preceded them, are merely representatives of this Gold, and they are depreciated in proportion to the amount coined/printed/created in relation to the Gold they represent. (See my 2007 Blog Gold Why Its Price Is Soaring) It has always been the case that this reality asserts itself when there is a crisis in the fiat money, and credit system. So it is today. As more paper money is inevitably printed (which current proposals for the ECB to buy up peripheral Bonds, and the proposals to leverage up EFSF funds require on a large scale) to deal with the crisis, so inevitably will the price of Gold rise! In fact, the authorities over recent years have done everything they could to stem the rise in Gold. Gordon Brown's much publicised sales several years ago were part of a wider attempt by Central Banks to sell Gold to reduce its price.

In recent weeks, the Commodity Exchanges have increased, several times, the margin requirements for Gold trading i.e. the amount of deposit that traders have to put down on each trade. The last time that was done was last week, when the Gold price was under pressure already from Hedge Funds and other Financial organisations desperate to sell everything to raise cash. Despite that, Gold has continued to rise, having fallen back to where it was six weeks ago, the last few days have seen it begin to regain what it had lost.

Nor is it clear why “it is needless to say” that the Fed did not announce QEIII. On the contrary, QEIII and other measures such as “The Twist” are highly anticipated!

Eddie also confuses Bond Yields and Interest i.e. the Coupon paid on those Bonds. The Interest, or Coupon is the amount the Bond Issuer pays on the face value of the Bond. The Yield is the actual percentage this represents of the current market value of the Bond. This does not change the actual amount of Interest that the Bond issuer pays out on existing Bonds, but only the price at which it is able to sell new Bonds. He also confuses a “Bear Market Rally”, with a “dead cat bounce”. The latter is when markets have fallen precipitously, and on the following day rise only marginally i.e. in the way a dead cat might bounce. The former is also called a “Bear Trap”, that is in a Bear Market, shares can rally sharply encouraging investors to believe that the bear market is over, but then after money has come into the market, the slide resumes again.

What we have seen is the latter, and its important to recognise this difference, for what it tells us. At the beginning of August when Eddie's article was written, we saw dramatic falls on markets. But, those declines were matched almost alternately by large rises. Then, during September we saw markets largely recover, until the sell-off resumed, as fears over the EU debt crisis returned. In other words the markets have been characterised by extreme volatility with the VIX index hovering around 40. What this indicates is that the markets are uncertain about where the global economy is headed. One minute the markets are consumed by fear, at the thought that Greece will default, and another Lehman style calamity will engulf the world. The next minute, they believe that politicians and Central Bankers have got their act together to resolve the EU crisis, and that the conditions are set for a return to growth.

That is important, for understanding what that build up of “Surplus Capital” that Hillel Ticktin referred to represents.

If you have a lot of money in the Bank, and decide not to spend it for now, it does not mean that you have nothing to spend it on, or that you do not intend to spend it. It can mean that you have a precautionary motive (as Keynes described it in his Theory of Money) for holding on to it under current conditions. For example, you might think that the car or house you want to buy is about to fall significantly in price, so it makes sense holding on to your money for now, in order to buy it cheaper in a few weeks time. Or it may mean that you think you might lose your job, and so you will need the money to cover bills. In fact, as I have argued for the last 18 months, what the Liberal-Tory policies did in the UK, was to affect these “animal-spirits”, and cause consumers and firms to become far more precautionary.

The same is true of the austerity measures in Europe, and as a consequence, firms globally, even though they continue to make rising profits, have decided that the rewards for future investments do not justify the risks involved in making them. In short what we have is not "Surplus Capital", but Money Hoarding. If politicians got their act together to resolve the EU debt crisis, which they could easily do from an economic if not a political standpoint, then that risk/reward ratio would change dramatically, and a considerable increase in investment could occur. That is why the markets are whipsawing between pessimism and optimism.

Eddie Ford is right to say that the US economy has slowed. I've stated some of the reasons for that above and elsewhere. But, it is also true that for the last 30 years at least, the economy has moved through three year trade cycles. In the last 18 months the economy was growing strongly after the last cycle in 2008/9 coincided with the Credit Crunch, so a new slow down would have been due towards the end of 2011, beginning of 2012 anyway. But, a slow down does not mean a recession. A slow down in the context of a period of strong growth can be barely noticed, and in any case can be mitigated via the automatic stabilisers that operate in a modern Capitalist economy through the Tax and Benefit system.

Its important to separate out these economic realities from the effects of the Political and Financial Crisis, and how they might in turn affect the real economy. To say the EU is “too fractured” and so on, as Eddie does, is to provide a hostage to fortune. I've set out exactly what those fractures are, and why the DO make it difficult for EU politicians to do what is needed.

But, we do have a single EU Capital, and the interests of its dominant component, and indeed of global, Multinational Capital, is that a solution is found – hence the amount of statements to that effect now being made. Every EU crisis has led to greater integration and closer union. It is foolish to say it definitely will not happen this time too.

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