The Economy Of Analysis - Part 14

Eddie Ford in his Weekly Worker article referred to yesterday, repeats an argument that Mike McNair has put forward in the past about the decline of the US hegemon. But, those arguments seem misplaced. The decline of the US hegemon does not require a new one to immediately replace it. At the end of the 19th Century, Britain lost its hegemonic position, as Germany, France and the US rose to challenge it. Yet, that did not prevent a period of rapid expansion of Capitalism on a global scale, and its extension to other countries such as Russia. The Pound did act as a global reserve currency, and yet all currencies were tied to the Gold Standard, such that it was Gold, which really operated as Global Money, and the role of the pound was if anything constrained by that. In the 1970's, when a similar period of rapid Dollar decline occurred, its role as reserve currency did again come under attack, and for some years there was chaos in the global currency system – which is one reason that Gold resumed its traditional function as Money, rising from $30 an ounce in 1970, to over $800 an ounce in 1980.

It was only resolved with the introduction of floating exchange rates, which in turn was only made possible with a return of dollar stability arising from the Monetary policies introduced by Paul Volcker. Today, the dollar is showing relative strength, despite the US Credit Rating being downgraded, just as the yield on its Bonds is falling too. That is because fear is causing a demand for cash, and safe havens. The US continues to be seen in that role, but the rise in the price of Gold, and the demands of China for some new reserve currency based on a basket of currencies, shows that the existing global currency system is no more set in stone than was the Gold Standard, nor the arrangements established at Bretton Woods.

But that is just a reflection of the fact that the relations of the world economy are no longer those established after WWII, a fact that much of the Left seems to have difficulty coming to terms with, especially those elements of the Left, which have worked with the kind of dogmatic theories of Imperialism, which denied any real development in former colonies, and neo-colonies, that operated with a crude centre-periphery model, or based itself on dependency theory.

So, it continues to define the health of the global economy, not by looking at its totality, but by continuing to focus narrowly on every downturn, every setback affecting the old developed economies. But, the reality is that although there is clearly a global, as well as a North American and European slowdown – which is inevitable in a global capitalist economy – the conditions facing the economies of China, India, Brazil etc. are not at all those facing Europe and North America. In the developing economies 20 million new jobs per year are being created!!! This is a symptom of the real economic basis to the crisis affecting the old developed economies – the restructuring of Capital on a global basis, the effects of Combined and Uneven Development within that restructuring, and the fact that a new powerful, dynamic drive forward of Global Capitalism is coming up against the inevitable contradictions that creates, especially within the continued existence of political superstructures created in the 19th Century, based around national Capitals, and the need to develop new international and intra national state structures compatible with a new dynamic global Capitalist environment. The political crisis in the EU, and its ramifications, are the clearest example of that.

It is important to understand that not every crisis is one that threatens to bring the Capitalist System down, it is important to understand that not every crisis is immediately economic in nature. The current crisis in Europe is evidently political rather than economic. If we take the Eurozone economy as a whole, then the levels of debt to GDP, the size of deficits are not at all exceptional.

That is one reason that although, everyone knows that ultimately it is the German economy that stands behind the debts of Greece etc. the Yield on German Bonds is historically low. It is why, the Euro currently stands at more than 50% more than the 80c value against the dollar it had shortly after its introduction. The EU, taken as a single economy, does not have an economic crisis.

It has more than enough resources to ensure that its current debts are paid, and that it can borrow at reasonable rates, to ensure that it can invest and restructure its economy, to ensure that it is able to operate efficiently within the global market. If it chose to do so, the increase in investment and employment that would result, would give a massive boost not just to the European economy, but to the global economy. What prevents that is not economics, but politics.

Hillel Ticktin referred to the large amount of Money that is hoarded around the globe.

Keynes in his Theory Of Money, describes three types of demand for money. Firstly, a Transactions Demand, made up of the money that people require on a general basis to purchase goods and services, to pay wages etc. Secondly, there is a Speculative Demand, which is made up of people wanting money to invest because they think that the price of something is going to rise in the near future. Thirdly, there is a Precautionary Demand made up of people who want to hoard money, because they think that prices may fall in the near future providing an opportunity to buy at more advantages prices, or who fear some kind of setback, which will mean they need savings to cover their expenses.

If we look at these we can see that there could be a decline in the first, because as economic activity slows, fewer and smaller transactions occur. On the other hand, rising inflation could mean that more money is required to pay for more expensive goods. But, we can see why the other two types of Demand could rise sharply, creating the tendency for money hoarding that is being seen.

On the one hand, Speculative Demand for Money has been manifested in falling share prices, and in the prices of other risky assets, and has gone into Gold, as well as into Government Bonds of those countries who investors believe represent relative safety against default i.e. those that can print their own money, such as the US, UK, Switzerland, Japan etc. And contrary to the nonsense talked by the Liberal-Tories, this has nothing to do with implementing austerity measures to control deficits, as the low yields on US and Japanese Bonds illustrates.

Finally, because of the political crisis in the US over the Debt Ceiling etc., and in the EU over bringing about a political solution to the debt crisis in the periphery, and in Britain brought about by the austerity measures introduced by the Government, firms have decided to hold back on further investments, for fear that these political factors will create economic chaos. And the economic consequences of that IS to bring about economic crisis. It is to cause individuals also to operate their own precautionary motive to put money to one side for a rainy day, to look to selling your house, and move to something smaller or to rent, for fear that in the near future you will not be able to pay the mortgage, and that rapidly falling house prices will then leave you with no exit strategy outside repossession, and so on.

This is the real political and financial basis of the rise in money hoarding, rather than any kind of absolute Surplus of Capital that could not find profitable avenues of investment were that climate of fear, and political crisis not to exist.

In concluding this series, I want to look at some of the policies that have been put forward by the Government and Opposition for stimulus. One suggestion put forward by Labour has been for an immediate cut in VAT. The Liberal-Tories have also looked at the possibility of tax cuts, most notably the Tories muted proposals for cutting the 50p tax rate.

But, given the nature of the problem, tax cuts of any kind will not act to provide the needed stimulus. If what we have is money hoarding out of fear of what the future holds, then a tax cut simply facilitates a greater amount of money hoarding, not greater consumption or investment. If you think you might lose your job next week, a small reduction in your shopping bill, because of a cut in VAT will not cause you to rush out and spend, it will cause you to put the few extra pennies away to cover next week's bills.

If you are a firm that is looking at a falling order book, or even fearful that things could turn down due to your customers losing their job at the local Council, a cut in Income tax, or Corporation Tax, or National Insurance, will not cause you to go out and employ another couple of workers. Tax cuts can only act to stimulate activity, if they are introduced in a period of rising confidence and optimism about economic conditions.

The other solution that has been mooted is that of bringing forward Capital Projects for various types of infrastructure such as road building, the introduction of fast-broadband connections and so on. But, again this depends upon the kind of projects being planned. Over the long-term, many of these projects are required in order to create an efficient economy.

However, a balance has to be struck. The project to construct the High Speed 2 rail network, for instance, is likely to take more than a decade. During all that time, resources will be required for its construction, all those working on it, will need to be fed, housed clothed, entertained etc., all of which requires resources that could have been put to other productive uses. Yet, because it will take more than a decade to complete, none of these consumed resources will find their way back into the economy in the form of improved transit times etc. until then. And, of course, HS2 will not bring about faster, more efficient transport of goods, and there is a question in an era of increasing electronic communication, as to whether a train service of that kind is the best use of resources compared to the development of tele-conferencing etc. even now, let alone allowing for what conditions and potential might exist in ten or twenty years time.

But, the same thing applies with fast-broadband too.

If a massive campaign were undertaken to bring about a super-fast broadband network covering the whole of Britain to be completed in the next year to eighteen months, that might have some justification, and be able to be bringing some quick benefits from both employment, and the reduction of costs, improvement of efficieny for business. But, the current proposals will leave Britain with what is already a slow Broadband compared to places such as Singapore, (which intends to have a superfast broadband provision to 85% of people, up to 1GB per second by 2012) and certainly by the time its roll-out is completed in ten years time, will be woefully inadequate, and out of date.

Any such projects, which suck resources out of the economy to cover the necessary investment, and to pay for the wages of those employed in the construction, but which do not quickly put value back into the economy, are likely to be counter-productive. What is required is to invest in those things, which will bring about rapid gains in efficiency in the way the economy operates, which will be immediately labour-intensive, and will begin to reverse the rise in unemployment, and falls in confidence. In fact, one of the biggest things the Government could do in that respect would be to call a halt to its Cuts programmes for the State capitalist sector.

It could, instead look at changing the allocation of resources within it. Things such as an extension of cheap child care, would both create meaningful jobs, whilst facilitating employment by women workers, currently tied down by inadequate childcare facilities.. Further resources for Secondary Education could have an immediate effect in helping to ensure that kids leave school with better skills, needed for the transformation of the economy towards higher-value, higher skill production. Similarly, a focus on dealing with road maintenance in areas where this causes repeated problems would be more effective than large scale road building projects.

Further changes would be more drastic. If economies like the US and UK are to quickly shift their economies towards high-value, and to do it before their existing advantage is eroded by India, China and other countries moving themselves into those areas, they need a large supply of appropriately trained workers. The approach that has been adopted of encouraging workers to engage in Higher Education, and to cover the cost via taking on massive amounts of debt, is unlikely to be successful in a climate of fear, and concern over the amount of existing private debt.

Given the issues over how to fund this Higher Education, one solution would be to abandon the existing models, and return to the idea put forward by Marx and the First International, of combining education with employment. After all, if Capital wants to have access to these highly skilled and educated workers, it needs to be prepared to pay for them.

In place of the Fordist, educationalconveyor belt, which simply feeds new workers through from Primary School, to University, the Government could encourage workers to leave school at 16, at the latest, and for them to be given a guarantee of paid employment.

That should be combined with a requirement for all employers to have to send their workers to College and University, and to pay their fees. The Government might even consider tax relief for those that do so. This would avoid the problems of students mounting up huge debts, it would mean that there would be a guaranteed number of students entering College and University each year, and facilitate an expansion of Higher Education. It would mean that students would have a much more rounded experience than simply being cloistered in academia for the first 20 years of their life, and would ensure that skills and education acquired would be immediately relevant, and applicable, bringing immediate benefits in terms of efficiency and output.

Such a suggestion is not put forward out of any interest in advising Capital how to resolve its current crisis, but in order to show that rational alternatives are available to the policies currently being pursued, they are the kinds of policies that a Workers Government, for example, could introduce, with immediate benefits for the working-class.

But, the much bigger issue is what measures will be taken immediately within Europe. In February this year I wrote a blog, in which I also speculated on what might happen over the current year. (Why Paul Mason Is Wrong) In that speculation I concluded,

“Even an expanded EFSF is not large enough to do the job. The EU, cannot respond in the way it should – by issuing EU Bonds – because of bureaucracy, inertia, and national interests. Germany essentially says, if you want us to pick up the tab, we want an EU state and central control.

In the meantime, to prevent a complete collapse, the ECB is forced to print money, and buy sovereign debt in the secondary market on a huge scale.

The Bond Markets respond by seeing inflation and risk down the road, and Bond yields rise, and there is a flight to Gold, which hits $5,000 an ounce by year end. The asset prices – property and shares – that have bubbled up over the last 30 years, on the basis of huge amounts of liquiidty pumped into the global economy, collapse – a return to the mean, and more, a 75-90% collapse as happened in the 1930's, or as happened with the NASDAQ in 2000. Faced with economic meltdown, and widespread social unrest, the EU eventually agrees to the establishment of some form of political union short of the establishment of an EU Federal State, but enough to also establish Fiscal Union to work alongside the Monetary Union. It begins to issue EU Bonds, and to reflate the European economy within the context of a restructuring of Capital possibly along the lines of German post-war re-construction with an attempt to incorporate Labour through the Trades Union bureaucracy, via Works Councils and so on.”

Actually, that and the other speculations contained in it, have not been too far out so far. Grudgingly, and through numerous bureaucratic manoeuvres, and crises, the EU is moving towards that kind of resolution. Even the Finns have agreed to the changes in the EFSF, and Germany will do so today. That is the first step to the next development of the EFSF into a staging post essentially issuing Euro Bonds. The EU Commission President, Barroso

, has called for the establishment of Fiscal Union, which could only happen with Political Union. The commission has also agreed to put forward the idea of a Tobin or Financial Transactions Tax. Britain, may oppose that for the EU, but it now seems likely that it would then be introduced within the Eurozone. There is many a slip 'twixt cup and lip, but European Capital has invested a lot in the idea of the EU, and of the Euro. The consequences of its failure would be drastic, which is why every effort is likely to be made to save it, and it can only be saved by taking it forward. The current proposals for a solution, are only a stop-gap. The problem remains that any bail-out of Greece – essentially forgiving its debts – have the potential for moral hazard. Not, only could it result in Greece, not taking the measures necessary to restructure its economy, but it would encourage other economies such as Portugal, and Ireland to default, and seek forgiveness too. That is why some centralised control of budgets, and borrowing would be required, and why some centralised growth plan, based on large scale investment in Southern Europe – like the way West Germany invested in East Germany after reunification – would be required. It appears that the Eurozone, may become the basis of a new EU State. Its strength in the future alongside the waning power of Britain, is likely to see Britain then having to petition for admission to it, on worse terms at some point in the future, as it did with entry to the EU itself.

If that happens, that Surplus Capital that Hillel Ticktin referred to would quickly find a home. The reality of the global Capitalist economy remains one defined by the new Long Wave Boom, and by the fact that, modern Imperialism represents the most dynamic stage of Capitalism. The resolution of the political crisis in Europe, will open the door to the resolution of the Financial Crisis, which will set the stage for a return of confidence to consumers, and businesses, and for a period of strong economic growth. On the other hand, should the Political Crisis not be resolved, should it result in continued policies of austerity, and beggar thy neighbour, as each nation state seeks to provide its own solutions, it will lead to a severe economic crisis, probably a Depression in Europe and North America, and a significant reduction in workers living standards in those areas, as well as a marked weakening of the influence of the West as against China, and the newly arising global powers of the East.

Back To Part 13