The Economy Of Analysis - Part 3

In Part 2, I argued that, in the specific conditions of the 80's and 90's, Capital found that State intervention via Monetary rather than Fiscal Policy best suited its needs. But, what that also entailed was a massive build up of debt, in western economies. It meant that western economies, in the US, UK, and parts of Europe, which did not adequately restructure – partly because these measures prevented their economies from slipping into the kind of 1930's Depression, that would have massively deflated asset values, for things such as houses, shares and so on, and would have massively reduced wage levels, and partly because the domination of these economies, by massive monopolistic enterprises, meant that they could continue for a long time, even though those enterprises were increasingly uncompetitive, and even loss making, without restructuring, or diverting capital into other more profitable ventures – saw a huge disproportion arise.

Some of these old industries, and enterprises, such as Ford and GM in the US, became a massive drag on Capital Accumulation. Resources were used for a long time to keep them going. Both Ford and GM, along with other US manufacturing behemoths like GE, ventured into the arena of Financial Capital, setting up their own arms providing finance not just for buying their cars, but for mortgages etc. The profits made in these ventures were used to subsidise continued motor manufacture.

At the same time, some of the new companies that developed in the 1980's, and 90's, such as Microsoft and other technology companies were growing rapidly, and making massive profits.

Rather than being in debt, these companies accrued huge cash balances on their Balance Sheets. Its clear that if the US – and the same is true for much of Western Europe – were to compete in the new global market, where the Value of Labour Power was now being determined internationally, in economies such as China, India, and so on, it could only be by restructuring towards these new industries, where the requirement for highly educated, highly skilled Labour Power gave the US and other developed economies a comparative advantage, in fact, in many cases, an absolute advantage. But, the fact that Capital remained locked up in many of those old industries meant that this restructuring did not take place at anything like the extent required.

In part, the reason for that was also what I set out in my response to Jim Creegan. Although these economies had many highly educated, highly skilled workers, the number was far too few to facilitate a rapid development of these knowledge based industries, and as demand for them outstripped supply, so their wages rose rapidly undermining the profitability of such ventures.

As I pointed out to Jim, former Fed Chairman, Alan Greenspan, had repeatedly told Congress that the US was suffering from a crisis in its education system, that was failing to churn out sufficient numbers of such workers. In Britain, it was reflected in the commitment of New Labour to send 50% of students to University, though, of course, as they have got used to with 60 years of the Welfare State, they saw the means of achieving that being to ensure that its cost was born not by Capital, but by the workers themselves in the form of a move to Student Loans, and the introduction of Tuition Fees.

It was just one of the many ways in which workers in these western economies themselves became heavily burdened with debt. In the US, Student Debt now exceeds Credit Card debt, and its likely that the UK will be in a similar position in a few years time. But, private debt expanded massively during the 1990's, and the last decade, as workers both attempted to compensate for stagnant wages by higher borrowing, and were persuaded to borrow money against already massively inflated property prices.

It was what led to the development of all the financial derivatives, such as Mortgage Backed Securities, which, by supposedly spreading the risk of lenders, to a large number of buyers, of these derivatives, facilitated lending to people who clearly had no ability to repay the loans, and facilitated a massive increase in leverage, such as the provision of 90%, then 100%, and then even 125% mortgages. Where until the 1990's borrowers were usually required to put up around 25% deposits when buying a house, and were only allowed to borrow approximately twice household income, which in itself acted to constrain demand for housing, and thereby kept down house prices, in the 1990's and up to the Credit Crunch, not only were mortgages issued for more than the price of the property, but loans were made with little proof of income, up to six times household income! Right up until the 1980's, it was common for borrowers to have to demonstrate, to lenders, their ability to save, by having been regular savers with the Building Society for several years, before they would approve a mortgage.

After, twenty years of Banks and Building Societies encouraging people to spend, and borrow, rather than save, it is no wonder that they are facing a culture shock today in having to provide even modest deposits of 10-25%, before mortgages are granted.

Monetary Policy could work as a means of stimulus so long as consumers could be persuaded to borrow and spend. The other consequence of it, was that this borrow and spend economy created Supply to meet the Demand. To meet consumer demands for increasing amounts of consumer goods, bought on credit, vast amounts of capital were invested, not in the kinds of new, high value added industries, that could have made these economies globally competitive, but in the creation of ever more lavish Colosseums devoted to the new Bread and Circuses.

Out of town retail parks, and town centre, shopping arcades became the 21st century equivalents of Pugin's Churches and Cathedrals. Of course, having failed to adequately, restructure into new areas of production, the goods in these Arcadia, came from far away places in China, and elsewhere, and were paid for then by growing trade deficits, in turn covered by yet more borrowing at the State level. At the same time, similar huge amounts of Capital were invested in Financial Services, with every high street filled with its contingent in the army of Independent Financial Advisors, Mortgage Advisors, not to mention the return of the old Usurers in the form of the Pay Day Loan providers, and those prepared to fleece the unwary with the offer of loan consolidation.

These leeches upon society, previously pushed back into the murky undergrowth, operating as back street loan sharks, now were able to emerge into the light of day complete with TV adverts fronted up by such respectable personalities as Carol Vorderman.

The main exception to this in Europe was Germany. Unlike the UK and US, Germany's housing market is not primarily based on owner occupation, but on renting. This means that the kind of massive asset price bubble in housing that developed in those economies did not envelope the German economy. As a consequence, there was not the same facility to borrow against such hugely inflated property prices. In addition, there is not the same culture of consumer spending in Germany that there is in the UK and the US.

It meant that Germany had to restructure, because it could not count on a debt financed consumer boom at home to keep its economy going. After reunification, it also required a massive "Marshall Aid" type restructuring programme for East Germany. It focussed on winning export share through the production of high quality, and high value added products. Until just a few months ago, when it was overtaken by China, it remained the world's leading exporter. It is not surprising, then, that having had stellar growth figures until recently, the slow down in global, particularly European, economies has caused a marked slow down in the German economy too. It is perhaps not surprising, then, that as Paul Mason reports, discussions are being held, in Germany, about the possibility of a German financed Marshall Aid type rescue of Southern Europe. However, as I've argued previously, I beleive the size of such a rescue and restructuring programme would be so large as to only be feasible on the basis of it being financed by the issue of EU Bonds, which can only arise on the back of a considerable measure of European Political and Fiscal Union i.e. the effective creation of a European State.

So, in just the same way that, in the 1970's, Governments were fighting the last war, by attempting to use Keynesian measures, so, after 30 years of Monetarist orthodoxy, they have found themselves again fighting the last war, as, increasingly, that Monetary policy fails to have the desired effects.

As Keynes had pointed out, Monetary easing can only work, if people actually demand the money that is being printed. If they do not, then it is like pushing on a piece of string, the more string you push forward, the more it just bunches up, with the front of the string moving no further forward. The Credit Crunch was a crisis which signalled that this policy could no longer work. The amount of debt built up, particularly private debt, was such that there was no scope for it to be extended. Although the Government, in the UK, has made a big play over the extent of Public Sector debt, in reality, the much bigger problem is Private Sector debt, which stands at more than twice the level of the Public Sector, at around £2 Trillion.

Whereas, the State can cover its debt by printing money, the individual cannot do that. Either they have to pay that debt back, or else they become bankrupt, which means that the debt is then assumed by others within the private sector, the Bank etc. that lent the money, the insurance company that insured the lender against the loan going bad and so on. This is the real danger that lies behind the European debt crisis, and which was only partially revealed by the Credit Crunch, and the collapse of Banks in the US, UK, Ireland, Spain, and Greece etc. that required the intervention of the State to bail them out, and which in turn led to the sovereign debt crisis.

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