Thursday, 13 December 2012

The Zombies Are Coming! - Part 5

The Zombie Banks

That in turn brings us to the other zombies in this zombie economy – the banks. In the US, and Ireland the banks were essentially nationalised and recapitalised. With the collapse of their property market, something approaching an accurate valuation of their banks' balance sheets was established, which set the base line for the required level of recapitalisation. In the US, that still leaves the other assets on the banks' balance sheets – the huge amount of credit card and other personal debt, like student debt (over $1 trillion), and their exposure to other global banks, particularly those in Europe – but, in the UK and Spain, with their property bubbles still largely to burst, no such cleansing of the balance sheets has occurred. And, like the US, in addition to these property debts, there is also the huge amount of private debt – around £2 trillion in the UK.

Its no wonder that Mervyn King says the UK banks need to undergo further recapitalisation. Yet, as happened recently in Europe with Italian banks, its unlikely that it will be possible to recapitalise the banks via share issues, without offering large discounts. The other option is for the banks to improve their capital position by reducing their loan book, which again would mean calling in many of these non-performing loans, which would spark a collapse of the zombie companies and zombie properties. In Spain, that denouement looks imminent. The state is forcing its zombie banks to merge, alongside having nationalised some like Bankia, and having sought a bail-out for those banks via the ECB. It was reported on 13th December, that Spain is to nationalise another two banks. But, as I've pointed out previously the value of property on Spanish banks' books is a total fiction, and with banks beginning to liquidate those properties, and the establishment of the bad bank, that process is likely to accelerate. With Spain's economy, heading rapidly down hill because of the same crazy austerity policies being pursued in the UK, it has little chance of being able to generate the income to cover its debts, especially as those debts continue to escalate with increasing demands from the regions.

To infinity and beyond!  Ben Bernanke's
 latest version of QE has no limit.
  It will continue he says until
 US unemployment falls below 6.5%.
  Like a flesh eating bug, it is sprading out,
 with the renewed agreement today
 between the Federal Reserve, Bank of England,
 ECB and other Central Banks
 to extend their swap arrangements until January 2014.
The only thing that has been keeping the banks afloat, throughout the world, where they have not already been nationalised and recapitalised, is the massive amounts of money they have been supplied with by Central Banks. But, that money printing is itself part of the process of zombification of economies. As I pointed out a while ago - QE etc Spells Desperation – the money printing is presented as being required to save and stimulate economies, but is doing nothing of the sort. The money printing is simply allowing bust banks to treat a crisis of insolvency as a crisis of liquidity, and thereby buy time, during which they hope to rebuild their balance sheets. Where banks previously lent to anyone whether they could pay the loan back or not, now the banks take cheap central bank money, and stuff their Balance Sheet with it. Some of it then gets recycled into buying sovereign debt, that has itself been underwritten by those same central banks.
Mario Draghi is providing banks with free money.
For example, European Banks get provided with cheap money via the Long Term Refinancing Operation (LTRO) that allows them to borrow money for three years, at very low rates. Then, they buy say Spanish or Italian Bonds with a coupon (interest rate) perhaps double what they have paid to borrow through the LTRO. The Capital Risk for the banks of buying say a 3 year Spanish Bond, has been removed as a consequence of the OMT introduced by the ECB, whereby it guarantees to come in and buy these sovereign bonds, if their price falls too low. In other words, the ECB is in reality just handing over money to the banks for free. But, as the guru of Monetarism, Milton Friedman said, “There is no such thing in life as a free lunch.”

Paper currencies are only money tokens,
 not real money.  They represent a given
 amount of real money - Exchange Value.  If you
print more tokens without increasing
 the actual amount of Exchange Value
in the economy, the tokens themselves
 become depreciated in proportion.
  More tokens have have to be given
 in return for a given amount of Exchange Value.
In other words inflation.  The alternative
 to inflation is that Governments
cover the free money Central Banks
 have given to the banks by raising
taxes.  Either way, the cost falls on workers.
Money does not simply appear from nowhere. Real money, gold, for example, has to be dug up from the ground, and processed. It takes real graft. Even where money is just a representative of Value, the Value it represents has to be created by someone, by similar hard work. If you simply print more money tokens – representations of real money – or create more credit, then either that has to be a reflection of some more real value having been created, or else the money tokens themselves become devalued in proportion. In other words inflation. The only way to avoid that, is to take the excess money tokens and credit out of the economy. But, that ultimately means that the money that has been given to the banks has to be paid for. That is done, by Governments raising taxes. In other words, Central Banks give the banks free money, and ultimately, workers pay for it in higher taxes. That in turn takes aggregate demand out of the economy, which sends the economy once more on another downward spiral.

As a bank, why would you lend money to someone to
buy a house, when they might be on the dole tomorrow
given the state of the economy, and when you might not
get your money back from repossessing the house, with house
prices falling significantly due to a large excess of supply over demand.
But, the free money being given to the banks can only cause inflation – and to the same extent could only stimulate economic activity – if it actually circulated in the real economy. Most of the evidence is that it isn't. Instead of making loans to anyone, whether they can pay it back or not, the banks now avoid lending to anyone other than those virtually guaranteed to pay it back, and then only at interest rates way above what it has cost the bank to borrow from savers or from the central bank. That is how the banks rebuild their balance sheets. It is how many of the banks are now making large profits once again. Why would you lend money to someone wanting to buy a house or set up a small business, who tomorrow might be on the dole when you can buy a Spanish 3 year Bond paying you a 3.75% Coupon, which is guaranteed to be paid by the ECB, and on which you might even also make a Capital Gain?

But, its also not just a matter of the banks not wanting to lend other than to those with a cast iron guarantee of repayment. In Britain, and the EU, those to whom the banks might be prepared to lend, mostly do not want to borrow. Large companies in general have their own Balance Sheets awash with cash. As the global economy moved from the Long Wave downturn of the 1980's and 90's into boom, the rate of profit rose. Large companies, in particular, have benefited first from a rising Rate of Profit, and then as the boom took hold, a growing mass of profit. But, there are numerous reasons why this growing mass of profit is not currently being reinvested.

The release of a new iPad on its own raises US GDP
by noticeable amount.  But, its made in China.
 The majority of its Value, however, comes not from
its manufacture, but from the highly complex, intellectual
labour required for its design and development in the US.
Firstly, the nature of modern production has changed. The most valuable company on the planet is Apple. The release of its latest products alone can add noticeable amounts of growth to the huge US economy. Many of its products, however, are not even made in the US. They are made in China. But, only about 9-10% of the value of the product goes to China, the rest goes mostly to the US. Why? Because the real Value of the product, unlike commodities in say Marx’s time, is not made up of the Constant Capital, the raw materials, and instruments used up in its manufacture. Nor even is it made up of the labour-power used to assemble the product in China. The vast majority of the Value of the iPhone, iPad etc. comes from the very highly skilled, complex labour that goes into the design of the phone, into the design and development of the chips inside it and so on.

But, once you have bought that highly skilled labour power, for a company the size of Apple, you do not need to add to it to increase production. Rather, production of the latest generation of products gets ramped up, whilst that highly complex labour you have already bought, moves on to design the next product to replace it. So, these companies become highly cash generative. They will also have a tendency to hoard the skilled labour power, whilst all the more being able to limit how much more they take on, if they feel that the future is uncertain. There is some evidence that one reason for unemployment not rising in the UK at the moment, besides all of the zombie jobs, is due to labour hoarding of these types of labour in these new types of production, and service provision.

Engels in his Critique of the Erfurt Programme
pointed out that Capitalism was no longer
defined by the kind of Capitalist firms Marx had
analysed in Capital.  It was large firms and trusts that
 dominated.  They signified both the end of private capital,
 and of 'planlessness'.
But, secondly, as Engels pointed out, at the end of the 19th century, Capitalism had already by then moved beyond the kind of rather small scale capital that Marx had analysed. The new huge companies and trusts, were no longer guided in their actions by the price fluctuations of the market, but had moved to their own version of planned production, with massive investment projects designed to cover a period of years. But, that same enterprise level planning means that when these companies, via their market analysis, see the potential for uncertainty, for demand to decline, they are able to pull in their horns, to hold back increases in Supply that could lead to overproduction and crisis. All these firms see that at the moment, and have simply hoarded the large profits they continue to make as cash, ready to use it once the uncertainty is removed one way or another.

On CNBC, yesterday, Jamie Dimon, of J.P. Morgan said that if the US resolved the question of the “Fiscal Cliff”, he believed there was sufficient investment waiting to be made, that it would see US growth rise next year to 4% plus! Nor, he said, did it really matter how it was resolved. He was happy to pay a higher rate of tax, for example.

In short, the people to whom the banks would be happy to lend, do not want to borrow at the moment, and the people who do want to borrow, because they are bust, their incomes are too low, or their businesses are not very sound, can't get the banks to lend to them. That is why we have the ridiculous situation whereby interest rates are at their lowest level for 300 years, and yet the fastest growing business in Britain is Usury, with Pay Day Loans companies charging 4000%, p.a. interest!

The consequence of this, is that the money pumped out by central banks to the banks does not get into the real economy. If it goes anywhere, it simply circulates as what Marx called “fictitious capital” i.e. as inflated asset prices in shares, bonds, and property.

The way money printing, and the creation of bank money works is this. The bank knows it only has to retain say 10% of money deposited with it, because on average people never want to withdraw more than that. That means the bank can lend out the other 90%. It does so, by creating a deposit for the borrower equal to the money lent. But, that means its deposits have risen by this amount, so it can now lend out 90% of the amount of this new deposit. This multiplier effect continues so that ultimately, the bank can have created 10 times as much money as was originally deposited with it. Nor does it matter, whether the borrower leaves the money as a deposit, which is unlikely or else why borrow it, or spends it. If someone borrows £1,000 and buys a car, the car dealer then deposits, the £1,000 in the bank, and so on.

In the Weimar Republic in the 1920's, more and more
money tokens were printed, and the value of each token
became more and more worthless, as Marx had said 70 years
 earlier would be the case. 
The idea is that such lending puts money in people's pockets, so they go and buy things, which encourages suppliers to increase production, to take on new workers, buy more materials, and so on. Provided, it leads to an increase in economic activity, which creates as much new value in the economy as the nominal value of the money printed, then it does not create inflation, because the money being circulated is only what is necessary to circulate those commodities. However, if the money goes into the economy creating additional demand, but suppliers do not increase production, but instead take advantage to raise prices, then the money printing does lead to inflation. More money tokens circulate in the economy than was required to circulate the value of commodities, and so the value of the tokens is depreciated.

Large scale money printing in the west, went into creating, Chinese
bank desposits, increasing chinese money supply, creating chinese
inflation.  The longer term consequence is that the masses of cheap
chinese imports that kept western inflation levels down are
 increasingly not so cheap!
But, its precisely this latter scenario we have seen. It would normally be manifest in an increase in those measures of money supply, which show up as bank deposits, but it hasn't. What has happened is something like this. During the early years of this century during the boom, cheap money was fed to the banks, which was lent out. Consumption rose sharply, but it was consumption satisfied by cheap imports from China and elsewhere. The bank deposits created, therefore, were not in the UK, US etc. but in China. The effect was to increase Chinese inflation. It is what has led ultimately to demands for 50% wage rises by Chinese workers. It is also what has led China to itself seek locations for production, using cheap labour, in places like Indonesia, and Vietnam. In fact, the US and some other western countries have started to bring back some production from China, because costs have risen there so much.

Every bubble bursts, as happened with the UK housing
market in 1990.  But, in 1980 Gold reached $800 an ounce
from its price a decade earlier of $30 an ounce.  But, then its
 price crashed too.  In 1999, it was only a third of its nominal
1980 peak, standing at $250 an ounce.  On an inflation adjusted basis
it was only about a tenth of the 1980 figure.
But, China itself used this cheap money that ended up as deposits in Chinese banks to also ramp up its own demand for inputs, of things such as oil, food etc. That meant that money flowed to Brazil, Russia and other countries producing these materials, creating new bank deposits there. In the UK, the cheap money instead went into blowing up asset price bubbles. But, that itself can only continue for so long. Sooner or later, more people begin to think that prices are more likely to fall than rise, and when that happens prices indeed do begin to fall, and often fall drastically. As is the nature of these things, when something falls drastically, the money will often then go to the next fad. After a share price crash, the money goes into property. When the property market then crashes, the money goes into Bonds. When the Bond bubble bursts, the money goes into gold. When the gold price crashes, the money goes into cash or diamonds etc., until eventually, the most sensible place to put it is actual productive investment. Only then can the merry go round cease, and the bubbles disappear.
The Liberal-Tories have hyped up the level of Government debt,
but private sector debt is the real problem in the UK, as in many
other economies.  UK private debt is twice the level of Government debt.
But, the Financial Meltdown of 2008 also coincided with the cyclical three year downturn. Even without the latter, the meltdown would have caused a sharp contraction in economic activity due to uncertainty. As well as many financial assets getting written down, firms and individuals began to de-leverage, that is to reduce their debts. Of course, you can only do that, if you have more income than expenditure, and the latter, itself in part can be a function of how much debt you have, how much interest you are paying on that debt. So, in general, better off people have been able to take great advantage of the record low mortgage rates, and use it, if they have sense, to pay down or pay off their mortgages, or else they have been able to use the savings on their mortgage payments to pay off their more expensive credit card debt.

Millions of people have not benefited from
lower mortgage payments.  Instead, they may
have lost their job, seen their pay, benefits or pension
cut.  In the meantime, their rents, their energy bills, their
food costs continue to rise.  Millions now depend on borrowing
from usurers to survive, and even in middle class areas, a growing
business is pawn broking!  An increasing proprtion of people
rely on food banks.  This is one aspect of a zombie economy, that
is thoroughly rotten at its core.
But, millions of people have not been so lucky. Those that have lost their job, or seen their pay frozen and cut in real terms, those who didn't have a mortgage, and whose rents have risen, have seen their expenditure continue to rise, whilst their income has fallen significantly in real terms. That is why millions of people do not have sufficient income to last beyond the third week of the month, and why the Pay Day Loan companies are booming, as these people turn to them to make up the difference. Of course, with interest rates of 4000% p.a. rather than making the situation better, it only makes it gradually worse, because if you didn't have enough money to get beyond week three previously, when 20% of your month's wages then goes to pay the interest on the loan you took out last month, you may only have enough to last until part way through week two, and so on.

The massive fiscal and monetary expansion adopted in the wake of the meltdown, quickly brought about economic recovery in 2009. The new dynamic economies like China, and Brazil hardly noticed its effects anyway, as the Long Wave boom kept the economies growing strongly. But, the introduction of austerian economic policies in Britain from 2010, and in parts of Europe, along with the adoption of similar policies by Republicans influenced by the Tea Party, at State level in the US, and Republican frustration of further stimulus measures by Obama at Federal level, began to undermine the recovery from 2010 onwards. That was compounded by the onset of the new three year cyclical downturn that began at the end of 2011, that also slowed growth in China and elsewhere. To put things in perspective, however, despite prognostications of some catastrophists - A Reply To Paul Smith – earlier this year (as with pretty much every year catastrophists forecast the end is nigh) that Chinese growth was to fall to just 4.5%, it has remained at around 8%, and is forecast to rise again next year.

Banks are exercising forbearance rather than
foreclosing on mortgages in arrears.  They are
doing so to avoid collapsing the property market
and thereby destroying the value of assets on
their balance sheet.  But, as Greece demonstrated
you can't deny reality for ever, and simply lending more
money only makes the debt worse, until it has to be written off. 
So, as with so many aspects of the economy both at a national and an international level we see bifurcations. On the one hand, there is the paying down of debt, a reluctance to borrow by some – who the banks would lend to – and a desperation to borrow by others, that the banks will not lend to, which provides the basis for the growth of usury. The net effect, is that the money printing by central banks is going into banks balance sheets, and not into the real economy. The banks are rebuilding their balance sheets on the back of this funny money, and making large profits by lending now into risk free markets, whilst having to exercise forbearance on existing loans on risky assets. That is true whether it is accepting hair cuts on their lending to Greece, or else extending terms etc. for home buyers unable to repay their mortgages.

Whenever the capitalist state nationalises anything
it does so in the interests of capitalists not workers.
 If anything, as Marx, Engels and Kautsky pointed
out, it means only more intense exploitation of the firm's
workers.  That's why Marxists do not call for nationalisation.
The State remedies the failings of the capitalist owners
by recapitalising the business, sacking large numbers of workers
and increasing their exploitation.  Eventually, it then sells the
business back to private capital at a low price.  That is as true
of the banks as it is of coal mines.
But, the banks were helped out of their situation in relation to Greece, by Central Banks who over a period, bought up that debt in the secondary markets, thereby taking it off the books of banks and financial institutions and transferring it on to the books of the State i.e. to be paid for ultimately out of workers taxes. Some of it, is being done similarly in respect of property loans gone bad. But, the scale of that when the property bubble in the UK and Spain bursts, is likely to be many times what has gone before, for example in Ireland, and even in proportional terms the US. Either those banks will be allowed to go bust, which means all their investors, including all the other global banks that bought their shares, debt, or lent them money, will take a massive hit too, or else the State will have to nationalise them, which means once again that workers once again will have to pick up the bill.

The final piece of this twilight world is the situation in the Bond Markets. I will look at that along with the zombie economy in general in the final part.

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