Debt Slavery

First some facts. Billionaire investor, George Soros, has made a $1.25 billion bet against the S&P 500. In virtually every month since 2000 foreigners have been net buyers of US debt. In the last 5 months in a row they have been net sellers. The two biggest sellers of US Treasuries in recent months have been China and Japan, who are usually the biggest buyers. In June, there was the biggest withdrawal of foreign money from US bonds since August 2007, when the Credit Crunch began. Deutsch Bank is reported to have exposure to global derivatives equal in amount to the entire global GDP. According to the Bank for International Settlements, the total exposure to derivatives of European banks is around ten times that figure. Many of the surplus countries that have provided the funds for buying the bonds of countries like the US and UK, have seen their reserves fall in the last two years, meaning they have less spare cash to invest. Global bond yields, having been on a downward path for the last 30 years, are moving higher sharply.

In the 19^th century, when Britain was the workshop of the world, it frequently faced situations where its production increased so rapidly that global markets could not cope with all of the commodities thrown on to them. Most of this production was for textiles. Bourgeois economists, who accepted the idea contained in Say's Law, that overproduction of commodities is impossible, because supply creates its own demand, i.e. every sale creates a purchase, even explained the obviously glutted markets by claiming that it did not represent overproduction by British capitalists, but under production by those countries Britain was exporting to! There was only so much Chinese Tea that Britons could consume in exchange for all the Opium that Britain was forcing on China alongside its textile production. If only the Chinese would produce more things that Britain needed they would be able to consume all those goods Britain insisted they buy.

But, Britain had a solution to this problem. British capitalists were making huge profits. Previously, large amounts of money was poured into buying UK Government Debt, which reached 250% of GDP, as Britain created the infrastructure it needed to become an advanced industrialised economy. But, now less was required for that. So, British capitalists instead were able to simply ship their capital, in money form, to China, India and elsewhere, where it could be lent out to enable the peoples of those countries to buy all of those commodities, Britain was shipping to them. The Chinese are obviously very good at learning the lessons of history!

In the 1980's and 90's, many of the so called Asian Tiger economies, borrowed large amounts of money to finance their own industrial revolution. Some of that money also found its way into speculative ventures, blowing up property and share price bubbles in those economies. That came to an end with the Asian currency crisis of the late 90's. But, although some of the debt they had built up went into speculation, a lot had gone into bringing about their industrialisation. In the following period, that process meant that they like China were able to export large amounts of commodities, as the world entered the new Long Wave Boom after 1999.

By contrast, the borrowing undertaken by the US and UK and other western economies has largely gone into maintaining their levels of consumption. As a reversal of the situation in the 19^th Century, it has been China and other Asian countries that have been lending them the money so that they can continue to import increasing numbers of cheap Asian commodities. Where western economies have undertaken investment that too has largely been achieved by borrowing. The US and UK Governments have issued debt to cover their own expenditure. The UK financed the rapid expansion of schools and hospitals via PFI, and where it invested in the education of its citizens, the cost of that was thrown on to borrowing by those citizens. University students were lumbered with increasingly large amounts of debt to cover their expenses, and their Tuition Fees.

In the United States, student debt now stands at over $1 Trillion, which is now more than the amount of credit card debt. Unlike other forms of debt, this student debt is not even written off if you declared bankruptcy, which means that once again, individuals are placed in a worse legal position than companies.

A large part of the debt in the US was run up to cover property speculation. When the sub-prime crisis struck, many people, unable to pay their mortgage, and with the value of the property below the outstanding amount on the mortgage, simply walked away from their houses. The banks were simply left with the debt they had recklessly created. But, as so often happens, they escaped the consequences of that, as the banks persuaded the Government to bail them out. Now, as people have turned once again to Credit Unions as a means of dealing with their need to borrow outside the clutches of the banks and usurers, the banks in the US are pressuring the Government to remove some of the tax advantages that the Credit Unions enjoy.

In Britain, the Government is actively trying to get people to go more and more into debt. For many that is not difficult. An increasing number are unable to get to the end of the month on their income. Millions of people are now dependent on the Pay Day Loan sharks. They operate by knowing that a large part of their loans will never be repaid, but afford it by extortionate rates of interest on those who, for a while can make repayments. It is just like a revolving door of people who have no money financing people who have even less, who then become bankrupt only to be replaced by those who yesterday were just managing to make the extortionate repayments. But, sooner or later that merry-go round will stop, and it will be the money markets that have lent to the usurers who will find that they don't get paid back.

It is all of this complex of huge volumes of interconnected debt that makes all of the derivatives necessary so that the real situation of bank and near bank debt can be hidden. Most of the debt on the books of banks like Deutsch Bank, however, remains property debt, comprised of vastly over valued property across Europe, including Britain. The fact that global interest rates are now rising threatens to quickly collapse this house of cards in a far more dramatic way than occurred in 2008.

The reason the surplus economies like China, India, Indonesia etc. have seen their reserves drop over the last couple of years is that I have pointed to recently. The Long Wave has moved from its Spring Phase to its Summer Phase. Growth continues to be robust, but the costs of achieving it rise, leading to a fall in the rate of profit. The price of raw materials no longer rises so fast, but the big productivity gains that meant those higher prices could be dealt with also slow down, so unit costs rise. Moreover, as the vast reserves of labour-power get used up, the demand and supply balance tilts in favour of workers. That has been seen in the 50% wage increases to Chinese workers, and it is being seen in the increasing number of strikes by workers such as the mine workers in South Africa.

More capital has to be invested in order to obtain any given increase in output. But, as Marx points out in Volume III of capital, this does not prevent investment or growth, because the fall in the rate of profit is compensated for the biggest companies, by the increased volume of profit. But, it has other effects. In the previous period, companies with large amounts of profits have used it to pay out as dividends, or else to benefit shareholders in other ways, for example, buying back shares, which pushes up the share price, giving a capital gain to shareholders. That money pumped out to shareholders, in turn finds its way back into the circulation of money, speculating in other shares, in property, and in government bonds. It also finances other forms of unproductive consumption by these coupon clipping capitalists.

As, the price of commodities falls, so the price of these luxury goods also falls, so even as a smaller proportion of surplus value is paid out in dividends etc. so what is paid out still buys more, so even with a falling rate of profit, a bigger proportion can go to investment in productive-capital. It isa this change in balance that means money balances get run down, and the potential money-capital gets used up productively. Less goes to speculation. That is one reason that capitalists in these Asian countries are buying fewer US financial assets. The other reason is that they recognise that the policy of QE has run its course. Whether the Federal reserve tapers or not, US interest rates are going up, and in those circumstances there are no prizes for being the second one to sell out of these assets as they crash. Britain is in an even worse position because unlike the US, its housing market is yet to go through the necessary crash, and Britain is suffering from much higher levels of inflation.

But, in this interconnected world of debt, the consequence of higher interest rates is that first property markets crash. Existing mortgage payers find they can't make their monthly payments. The first to sell out in those cases should be the buy to let landlords, but many of them think they are genius investors as they have made money when conditions meant it was almost impossible not to. Many will instead buy even more property, thinking its a buying opportunity, only to find that prices fall further and faster, whilst rents fall and their mortgage payments rise. The banks will no longer be able to continue the policy of pretend and extend, by which they have held back from foreclosures, and extended people's mortgages. Many of the banks themselves will go bust as the web of derivatives unravels. Many more will see the rising mortgage rates, and rapidly falling house prices, and rationally decide as they struggle in any case to make ends meet that their will be much better bargains to be had in future. That is exactly what has been seen in the deflation that has gripped Japan, where property prices fell by 90% in 1997, and have continued to stagnate ever since.

In fact, the increased economic activity that is being seen currently only exacerbates this process. On the one hand, it is not enough to raise wages enough to cover the inflated property prices. In fact, in the UK it is not even enough to raise real wages to cover increasing inflation. On the other, increased activity means more capital has to be invested productively, which puts further upward pressure in interest rates. The irony is that this increased economic activity is likely to be a cause of both a collapse of the property market, and the destruction of most of the zombie companies that only survive on the back of low interest rates, and low wages. The good thing is that it will mean workers will benefit from much lower housing costs, and more efficient capitals will take over the zombies businesses, providing better employment opportunities. That is also no doubt the logic behind Soros' decision to buy $1.25 billion worth of put options in the S&P. A put option gives you the right to sell shares at a predetermined price, so if you think the price will fall, you can sell shares at that price, buying the necessary shares at the much lower price to cover the sale. Its a bet that there is going to be a big shake out of capital.