Thursday, 31 October 2013

Capital II, Chapter 8 - Part 11

The distinction between expenditures that are for maintenance, for repairs, or for replacement, tends to be flexible. It is ultimately a matter of accounting, but the flexibility is used to obtain financial benefits by charging expenditure to either the capital or revenue accounts. In the 1990's, Local Government used this flexibility to advantage, for example, as a means of achieving required spending cuts on its revenue account. Expenditure for repairs and maintenance on things like playgrounds was taken out of the revenue account and placed in the Capital Account.

Marx details with various testimony, the practice on the railways that even with the “new” replacement engines and carriages, they would frequently utilise existing wheels, boilers etc. from rolling stock that was being scrapped, and so it was accounted for out of revenue, as though it were a repair rather than a replacement.

“The same with coaches:

“In the course of time the stock of engines and vehicles is continually repaired. New wheels are put on at one time, and a new body at another. The different moving parts most subject to wear are gradually renewed; and the engines and vehicles may be conceived even to be subject to such a succession of repairs, that in many of them not a vestige of the original materials remains.... Even in this case, however, the old materials of coaches or engines are more or less worked up into other vehicles or engines, and never totally disappear from the road. The movable capital therefore may be considered to be in a state of continual reproduction; and that which, in the case of the permanent way, must take place altogether at a future epoch, when the entire road will have to be relaid, takes place in the rolling stock gradually from year to year. Its existence is perennial, and it is in a constant state of rejuvenescence.” (Lardner, op. cit., pp. 115-16.)” (p 183)

Taking a branch of industry, or social production as a whole, this process of continual replacement of fixed capital occurs in the same way that Lardner describes for a railway. For the most durable forms of fixed capital, like canals, bridges, etc. the amount of wear and tear may be infinitesimally small, because they are expected to last for such a long time. For these kinds of structure, then it is not this wear and tear whose value is mostly transferred to the end product, but their necessary repairs, undertaken annually etc.

In Volume I, Chapter 3, it was shown how money is divided in society into a hoard and money in circulation. Money is in circulation when it is being used as a means of purchase or means of payment. But, there are always periods when money has been received, but is not immediately used again for purchase or payment. So, it forms part of a hoard.

The value of fixed capital transferred to the end product as wear and tear, is reproduced in that product, and assumes a money form. It then is stored in a reserve fund to be used to replace that fixed capital at the end of its working life. So far as it is stored, in this reserve fund, it forms a part of the money hoard in society. When it is used, to replace the fixed capital, it goes out as one lump sum, into circulation once more. But, no sooner has this occurred than the replacement fixed capital begins transferring its value piecemeal to the end product – this value itself then being circulated – whilst its money equivalent once more returns to be built up into a new hoard.

“With the development of the credit system, which necessarily runs parallel with the development of modern industry and capitalist production, this money no longer serves as a hoard but as capital; however not in the hands of its owner but of other capitalists at whose disposal it has been placed.” (p 185)

Forward To Chapter 9

Back To Part 10

Back To Volume II Index

Tuesday, 29 October 2013

Capital II, Chapter 8 - Part 10

So, the average life, of fixed capital, is based on it being maintained and repaired to the necessary level. But, the amount of repairs required is indeterminate, because it depends on accidents, and the individual machine.

“But then it is also evident that the value added by this extra expenditure of capital and labour cannot enter into the price of the commodities concerned at the same time as it is incurred. For example, a manufacturer of yarn cannot sell his yarn dearer this week than last, merely because one of his wheels broke or a belt tore this week. The general costs of spinning have not been changed in any way by this accident in some individual factory. Here, as in all determinations of value, the average decides. Experience shows the average occurrence of such accidents and the average volume of the maintenance and repair work necessary during the average life of the fixed capital invested in a given branch of business. This average expense is distributed over the average life and added to the price of the product in corresponding aliquot parts; hence it is replaced by means of its sale.” (p 179)

Capital seeks to regularise such expenditure as much as possible, for example, as stated above, via insurance, but it attempts to do so via planned maintenance and servicing too. In large enterprises, it was the practice, until the 1980's, to have in-house maintenance departments, to undertake such work. But, under the neo-fordist regimes, introduced in the 1980's, which brought in various forms of flexible specialisation, many of these were closed down, and the work transferred to external, usually small, local specialist firms, who were then tied to the contracting large enterprise.

Although repairs are undertaken at indeterminate periods, depending on when they are required, they are closer to being circulating than fixed capital. They are reproduced, on an average, out of the value of the product each year. Marx sets out how capital usually achieves this in its book-keeping, however, by lumping it together with wear and tear. So, for example, if a machine is estimated to last for 15 years, its lifespan is instead calculated on the basis of 10. Instead of 6.66% of its value being written down each year, and transferred to the end product, it is calculated as 10%. The additional sum, each year, then covers the necessary cost of repairs.

Repairs arising from accidents are not part of wear and tear, and the cost of these is not then reproduced in the value of the end product. It is a total loss to capital. In order to share out the risk, insurance is taken out. The insurance premium is paid for out of the Surplus Value. In a sense it is like any other type of unproductive consumption paid for out of surplus value by the capitalist.  So, on the one hand, the money reserve can be, and is, used for the expansion and intensification of production, rather than just to repair and replace fixed capital, on the other, surplus value is used to replace fixed capital, and to cover the costs of insurance, depreciation etc. The process of replacing fixed capital is often indistinguishable from the process of its extensions and intensification.

“In point of fact only the smallest part of the capital needed for replacement consists of the money reserve fund. The most substantial part consists in the extension of the scale of production itself, which partly is actual expansion and partly belongs to the normal volume of production in those branches of industry which produce the fixed capital. For instance a machine factory must arrange things so that the factories of its customers can annually be extended and that a number of them will always stand in need of total or partial reproduction.” (p 181)

Within this process, some capitalists, even within the same branch of production will be more fortunate than others. Some will have machines that break down less frequently than others. Yet, it is only the average cost of repairs that will be passed on to the value of the end product.

“But the addition to the price of the commodities resulting from wear and tear and from costs of repairs is the same and is determined by the average. The one therefore gets more out of this additional price than he really added, the other less. This circumstance as well as all others which result in different gains for different capitalists in the same line of business with the same degree of exploitation of labour-power tends to enhance the difficulty of understanding the true nature of surplus-value.” (p 181)

Back To Part 9

Forward To Part 11

Monday, 28 October 2013

US Politics and Economics v The UK and Europe - Part 1

The Thatcherite Brittain - "We are all
Keynesians now."
In the period since the financial meltdown of 2008, the US has pursued a policy of Keynesian fiscal intervention. Although, in the immediate aftermath of the crisis, most economies followed a similar course – as Thatcherite, Samuel Brittain wrote, in the FT at the time, “We are all Keynesians now” - in the following period, governments in the UK and Europe have instead adopted Austerian economic policies. The difference has been stark. The US economy has grown throughout the period, at some points quite rapidly, whilst in the UK and Europe, the recovery has stalled and reversed. Its hard to see how the austerian policies have been in the interests of capital, certainly not big industrial capital. So, why have governments, in the UK and Europe, followed such a disastrous policy, for both workers and capital, whilst the US has pushed ahead with fiscal and monetary stimulus? That is what this series of posts over the next few weeks will examine.

Back in October 2010, in the Weekly Worker, Jim Creegan replied to a letter I had written in relation to his article – Tea Party Rumblings On The Frenzied Right. In his original article, Jim had identified the Tea Party as representing the ideas of the US ruling class, and setting their sights against the politicians in Washington.  In my reply  I pointed out the logical problems with this argument. Whose interests exactly did Jim think the politicians in Washington represented, if not the interests of the ruling class, or fractions of it? Only if you bought the Tea Party propaganda that Obama was a socialist, could you not conclude that both Republicans and Democrats were representatives of Capital. The only difference, as with Labour and Tories in Britain, Social Democrats and Christian Democrats in Germany etc. or Legitimists and Orleanists, as analysed by Marx in “The Eighteenth Brumaire”, is which fraction of Capital these different bourgeois parties represent.

In the latest Weekly Worker Jim has eventually conceded the point.

“A fundamental question has run throughout our coverage of the Tea Party over the last four years: is it an Igor-like servant of the big bourgeoisie, deformed but dutiful? Or is it rather a Frankenstein’s monster - a petty bourgeois rabble that has escaped the control of a ruling class that nurtured and encouraged it? The recent government shutdown and debt-ceiling crisis have now supplied a definitive answer: a Frankenstein’s monster.”

Not exactly an accurate representation of that debate, or recantation, but its a good start and a good sign. The mark of a good Marxist is not that they are always right, but that they can acknowledge when they were wrong. The Tea Party has never been a servant of big capital. On the contrary, like UKIP or the Tory Euroseptics, or the similar splinters of European right-wing populism, the Tea Party have always been a petit-bourgeois grouping that has been a thorn in the side of the interests of Big Capital. It has never been true that big industrial capital sought to promote the Tea Party, whose ideology is anathema to its interests. On the contrary, where they intervened, it was to bolster the Republican Establishment against challenges by the Tea Party to incumbents. If big capital could be charged with anything, it is not with promoting the Tea Party, but with being inadequately engaged in stopping them! That is a failing that the recent statements, after the Debt Ceiling débâcle, by The National Retail Federation, the US Chambers of Commerce, and others - See: US Political Crisis - Republican Civil War – suggest will now be remedied.

Big industrial capital in the US has been crippled by the costs
of the health and social insurance it has to cover for its workers.
It has long sought to shift those costs off its own shoulders in
the way European capital did long ago with the establishment
of socialised healthcare systems paid for by workers, the
middle class and small capitalists.
The fact is, as I pointed out to Jim in that letter, and in my further letter the policy of Keynesian intervention, required in the interests of big industrial capital, which continues to be dominant in the US, was not just something introduced to deal with the financial meltdown, nor was it just a policy introduced by the “socialist” Obama. Not only had Bush introduced a massive fiscal stimulus in response to the crisis, but in the preceding eight years, he had run up a massive budget deficit, the epitome of Keynesian intervention. In 2005, Bush had taken $750 billion of prescription medicine costs off the books of big private companies, and put them on to the books of the state. In other words, it was a large move towards socialising healthcare costs that were crippling big industrial capital.

And, the forerunners of the Tea Party, the Libertarians and their associates like Ron Paul had been arguing against such policies from way before that. The question is why is it that the Tea Party has been kept in its box in the US, and yet the same policies it promotes of austerity etc. continue to exert an influence not just over fringe groups like UKIP, and the Tory Right, but over Cameron, Osbourne and Clegg, and with their counterparts in Europe? That is a question I will examine next.

Sunday, 27 October 2013

A Three Legged Stool

The financial markets are like a three legged stool, the legs being the equity market, the bond market, and the property market. If any of these legs breaks the whole stool collapses. The only question is, which it will be.

Back in 2010 I argued that I thought a huge crisis would arise because of a crisis in the property market. I still believe that will be the case, but it may not be the property market that is the first of these markets to crack. Since 2010, the property market in the US did continue to collapse, down by 60% in places, the property market in Ireland collapsed taking down its banks, and as it bailed them out, almost bankrupting its state. The property market in Spain has fallen by around 50%, and its banks, along with others in Europe affected by it, have either gone bust, been merged, been nationalised, or else cling on to life, only because the ECB has provided masses of liquidity via the LTRO's, that have enabled the banks to liquidate their bad property loans over the intervening period. In Britain, the property market outside London continued to fall, despite record low mortgage rates made possible by state intervention, which in turn have caused what everyone now recognises as an unsustainable and soon to burst bubble in London.

But, as I've pointed out more recently the factors that led to falling rates of interest and inflation over the last 30 years, have now reversed, and despite massive money printing continuing, global interest rates are rising. Put the other way round, Bond Markets are falling. Given that Bond markets, like Equity Markets, and Property Markets are in one of the biggest bubbles seen in history, the likelihood of the Bond markets declining in some kind of gradual orderly fashion are pretty low. But, if Bond markets fall heavily, the initial effect may be to cause a “great rotation” from bonds to equities, but, on the other hand, as happened in 2008, it may simply result in a rush away from all asset classes, particularly if those caught out in the Bond Markets, have to rush to liquidate their shares, property, gold etc. in order to obtain cash. Whichever occurs, the fall in the bond market would cause interest rates to rise sharply, which means that property prices would collapse, as people default on their mortgages.

As with any Ponzi Scheme, its not when people start selling that causes the crash, its when they stop buying in sufficient quantity to provide the new money to pay out, to the initial investors, or to inflate their fictitious capital.

But, it may not be the bond market that collapses first. As I've pointed out over recent months, one of the effects of the low rates of interest produced on the back of the high rates of profit of the last 30 years, has been that firms have bought back their shares, even borrowing money to do so, in order to boost their share prices – and with it the bonuses, and share options of directors. Equity markets, that had already ballooned during the 1980's on the back of huge amounts of money printing and low interest rates, have been blown up once again over the last 3 years, way beyond any real increase in the growth of economies or the real value of companies.

The real measure of that is given by the Price-earnings ratio. As I've pointed out before, the P/E figure given by the business channels, that generally act as cheer leaders for rising markets, are highly misleading. They frequently are based on forecasts of future earnings, but that in turn is based on projections of economic growth that is unlikely to materialise. Already, we've seen in the recent earnings season that actual earnings have been disappointing. The profit margin of companies like Apple has declined sharply.

But, a more accurate measurement of the P/E ratio is that provided by Robert Shiller. That is the Cyclically Adjusted P/E, or CAPE. On that measure, it currently stands at over 24. In other words, the average price of shares is 24 times the earnings (profits) per share. On every occasion this measure has been at that level there has been a stock market crash. The only times this measure has been at levels higher than this were in 1929, and 2000.

Other measures suggest that stock markets are overvalued. For example, using Tobin's Q, which measures the current market value of shares against the current reproduction cost of the capital they represent, Andrew Smithers has calculated US non-financial stocks to be about 58% overvalued.

The current levels on both measures put stock markets as being as overvalued as they were in 1987, when the biggest crash in stock market prices ever, including 1929, occurred.  If stock markets crash, then this could also be the spark for a bond market crash, as well as a property market crash, all three interacting. For example, if there is a sizeable stock market crash, that would provide, when the dust has settled, a solid basis for a rotation of money out of bonds, and property into shares. But, as money moves out of bonds, that would cause interest rates to rise, which may cause share prices to fall once again.

It would certainly cause property prices to fall, for the reasons described earlier. But, if property prices drop substantially, then especially in conditions like now, when Central Banks have already stuffed as much liquidity into the market as they can, any dramatic fall in property prices, will expose the banks as bankrupt, as their property loans go bad, and the value of their balance sheet collapses. In financial markets where the share price of banks is so significant any such collapse of the banks, which would be on a greater scale than in 2008, would be bound to send stock markets down even further.

The contradictions that have been built up in financial markets over the last 30 years, as a result of massive money printing, and the inflation of these asset price bubbles have not been resolved after 2008. On the contrary, they have been made worse, by even greater money printing. At some point one of these legs of this three legged stool will wobble, and the stool will collapse.

Friday, 25 October 2013

US Shifting Alliances? - Part 3

Over recent weeks there seems to have been discernible shift, in US policy, of which the cooling of relations between Saudi and the US are a part. A number of factors seem to play into that. On CNBC a couple of days ago, legendary oilman, T. Boone Pickens, argued that the US pays a massive cost in the stationing of its fleet in the Gulf. It bears nearly all the cost, and yet, the US buys just 10% of the oil that is shipped through the Gulf of Hormuz. For several years now, Pickens has been advocating the “Pickens Plan” to get the US to invest in a conversion of its commercial vehicle fleet to gas, and thereby to make the US self-sufficient in energy, removing its dependence on the Gulf.

The fact, that “fracking” has reduced the price and, more importantly, increased the supply of oil and gas in the US, makes that idea more appealing. That may be part of a general more isolationist feeling that takes hold in the US periodically, especially when it has gone through a period of picking up the bills for being the global policeman. Yet, as stated above, that is not likely to be the real reason behind this shift, it shift it turns out to be. The cost of running a military machine that is bigger than that of the next several military powers combined, is considerable, especially at a time when the US is looking for ways to constrain its ballooning debt. But, it runs that machine for very real reasons that are no immediate in nature. Once global strategic positions are abandoned, they are much more costly to re-establish. It is less costly in blood and treasure to defend a bastion than to have to seize it.

Until recently, it seemed clear that the US was doing all it could to remove Assad, in order to open the door to Iran. Whether Assad used chemical weapons, or whether it was another manoeuvre to provide the pretext for military action is now moot. No such action is now likely. In fact, Assad's position seems strengthened as a result of the intervention of Russia, and the UN Weapons Inspectors. At the same time a change of Government in Ira, has opened the door to more friendly relations than has occurred for many years.

The fact that the US did not intervene openly in Syria, is probably the reason for the change in tone of Saudi Arabia, which seemed to be banking on such an intervention given that its proxies were appearing to be on the back foot, after Hezbollah fighters seemed more than a match for the tens of thousands of foreign jihadists that had swarmed into the country. If the US can come to some kind of modus vivendi with Iran that would give it a much less costly solution. After all, for decades, Iran under the Shah was the US's main strategic partner in the Gulf.

Such a modus vivendi may not suit Israel, but that may not immediately concern the US. Relations between Israel under Netanyahu, and the US under Obama have not been good. Netanyahu openly came out for Romney against Obama in the US election. Netanyahu is seen by the US as something of a maverick, whose hard line position has only made their task of stitching up deals in the region more difficult. But, despite Israel's public pronouncements, a deal with Iran may not be something they would oppose either. After all, they worked happily for decades with the Assad regime, and with the military in Egypt. In fact, to the extent some kind of Bonapartist state exerts control suppressing the jihadist forces in countries around its borders, the safer Israel is. Apart from Turkey, Israel could probably defeat any of its neighbours in a conventional war, but the kind of large scale insurgency that there has been in Syria, carried on within Israel would not only make life intolerable, but would ruin its economy.

So, its possible that in the short term, the greater room for manoeuvre the US has as a result of its new found oil and gas wealth gives it a better bargaining position against Saudi Arabia, whilst the change of government in Iran opens the door for negotiations that play off one potential strategic partner against another. In that respect the US would be doing nothing different than it did before WWI and WWII, in weighing up which side gave it greatest strategic and economic advantage.

After all, the US must be aware that the Gulf States in in financing, arming and training the jihadists, and finding them their recruits through the global network of madrassas, ultimately pose a threat to the US itself. Moreover, if Iran were disposed of as a global power, the Gulf States would have no need themselves of US protection. In fact, their historic protector – Turkey – is standing in the wings with an increasingly sectarian government wrapping itself in the clothes of Neo-Ottomanism. Its army is already the second largest behind the US in NATO, and its economy has been growing rapidly in recent years. The last thing the US would want to do would be deal with one sub-imperialism, only to open the door to an actual, and more powerful imperialism, especially one with one foot in the door of Europe, and whose history was closely enmeshed with that of European conflict.

Back To Part 2

Growth Nearly As Good As Under Labour

In April 2009, I predicted the power of the global boom,
combined with Labour's fiscal stimulus would end the recession.
 It did.  Quarter on Quarter growth not only took place, but it was
accelerating.  The Liberal-Tories scaremongering, and then austerian
economics was bound to tank the economy, as I said in 2010.  As
I predicted, the economy went back into recession at the end of
2010.  That was made worse, by the effects of the 3 year cycle, which
took effect in the second half of 2011.  The current growth is part of
the same cycle, but is goosed by the Liberal-Tory sugar rush introduced
into the housing market.  The crash from that, plus the next
cyclical slow down due for the second half of 2014,
 spell trouble for Osbourne.
The GDP growth figure for the last quarter came in at 0.8%. That is the highest since 2010. Of course, the 2010 figure was the result of the fiscal stimulus policies introduced by Labour. For the last 3 years, the austerity policies introduced by the Liberal-Tories have by contrast caused the economy to tank. In other words, their policies have caused capital to shrink, or at best prevented it from expanding. Hardly a result for a party that claims to be the party of business! But, of course, like their counterparts in the US, the Republicans, the Tories are really only the party of one section of business – the small capitalists who make up their core membership and support. Worse still, just as the Republicans are under pressure from the Tea Party, which is the extreme version of that ideology, so the Tories are under pressure from UKIP, and their own Tea Party wing.

In the US, big business has put the Tea Party in its place, as it threatened to destroy the economy over the Debt Ceiling. In Britain, big business has so far failed to do the same with the Tory, Tea Party Taliban. Over the last year, sections of big business have started to rail against Osbourne's failing policies, and the representatives of big capital within the national and international state – IMF, OECD and even the Credit Rating Agencies – had started to call on him to reverse or rein in the austerity measures. But, the growth of the last two quarters has subdued those calls for now. It will not last. The UK economy has been given a sugar rush as a result of the Help to Buy scam. But, like any sugar rush it is short lived, and then the body crashes. The same will happen with the UK economy. In any event, the normal three year cycle will cause growth to slow in the second half of next year. The two things together spell disaster for Osborne's economic policy, and the political strategy for 2015, he was building on it.

In the UK, the Tory Tea Party Taliban urged on by UKIP, are not only threatening the interests of big capital with their austerian economic policy, but the same ideology of small capital that stands behind it, is what is driving their policy of hostility to the EU, which will be even more disastrous for the interests of big capital. The Democrats realise that they made a mistake in 2011, when they came to a compromise with Republicans over the Debt Ceiling to introduce Sequester. They believed that the Republicans would not be so stupid as to risk the recovery of the economy by going through with the austerity measures that the Sequester entailed. But, under pressure from the Tea Party, they did. That is one reason the US economy's previous growth has slowed, but unlike British and European capital suffering under the impact of austerity, at least the US, as a result of the fiscal stimulus has been growing.

Back in 2008, I warned that the Financial Meltdown was about to happen, even though, as I pointed out at the time, the world economy was still booming. A few weeks later, that prediction was fully confirmed. The reason is that financial crises and economic crises, as Marx pointed out, are not the same thing.

Similarly, in April 2009, when most commentators were still sure the recession was continuing, I wrote that the recession is over. That was also correct. See – Now Its Official.

I provided further analysis of why that was the case by looking at the global conjuncture in – Why The Recession Is Over. The reason others on the Left had failed to recognise that such a recovery was likely was because of a general catastrophist view common on both the Far left and Far Right, as I set out in Oh Ye Of Too Much Faith.

By contrast, in the second half of 2010, when the Liberal-Tories talking down of the economy, and then their austerity measures began to be introduced, I wrote a number of posts setting out why these policies would tank the economy, and were, therefore, bad for capital in general, and particularly big capital. I forecast, again against consensus that the strong growth resulting from Labour's fiscal stimulus, would be reversed, and GDP would fall in the final quarter of 2010. Again that was proved correct, as I set out in Economy Sinking Into The Mire .

Whatever spin the Liberal-Tories try to put on these latest figures, the truth is that their austerian economic policies have been a disaster over the last 3 years, as these posts demonstrate. The UK economy, like the US economy, like every other economy such as Brazil, China etc. that used Keynesian fiscal stimulus had quickly bounced back from the effects of the financial meltdown – the worst financial crisis in history – in 2009. Those economies like the US that continued that policy continued to grow. Those economies that introduced austerian measures, quickly went back into recession, causing a destruction of capital. As a result, Governments like the Tories, have pulled off the remarkable feat of turning recovery into stagnation, in the context of a global economic boom that is probably the largest in history. They have also accomplished the feat of following a policy, thereby, which has been in the interests neither of Labour nor Capital.

Thursday, 24 October 2013

US Shifting Alliances? - Part 2

The idea that the US invaded Iraq for oil, is crude economic determinism. The US had a relation with Saddam for a long time, providing him with the chemical weapons, as well as the military intelligence, about where to use them, for the war it encouraged him to undertake, against Iran. The US could simply have bought oil from Iraq. It had no need of an expensive war to do so. I continue to believe that the Iraq War was more about an adventure by the Bush Government, than a necessary strategic goal for the US state, partly for that reason. What the US needed was not supplies of oil, but a strategic presence in the region, to ensure that in the future, it could continue to obtain those supplies, and if required deny them to its enemies.

It was a lesson they may have learned from Churchill in WWII. Even as Britain was besieged, Churchill had sent most of Britain's tanks and other equipment to North Africa to keep the Suez Canal open, and thereby protect its supply of oil, and other commodities from the Empire. Without that supply Britain would be choked, and to the extent that it could deny those supplies to Germany, its efforts would be frustrated meaning it was dependent upon supplies from the USSR. The main strategic concern for the US since 1979, has been Iran, which has seen itself as a sub-imperialist power exercising its influence in the region. It is the role of Iran within the region rather than globally that has been the US's main concern. There is little evidence that Iran has played any significant role, for example, in promoting global terror, though the US would like to give that impression. In fact, global terror organisations have been almost all linked in one way or another with Al Qaeda, which is a Sunni organisation, backed not by Iran, but by those very Gulf regimes with, which the US has been allied.

But, in fact, the war against Iraq, rather than strengthening the strategic position of the US in the region weakened it. Its hard to believe that the military strategists within the US state would not have envisaged that. Iraq is a country with a majority Shia population, but which was run by a supposedly secular regime, that was, in fact, based upon its minority Sunni population. Removing the existing state was always going to open the door to sectarian conflict, and the formerly repressed minority population switching places with its oppressors, as has happened elsewhere, for example, in Kosovo. Given the connection between the Shia population of Iraq, and that of Iran, and given the centuries old sectarian rivalry within the Middle East between Shia and Sunni, it was almost inevitable that the main beneficiary of this would be Iran. Again, its difficult to escape the belief, therefore, that the Iraq War was more a vanity project by the Bush government and the neo-cons, than a thought out strategic goal by the US state.

With the Sunni minority looking under serious threat, the US had to switch its emphasis, under pressure from the Gulf Monarchies, who declared that they would not allow them to be subjugated. The US essentially partitioned the country into Shia, Sunni and Kurdish territories, physically erecting barriers along the lines of those in the North of Ireland of previous times, to separate communities. The Kurds, have already essentially separated from Iraq. But, the Iraqi Government has become increasingly sectarian, and closer to Iran. Given the relatively small populations of the Sunni Gulf states compared to the Shia populations of Iran, Iraq and Syria that continues to be a problem for those states.

Having lost ground in Iraq, the US needed to bolster its alliance with the Gulf states, which make up for their small population with their extremely large, and sophisticated arsenal supplied by the US, as well as the presence of the US fleet stationed in Bahrain. Once again, very little is heard about the activities of the minority Sunni regime in that country, which backed by Saudi Arabia, daily murders its citizens to suppress their protests. A central aspect of that alliance, and the need still to deal with Iran, has been the support provided for jihadist forces in Libya and Syria, where the existing regimes were not reliable allies of imperialism. The overthrow of Assad, and a revival of a jihadist Sunni insurgency in Iraq, are vital preliminaries to removing support for Iran within the region.

Yet, such a strategy is fraught with danger. In both Syria and Libya, despite drawing forces from all over the globe, and despite having the latest weapons provided by the Gulf states and the US, the jihadists proved themselves incapable of winning. In Libya, it was only massive bombing by imperialism, and more importantly, the intervention of significant numbers of special forces on the ground, which turned the tide. The experience of Libya has prevented the US and its allies from obtaining the cover of a UN resolution for a “No Fly Zone”, to directly intervene openly in Syria. As I suggested some time ago - Whither Syria? - the consequence has been that the carnage has simply grinded on with no prospect of either side winning, whatever winning would mean in this context. And, as I said there, the consequence has been that the initial basis of the Syrian people's uprising has disappeared, and the opposition has simply become a reactionary, jihadist insurgency.

But, as Libya demonstrates, wars have their own dynamic. The jihadists having secured a bridgehead in Libya, have shown no gratitude to their US and European backers that helped them into power. They sacked the US Embassy in Benghazi, and killed its Ambassador. The US should not have been surprised. They created Osama Bin laden and Al Qaeda to fight the USSR in Afghanistan only to find him turning on them, and blowing up the World Trade Centre. The jihadists from their Libyan bridgehead then moved on to Mali, causing France to have to intervene.

It must have occurred to the US that given this history, once the Sunni jihadists secured control in Syria, especially as clerical-fascists in Egypt, and Tunisia were being pushed in a more extreme direction, and even the Sunni Muslim regime in Turkey was showing signs of wanting to reclaim its Ottoman heritage, with its increasing hostility towards Israel, as it sought to be the leader of the region's Sunni Muslims, that this would pose an existential threat to Israel itself. Yet, the US seemed to be prepared to risk that in order to boost its alliance with the Gulf Monarchies, and to undermine the allies of Iran.

Back To Part 1

Forward To Part 3

Nick Clegg - "I Agree With Karl" - Part 4

Another example of this approach was given by Marx in relation to Free Trade. In his Speech On Free Trade Marx lambastes the supporters of both Free Trade and Protectionism, both of which are supporters of exploitation, who choose one of these two options only as a preferred means for their class or class fraction to undertake that exploitation. We do not advocate either of these solutions, but instead advocate the creation of a workers owned and controlled, co-operative commonwealth. Yet, that does not mean that we have to abstain in preferring one of these solutions over the other.

“But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favour of free trade.”

In other words, as Marxists we advocate a programme based upon developing the working-class as an independent, class conscious force able to act to transform the environment in which it exists, and thereby to change the material conditions which shape its ideas. In the words of the Communist Manifesto,

“The Communists fight for the attainment of the immediate aims, for the enforcement of the momentary interests of the working class; but in the movement of the present, they also represent and take care of the future of that movement.”

But, it is precisely because in advocating our programme for socialism, for an adequate solution for workers problems, that we have to also start from where we are, including the existing bourgeois class consciousness of the workers, which itself derives from their existing material conditions, that we have to make compromises, rather than adopt a sectarian, purist position. We have to use the tools that existing bourgeois society provides, to change the material conditions, and thereby change the ideas that dominate the workers, by increasingly building the working class as an independent social force in revolutionary opposition to the bourgeoisie.

Marx describes this difference with the ultra left sectarians in Political Indifferentism. He begins by mocking the purists.

““The working class must not constitute itself a political party; it must not, under any pretext, engage in political action, for to combat the state is to recognize the state: and this is contrary to eternal principles. Workers must not go on strike; for to struggle to increase one's wages or to prevent their decrease is like recognizing wages: and this is contrary to the eternal principles of the emancipation of the working class!

“If in the political struggle against the bourgeois state the workers succeed only in extracting concessions, then they are guilty of compromise; and this is contrary to eternal principles. All peaceful movements, such as those in which English and American workers have the bad habit of engaging, are therefore to be despised. Workers must not struggle to establish a legal limit to the working day, because this is to compromise with the masters, who can then only exploit them for ten or twelve hours, instead of fourteen or sixteen. They must not even exert themselves in order legally to prohibit the employment in factories of children under the age of ten, because by such means they do not bring to an end the exploitation of children over ten: they thus commit a new compromise, which stains the purity of the eternal principles.

“Workers should even less desire that, as happens in the United States of America, the state whose budget is swollen by what is taken from the working class should be obliged to give primary education to the workers' children; for primary education is not complete education. It is better that working men and working women should not be able to read or write or do sums than that they should receive education from a teacher in a school run by the state. It is far better that ignorance and a working day of sixteen hours should debase the working classes than that eternal principles should be violated.””

Having set out in these terms, just how ridiculous such an approach would be, and yet such an approach had been advocated essentially by the Proudhonists, Marx comments,

The wages struggle continues to keep workers in the position of
being like hamsters on a wheel.  We have to keep repeating the same
struggles over and over again, without moving any further forward.
For that reason Marx said we should not devote too much of our
time to such struggles, as opposed to developing our own more
adequate, alternative solutions that make use of the tools that
Capitalism provides, for example using credit to extend worker owned
and controlled co-operatives throughout the economy.  But, that doesn't
 mean we can avoid wage struggles either.  Unless we get off our knees
to fight for decent wages, we will never be in a position to fight to
defend and extend workers owned property either.
“It cannot be denied that if the apostles of political indifferentism were to express themselves with such clarity, the working class would make short shrift of them and would resent being insulted by these doctrinaire bourgeois and displaced gentlemen, who are so stupid or so naive as to attempt to deny to the working class any real means of struggle. For all arms with which to fight must be drawn from society as it is and the fatal conditions of this struggle have the misfortune of not being easily adapted to the idealistic fantasies which these doctors in social science have exalted as divinities, under the names of Freedom, Autonomy, Anarchy. However the working-class movement is today so powerful that these philanthropic sectarians dare not repeat for the economic struggle those great truths which they used incessantly to proclaim on the subject of the political struggle. They are simply too cowardly to apply them any longer to strikes, combinations, single-craft unions, laws on the labour of women and children, on the limitation of the working day etc., etc.”

But, we see a similar sectarian approach by many who call themselves Marxists today. The EU, for example, is not the kind of European Workers State we would advocate, and yet it does represent an advance over the division into competing nation states that led to two world wars in the last century. Marxists would not advocate the establishment of the current EU, but why would we not defend/support it against a reversion to what amounts to a more reactionary previous situation?

Marxists do not advocate Keynesian fiscal
intervention, but we are not politically indifferent
between Keynesian fiscal intervention and Hayeckian
Marxists do not advocate Keynesian fiscal intervention in the economy as a means of resolving the current problems. We point out that no such capitalist solutions can ultimately resolve the problems of Capitalism in the workers interests. But, that does not mean we are “Politically Indifferent” over a policy of Keynesian intervention, which acts to stimulate economic activity under current conditions, and which is linked to the continuation of services important for workers, as opposed to the policies of austerity being pursued by right-wing populist parties, like that of the Liberal-Tories in Britain. To the extent, for example, that Obama pursues policies of Keynesian stimulus in the US, we support those policies against attacks by the Austerians.

We have to use what is at our disposal as a means of attempting to move beyond it. Nick Clegg's adoption of Marx and the First International's position on the organisation of schools is to be welcomed, though he undoubtedly does not know that he has adopted Marx's position. It is a step towards moving beyond the control of education by the capitalist state, to the control of education by workers themselves. The Labour Movement needs to develop means of doing the same thing in respect of all aspects of state capitalist provision. We need to begin to develop the working-class as an independent, class conscious force that operates on the basis as Marx puts it of “self-government” separate from the capitalist state.

Capital II, Chapter 8 - Part 9

Fixed capital requires maintenance, and some of this maintenance arises automatically as a result of the labour process itself. Fixed capital, left unused, suffers depreciation, which is a total loss to capital (note this is a capital loss not a trading loss. It has to be recovered out of capital not out of surplus value, i.e. surplus value that would have gone to capital accumulation instead has to go to replace the depreciated capital. If there were no surplus value to achieve this, then either the capital stock itself shrinks accordingly, or else new additional capital has to be created from elsewhere). Its use in the labour process reduces its use value, and therefore, its value as a consequence of wear and tear, but, at the same time, reduces the loss of use value and value arising from depreciation. This is a free gift from labour to capital.

“This maintenance resulting from use in the labour-process is a free gift inherent in the nature of living labour. Moreover the preservative power of labour is of a two-fold character. On the one hand it preserves the value of the materials of labour by transferring it to the product, on the other hand it preserves the value of the instruments of labour without transferring this value to the product, by preserving their use-value through their activity in the process of production.” (p 176)

But, it also requires positive maintenance – cleaning, oiling etc. - which requires an expenditure of labour-time. The calculation of the average life of a machine, required to determine how much of its value it gives up each year, presumes that this necessary maintenance is undertaken, just as in determining the average lifespan of a worker, for determining the Value of labour-power, its presumed that the worker is maintained by eating, being clothed and sheltered, and undertaking all other necessary functions.

“It is here not a question of replacing the labour contained in the machine, but of constant additional labour made necessary by its use. It is not a question of labour performed by the machine, but of labour spent on it, of labour which it is not an agent of production but raw material. The capital expended for this labour must be classed as circulating capital, although it does not enter into the labour-process proper to which the product owes its existence. This labour must be continually expended in production, hence its value must be continually replaced by that of the product. The capital invested in it belongs in that part of circulating capital which has to cover the unproductive costs and is to be distributed over the produced values according to an annual average calculation.” (p 177)

The labour so expended is unproductive labour. Just as the food the worker needs to eat, to reproduce their labour-power, counts towards the calculation of the value of labour-power, but the time the worker expends to eat that food does not, so these necessary costs, in maintaining the machine do not count in determining the value of the product it helps to produce. It can be seen why capital, therefore, tries to minimise these costs. It was one reason child labour was used to undertake the cleaning while the machines continued to run.

“However, in various branches of production, in which the machinery must be removed from the process of production for the purpose of cleaning and where therefore the cleaning cannot be performed in between, as for instance in the case of locomotives, this maintenance work counts as current expenses and is therefore an element of circulating capital.” (p 177)

In respect of repairs these can be of different types. A machine might suffer an accident, which requires repair. Obviously, such accidents are exactly that, and can occur at any time. It is for such purposes that insurance exists, so as to spread out the risk of such eventualities. Machines might also require additional labour to be spent on them when they are new to iron out teething troubles. In a similar manner, today, with large, complex computer systems, additional programmer time is required, after they have been implemented, to remedy bugs that only become apparent when the system is in use. When machines have gone past a certain duration, and wear and tear has accumulated, they may also require more repairs.

Back To Part 8

Forward To Part 10

Wednesday, 23 October 2013

European Bank Stocks Drop

European bank stocks dropped by around 2% today, whilst the stocks of some Spanish and Italian banks fell by around 5%. The reason is simply that the details of the ECB's stress tests were released. That in itself is an indication of the recognition that European banks are essentially bust. The ECB's stress test is likely to be no more rigorous than the previous tests. Months before Irish banks went bust they were given a clean bill of health, the same with the banks in Cyprus, and with Dexia. The ECB's criteria seems hardly demanding, given the history, and the fact that the European and global financial system is in such a tenuous condition. But, of course, its for that very reason that the test is not designed to be too rigorous, as with those that preceded it. On the one hand, the EC has to find that some banks need to increase their capital provisions, but it can't expose them all as being bankrupt, because even if it were to expose too large a number it would cause a collapse of the European if not global financial system. The problem is that however, the ECB tries to hide the truth, as with those previous tests it won't change reality. Its not planning to report its finding for another year, but if there has not been another major European banking crisis before then it would be very surprising.

The problem is that the ECB, like the Federal Reserve and other Central Banks is essentially playing a financial shell game, or some equivalent of whack-a-mole. It responds to a problem in one area only to create another one somewhere else. The real problem is that it is trying to deal with a problem of solvency – lack of capital – by increasing liquidity. Governments have huge debts, which need to be paid off by raising income, i.e. by increasing the amount they take in in taxes, which requires growth, capital formation. Instead, the problem is being addressed by yet further borrowing that is covered by central banks printing money, which they then use to buy up Government debt. For so long as China and other Asian economies continued to provide cheap commodities that could continue without causing consumer price inflation, but that period has now ended. China, India and other economies are themselves now suffering increasing levels of inflation, partly fuelled by that same money printing, and partly fuelled by the fact that their growth has now started to reach the limits of what increases in productivity could provide without input costs rising. Wages in China have been rising sharply, in some cases by as much as 50%!

But, the same problem applies to the banks. The banks are insolvent, they have huge amounts of fictitious capital built up over the last 30 years as a result of that same process of money printing and debt creation, but they have far too little real capital. Just look at the comparison of the way way economies have grown, compared to the rise in stock markets and property markets, which illustrates the point. The figure for economic growth gives an indication of the increase in the actual amount of capital, whereas the increase in stock and property markets indicates the growth in fictitious capital.

US GDP rose from $2.8 Trillion in 1980 to $16.2 Trillion in 2013, or an approximate 6 fold increase. But, the Dow Jones increased during that period from 1,000 to over 15,000 or a 15 fold increase! In Britain from 1997 to 2007, property prices quadrupled, from an already elevated level having been inflated in the property bubble of the 1980's, but the economy and real capital grew by nothing like that figure. The banks have expanded not on the back of real economic growth, and an expansion of real capital, but purely on the back of an expansion of fictitious capital. This creates a real problem.

The ECB is proposing to use a figure of 8%, as a requirement for bank's tier 1 Capital, i.e. for the actual equity capital that shareholders must have put into the bank to finance its lending. To be clear this is not the same as the value of the bank's shares, which fluctuate by the day. If I start a business, and put £1,000 into it made up of 1,000 shares, then this forms the firm's share capital. But, the firm owes that money to me, or whoever owns those shares, should the firm be wound up. If the shares are traded, the value of each share might rise from £1, to £2, but that does not provide the firm itself with any more money. Its share capital remains the £1,000 that was paid in. The only person who benefits here is me, as a share holder, because I can now sell my £1,000 of shares for £2,000.

It is this share capital of the firm that comprises the 8%. But, the important point here is 8% of what. The 8% is essentially 8% of the firm's total assets, and the bank's assets are made up largely of its loans, though to complicate matters, it also includes its own ownership of shares in other banks and businesses, the value of which does go up and down with the market price of those shares. The banks loans are to private individuals, for mortgages etc, to companies including the purchase of corporate bonds, and to governments in the form of sovereign bonds. The value of all these goes up and down with the market.

But, the real issue here is what is the actual value of any of these assets. A loan is only a real asset if it is going to be repaid. If I lend you money, but you don't pay me back the money is lost, it cannot be an asset. So, the question then comes down to how many of these loans are worth the paper they are written on? In the case of loans to Greece, Cyprus and other economies whose sovereign bonds have had to be written down or written off, the answer is not many. It was the fact that Cypriot banks had large amounts of Greek bonds on the balance sheets, which were essentially written off, which caused their collapse.

In looking at the value of these assets there are two ways they can be valued. They can be valued as marked to book, which is the normal practice, or they can be marked to market. It would normally be the case that the shares of other companies held on the balance sheet would be marked to market, because at any one time that is what the bank can realise by selling those shares. But, with property loans, it would normally be marked to book, i.e. valued at the initial value of the loan, because the intention is that the borrower will have to repay the fall value of what they borrowed, whatever happens to the value of the property they borrowed the money to buy. But, as the sub-prime crisis showed, that is unrealistic.

In a rising property market, if a borrower goes bust and can't repay the loan, the bank simply repossesses the property, and sells it at the current market price, thereby recovering what they are owed. That is why as the bubble inflated during the 80's, 90's, and 2000's, the banks were eager to lend, whether people could repay their mortgages or not. But, when prices stop rising, and worse when they start falling, when borrowers can't repay, the bank also can't get its money back from selling the property, whose price has now fallen below the loan value. That was what bankrupted the banks in the sub-prime crisis, it is what bankrupted the banks in Ireland, Spain, and to an extent Greece. It is what bankrupted Northern Rock, and would have bankrupted all the other British banks had the government not stepped in in 2008.

But, that problem has not been resolved. Governments have printed money, and where that has not worked to stop prices falling, they have as in Britain, stepped in with further bribes like Help to Buy, to persuade people to buy massively overpriced housing, to keep the bubble inflated to hold off the day of reckoning when the bubble bursts and the banks go bust. But, the term liquidity is an apt one for money, because like water it does flow to wherever there is the route of least resistance. In the US, the financial crisis caused a large amount of this fictitious capital to be destroyed. Stock markets fell in half, the property market fell by 60%. But, as the state came in to secure the banks, and then began to print more money, the money simply went back to where it found the route of least resistance.

In a situation where you don't know what the economy might be doing in a few months time let alone in a couple of years time, and when it takes a couple of years before any kind of productive investment might show any kind of profit, why would you put money to work in that way, rather than buying a share, whose price might rise by 10% in a month, or a property, whose price might rise by 10% in a year? Its not that the property had become more valuable, or that the share had become more valuable – which could only be the case if the company along with the economy really were growing at a rapid pace, which it wasn't – only that money once again continued to chase these bits of paper, pushing up their price.

So, money is printed and fights a route to the next place where it might make a quick buck, and when that blows up anther bubble, measures have to be taken to move the money away from that area to some other area, where once more it blows up yet another bubble, all the time the autorities having to try to make sure that in moving money from one bubble to another, they don't cause the first to burst catastrophically, so they err on the side of caution, by keeping all bubbles inflated to an extent. A European example of that currently is in  – Sweden and Norway. There the Central Banks are trying to control inflation, whilst trying to keep the economy growing. The latter means they need to keep interest rates low, but that very process is causing property prices to go into another bubble.

In China, loans are suspected of being of very poor quality, i.e. many may go bad, but the problem is lessened by the fact that the banks are state owned, and has huge reserves to cover any losses. But, in China too, the state repeatedly tries to reduce the risks of bad loans, and also of the creation of property bubbles, by periodically tightening monetary policy by various means. Yesterday, Chinese interest rates surged  on the back of tightened monetary policy, and that has knock on effects to global currencies and interest rates.

In the US, as interest rates have risen over the last few months, the surge in property prices and demand has come to a sudden stop, illustrating once again, how money can quickly move from one hot area to another, or simply sit in money hoards when no obvious home can be found. In Europe, the ECB has provided its own version of money printing over the last 3 years through the Long Term Refinancing Operation, whereby it provided low interest rate, three year loans for banks. But, the banks did not lend that money to businesses to stimulate economic activity, and thereby enable more real capital to be formed. Instead, they used the money to buy European sovereign bonds. That was the object of the ECB, which thereby reduced the dangerously high yields on the sovereign bonds of countries like Spain and Italy.

It is the real value of these sovereign bonds that the ECB is focussing on as far as the stress tests. But, that is largely a diversion. It is not public debt in Britain or in Europe that is the real problem, though right-wing populist governments focus upon that for ideological reasons. The real problem is the much larger amount of private debt. The public debt can always be dealt with by simply printing money, though it will cause another problem in the shape of inflation. But, the private debt in the form of mortgages etc. cannot be resolved in that way.

The individuals who owe that money to the banks cannot simply print money to repay it. In the circumstances of austerity and falling wages, nor can they repay it out of income. On the contrary, although Eurozone economies, and the UK have shown some return to sluggish growth, it is hardly vibrant, and within a year, the next trade cycle is due to cause it to go into reverse once more. But, nor can the banks expect to get their money back from higher property prices either. In London prices are soaring into the stratosphere, but in the rest of Britain, although prices remain in a huge bubble, they are not rising further, despite the government money printing, record low interest rates, and bribery such as Buy To Let.

So, not only does valuing these property loans on banks books at book cost, grossly overstate their real value, but even if they were marked to market it would still grossly overstate their real value, because if the banks come to recover these loans by foreclosing on the loans, many of which are already in default, then the value of these properties would fall massively from current levels. In fact, both in Britain, and in Europe, the selling prices of properties in many areas have continued to be significantly below initial asking price, even before any property firesale.

The figure of 8%, on the basis of the currently massively inflated value of bank assets, be those assets property, bonds, or equities is then wholly inadequate. Even a figure of 20% would probably not be enough, to cover the firestorm that will erupt when these bubbles burst. Indeed, as stated previously, its reported that in order to cover the real figure for the exposure of European banks to these property debts, European banks have used a range of derivatives to hide them from their balance sheets. In the case of Deutsche Bank alone the exposure to these global derivatives is reported to be equal to the entire global GDP!

Its no wonder then that Germany is cautious about the idea that the European taxpayer, and largely, therefore, the German taxpayer, should stand behind these banks should they go bust, in the same way that the Irish state stood behind the Irish banks ahead of them going bust. Mario Draghi wants the ECB to stand behind the European banks, and for the European taxpayer to stand behind the ECB. Germany, and the European Commission is instead demanding that the banks' bondholders should be the first in line, behind the shareholders, should the banks go bust. As Cyprus showed, behind them, next in line will be the depositors, and it is a brave person who believes that in such a firestorm it will only be deposits over €100,000 that will be at risk.

The ECB is busy trying to convince politicians that the European banks will not need any such taxpayer support. That is precisely the con the Irish bankers sold to the Irish politicians before they went bust. Asset prices have been inflated to such an extent over the last 30 years that the amount of fictitious capital sitting on the books of banks is now many times the amount of real capital in the economy, and the capacity of the global economy to produce the economy to repay it. The only answer will be for that fictitious capital to be destroyed.

That will cause a great gnashing of teeth for bankers. All the central banks can do is delay the inevitable.