The Institutions Have 24 Hours To Avoid A Global Crash

In just over 24 hours from now, the Asian financial markets will begin trading. Unless the ECB, EU and IMF have come up with a deal that provides Greece with a viable solution that the Greek people can accept, there will be turmoil on those markets. Everyone wanting to get out of all those shares, bonds and other financial assets that are likely to crash, before the European and then US markets begin trading, will rush to sell first, via the Asian markets, before global prices crash. Those Asian markets, as I reported recently are already very fragile. The Shanghai Composite Index is in a huge bubble, having risen 128% in the last year alone, largely financed on cheap credit. It is forecast to drop by at least 50%. The Chinese property market is also in a huge bubble, reminiscent of Spain, with entire cities having been built that remain unoccupied. But, that will be only the spark of the conflagration, as European markets open, with bond and stock prices already heading sharply downwards. The European banks are today even more shaky than in 2010.

The Syriza government has bent over backwards to accommodate the “institutions”, but those institutions decided instead to go for regime change in Greece, in the hope that, as they did in Italy, they could force the government out, and insert a technocratic government. But, just as they seem to have failed to understand that Greece is not Ireland, and so the austerity measures they proposed could not possibly have worked, without putting in vast amounts of capital, over several years, to create sustainable industries in Greece, so they seem to have failed to understand that Greece is not Italy either. There is no possibility that Greece is simply going to succumb to some kind of bureaucratic transfer of power to a technocratic regime that will inflict even more pain upon its people. The political centre in Greece has gone; it has lost all credibility and support. Syriza was the last hope for a democratic solution to be found.

As I pointed out in the week, it is not just a matter of the €350 billion of sovereign debt that will go bad, when the Greek people vote to reject the institutions further austerity measures – and as Paul Mason says, its inevitable that the Greek people will vote to reject them in the referendum on 5^th July – it is the further €350 billion of private debt that will go bad too, debt held mostly by European banks, who themselves, are insolvent.

I've pointed out previously the precarious state of banks in Luxembourg, whose exposure is far greater than was that of the banks in Cyprus, but its not alone. The banks in Malta, and in south-eastern Europe, as well as central and eastern Europe, are in a similarly precarious condition.

On top of that there is the unknown quantity of credit default swaps that will be triggered. Bear in mind that anyone can buy a credit default swap, just like spread betting on a football match, and no one knows how many rich individuals, institutions and so on, will have done so over the last few years, in the belief that ultimately this situation would arise. Good news for those who win that bet, very bad news for all those financial institutions who will be on the wrong side of the trade, bad news for all those unknown counter-parties, who, as 2008 demonstrated, have no idea that they even are a counter party, several times removed, to such a trade.

The cost of avoiding that crash is actually quite small. The institutions could effectively mothball the Greek sovereign debt, as Syriza had proposed. They could ditch austerity, as a policy that has clearly failed, and begin instead to put together a programme of fiscal expansion across Europe, to begin the much needed rejuvenation of infrastructure to make European capital more competitive in the global market. Without that, even if this crisis does not cause a financial crash greater than 2008, it is only a matter of time, before such a crash occurs.

In fact, such a crash would be beneficial to capital. It is ultimately required so that the draining effect of fictitious capital over real capital is ended, and money-capital is once again used for accumulation rather than for speculation. As Marx put it,

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”

(Theories Of Surplus Value, Part 2, p 496)

None of this debt in the form of fictitious capital – shares, bonds, property – plays any positive role in capital accumulation. In fact, to the extent that it leads to these kinds of speculative bubbles, it drains potential money capital away from productive investment, and into this speculation. The fall in the value of bonds, shares or the wiping away of trillions of dollars of debt, makes not one jot of difference to the continued productive capacity of the factories, machines and other productive-capital that was previously bought with the loaned money-capital. In fact, to the extent that the firms that utilise this productive-capital thereby pay less in interest, to the owners of the fictitious capital, the more they have available for further investment.

Over the last decade or so, huge amounts of company profits have gone, at the direction of the representatives of the money lenders, to boost share prices, by buying back shares and other such measures. If the prices of shares, and bonds collapse, companies could instead buy back their outstanding shares and bonds, at these cheap prices, so as to rid themselves of the need to pay that interest and dividends.

Similarly, a financial crash, that would inevitably reduce the value of property, would make it once again affordable for people to buy to live in, rather than as yet another vehicle of speculation. It would mean that workers pension contributions would once again buy them the quantity of bonds and shares, required to provide their pension funds with the basis of meeting their future pension requirements. In doing that, it would significantly reduce the value of labour-power, and boost the rate and mass of surplus value, again providing a basis for greater accumulation and expansion.

As Marx puts it,

"... the reduction of the money equivalents of these securities on the stock exchange list has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners."

(Capital III, Chapter 30)

But, the conservative governments and parties will do all in their power to avoid such a crash and a destruction of this fictitious capital, despite the beneficial effect it would have for real productive-capital. That is because, despite all of their spin about being “pro-business”, they are nothing of the kind. They are not “pro” the real businesses – the businesses made up of millions of workers, that produce commodities. They are only “pro” the money lending capitalists who leach off those businesses, by drawing off dividends and other forms of interest. That is why, rather than allowing the banks to go bust in 2008, those governments, stepped in to nationalise the banks, to provide them with vast amounts of liquidity, even at the cost of then crippling their economies, and the real productive-capital and businesses as a result of policies of austerity.

As Marx, says, a financial crisis of this kind can have economic consequences, as the financial crisis of 2008 did. Analysing a similar financial crisis in 1847, Marx indicates that a 37% contraction of economic activity followed. But, that was largely due to the fact the financial crisis itself was worsened by the effects of the 1844 Bank Act, which created a credit crunch. Once the Act was suspended, and liquidity was injected into the system, the long wave boom of the time resumed.

Today, governments have every possibility of ensuring that sufficient liquidity is made available to prevent a credit crunch, so that the circulation of commodities can continue unabated, without, as they did in 2008, propping up the banks and the values of fictitious capital. Large companies have unprecedented levels of money hoards, built up as a consequence of the massive rise in the rate and mass of profit over the last 30 years. Apple alone has around $150 billion of cash sitting on its balance sheet. Microsoft has around $75 billion dollars of cash on its balance sheet. At the end of 2013, US non-financial corporations had around $1.5 trillion of cash on their balance sheet.

Globally, around $7 trillion sits on corporate balance sheets. If stock, bond and property prices collapse, this cash will be able to pick up vast swathes of these depreciated assets. It will mean that there will be a huge centralisation of capital, similar to that which occurred at a similar phase of the long wave cycle in the 1960's. A similar process happened after the collapse of the railway bubble in 1847. It would mean a significant strengthening of the power of real productive-capital.

Marx makes this same point about the negative role played by this money-lending capital as against real productive capital. He writes,

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.” 

(Capital III, Chapter 33)

It is those interests, rather than the interests of actual business, or productive-capital that the conservative parties defend; it is those elements which provide the social and ideological basis for those parties. It is social democracy, which represents the true interests of business, i.e. of big industrial capital. Unfortunately, it has been the former rather than the latter that has been in the ascendancy for the last 30 years, which is why the interests of fictitious capital have prevailed over the interests of real productive-capital. But, as Marx demonstrates, economies work according to objective laws, and the contradictions which those laws have built up, as a result of this astronomical accumulation of fictitious capital, have reached their limit.

Given the nature of those conservative forces, the likelihood is they will once again attempt to defy the laws of gravity. The consequence will be the same fate as that which befell humpty dumpty.