CHAPTER 1 – NEOLIBERALISM IS BROKEN
Fiat Money
Paul describes the basis of fiat money being trust. He is quite right that both left and right wing economists who see the cause of crisis being fiat money, and abandonment of the gold standard, are wide of the mark. I'm not sure that Paul himself has properly grasped what money is, and as I haven't read the work of David Graeber he refers to, I can't comment on the claims that there is no evidence that early human societies used barter, or that money emerged from it. What I would say is that, even if the latter claim is true, it is irrelevant. Even if early human societies did organise trade between themselves on the basis of trust, i.e. credit, rather than barter, in order to arrive at some definition of what the amount of value is that you are trusting the other party to provide you with, at some point in the future, you must first have a means of objectively determining that value. That basis is labour-time, for which there is lots of evidence, throughout history, in cultures from across the globe.
And, that is what money is; it is a claim to a quantity of labour-time. It doesn't matter whether this claim to labour-time is in the physical form of a money-commodity, such as gold, whose own value is equal to that amount of labour-time, or in the form of a money token, such as a coin, or a note, or a notched stick, or a mark in a ledger, provided each of these latter are accepted as guaranteeing that the claim to the labour-time is honoured. A fiat currency certainly enables the state to abuse this trust by debasing the currency, but that applies to every coin issued over millennia. And, when gold from South America flooded back into Spain, following the actions of the Conquistadores, it led to a rise in inflation. A similar thing happened in Britain in the 18th and 19th centuries, which also provided a basis for primary capital accumulation.
The continual injection of liquidity from the late 1980's, in response to market corrections and crashes, certainly created the asset price bubbles that burst in 2008, though it was the rise in the rate of profit, and fall in interest rates it produced, that was the initial basis for the rise in asset prices. The existence of fiat currency made it possible for the Federal Reserve, and other central banks, to do that, to print money to stuff into the mouths of commercial banks, and to buy up bonds, so as to reflate their prices, but it did not require them to do so. They did it for a specific reason; to keep the paper wealth of the capitalist class inflated. That private capitalist wealth is now held almost exclusively in this form of fictitious capital, and landed property, rather than productive wealth. For the last thirty years, the capitalist state has protected that paper wealth, even where doing so required destroying real productive wealth. This situation, created over the last thirty years, is vital to understanding the history up to and after 2008, and the condition that the global economy now finds itself in. It gives the specific, concrete characteristics of this fifth long wave cycle, compared to the previous four.
Paul sets out the view of the right-wing economists such as Detlev Schlicter, but I've described similar views expressed by Libertarians and Austrians, like Peter Schiff, as far back as the 2008 crisis itself. When the financial crash comes, I think that many of the things they forecast may come true. We have already seen the preview in Cyprus and Greece, and, across the EU, new regulations have been put in place to appropriate the deposits of savers above €100,000. I doubt that central banks will respond by printing even more money, because, contrary to Paul's argument, the problem really is, as seen in Weimar, Argentina, Zimbabwe and elsewhere that if you print too many notes, you get hyperinflation. Indeed, we already have had hyperinflation of share, bond and property markets, that has spread to other assets. Just look at the prices of works of art, wine, classic cars, vinyl records and so on, all of which have been inflated.
When the crash comes, as I wrote recently, cash is king, because a given amount of money will buy much more of these assets. In the 1930's, even the most expensive mansions in New York sold for 10% of their previous price. That, of course, is provided your savings are not confiscated to cover the banks' debts. But, as these asset prices crash, the flow of currency out of these spheres will rapidly inflate consumer goods prices, especially as people do what they always do in such conditions, and begin to buy up, and hoard, as much of vital commodities as they can get their hands on.
Financialisation
Paul describes the process of decay of urban areas, since the 1980's. It is a picture those of us who remember the 1970's can relate to, whereby high streets that once sustained retail businesses, today sustain pawnshops, pay day lenders and so on. It goes along with the description earlier of stagnant wages and precarious employment, supplemented by easy, but very expensive credit.
Paul defines financialisation as a process whereby companies turned away from banks and went straight to the money markets for finance; banks instead of seeing customers as savers saw them as borrowers from whom they could make profits; consumers took on increasing amounts of debt, via credit cards, mortgages, student loans, car loans, etc.; a whole series of financial derivatives stood behind all of these different forms of lending, each being packaged together, and with other speculators betting on whether any of them would default.
Paul says,
“A growing proportion of profit in the economy is now being made not by employing workers, or providing goods and services that they buy with their wages, but by lending to them.” (p 16-17)
This is wrong. When a worker borrows money, say to buy a TV, what the lender obtains, on the loan, is interest, not profit. Interest is a deduction from profit. Either the capitalist who produces the TV must sell it below its price of production, by an amount equal to the interest, and so getting less than the average profit, or else the worker must get wages to be able to pay the full price of the TV, plus the interest, in which case the worker's employer loses an amount of profit equal to the interest.
Moreover, the money lender must either lend their own money-capital to the borrower, or else they must themselves borrow money-capital in the money market, so as to be able to lend it on. In that case, the “profit” they make will be equal to the difference between what it costs them to borrow, and what they can obtain from lending. They will also have to cover the costs of their buildings, equipment and wages. In effect, here, they act in the same way as a money-dealing or merchant capitalist, acting as an intermediary between lenders and borrowers, in the same way that a merchant acts as intermediary between producers and consumers. But, as Marx describes in Capital III, in relation to such merchant capitals, and the average rate of profit, if the rate of profit in such a sphere rose above the average, capital from other spheres would move into it, thereby reducing the rate of profit, as a result of competition between capitals, whilst raising the rate of profit in those spheres from where the capital had migrated.
Of course, as happened with the landed aristocracy, there is another alternative that can apply for a limited time. The landed aristocracy borrowed against the value of its estates, but the inevitable consequence of that was that it gradually had to sell those estates, so as to repay its debts. For a time they could delude themselves that they could sustain themselves on the basis of inflated land prices, but each time they sold land, they destroyed their own capital base, and source of revenue. A similar thing has happened with pensions funds that relied on capital gains rather than revenue to cover pension liabilities. Similarly, workers who had accumulated actual wealth in the post-war period, in the form of houses, were encouraged to borrow against that wealth, with equity release scams, and so on, including to provide money to lend to their children for deposits on grossly overpriced houses, so as to artificially maintain demand for those houses, and keep the property bubble inflated.
Alternatively, wages can be pushed below the value of labour-power, or for a time workers may work additional hours, but that ultimately snaps back. Debt can be continually rolled over, but eventually even the minimum payment can't be made, and the debts default. Ironically, a rise in official interest rates can have less effect here, because if you are already paying interest rates of 30% on credit card debt, let alone 4000% on payday loan debt, a quarter point rise by the Bank of England is neither here nor there. It's in the capitalised prices of bonds, shares, and property that these rises in rates have most effect.
Paul points out that US production workers wages have stagnated since 1973, whilst debt in the economy has doubled to 300% of GDP.
Paul also argues that this process led to a change between companies and banks. I think that's a stretch. Existing relations between companies and shareholders were enough to make executives have to focus on the quarterly figures, and those executives were always there to represent shareholders interest, irrespective of whether they obtained a proportion of funding via bank loans. The real change here was that the large corporations could sell shares or bonds at high prices so that the cost of funding for them dropped significantly. But, smaller businesses have increasingly found they cannot get bank loans, and where they have, recent revelations have shown how the banks often used the situation to expropriate their assets.
As state and central bank policies inflated asset prices, and fuelled a property bubble, the banks devoted nearly all of the cheap cash that came their way into property speculation of one kind or another. Only around 4% of UK bank lending went to finance business expansion.
Paul is right when he says,
“The problems described here can be solved only if we stop financialisation.” (p 19)
A progressive social-democratic government would restore credit controls, and raise official interest rates. Workers need higher wages not higher debts, and higher wages will encourage innovation to raise productivity.
In the next part, I will examine what Paul says about Global Imbalances and Information Technology.
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