The Great Recession
2008 was not an economic crisis, but a financial crisis triggered by an economic boom, whose effect was to cause interest rates to rise, and thereby to burst the sequential bubbles that had been created. It was that financial crisis, and the response to it that caused the seizing up of the economy, in its immediate aftermath, as commodity circulation was hit by a severe credit crunch. The sluggish recovery that followed the crash was itself a consequence of central banks and states sacrificing the real economy, in order to reflate asset prices, in order to restore the paper wealth of the top 0.01%, whose wealth is now almost entirely composed of this fictitious capital.
The truth of that can be seen in what happened in the immediate aftermath of the crisis. The credit crunch was ended with the printing of additional liquidity. As the global ruling class looked on in panic, and pondered the demise of capitalism, they reached for the traditional tools of Keynesianism. In addition to nationalising the banks, and bailing out the big car makers, large scale fiscal stimulus was put in place, most notably in the US and China. The immediate economic recovery was sharp, marked by the traditional “V” shape. In the US, that shape of recovery continued, as Obama followed on with the fiscal stimulus that George Bush had initially set in place. Whilst, US Republicans had mostly bitten their lip whilst Bush engaged in this large scale fiscal expansion, apart from their Tea Party and Libertarian wing, they had no reason to do so with Obama as President.
At the same time that the Occupy Movement was criticising the Democrats for bailing out the banks and Wall Street, the Tea Party were able to let full rip in their populist outrage at the reckless activity of Obama and the Democrats, as unreconstructed Socialism. And, long before Trumpist populism was a glimmer in anyone's eye, this right-wing populism of the Tea Party began to rally support around it. Republicans who did not commit 100% to the true faith of tax cuts, and balanced budgets faced being removed from office. At the level of the state, Republican Congressmen and women, and senators, had to prove their purity by voting against any spending plans by Democrats, including using all available methods to bring Congress to a halt via refusing to increase the debt ceiling, and so on. Wherever Republicans controlled state and local legislatures, they voted against spending measures, even where the funding for those measures had been handed to them by the federal government. As these actions by Republicans, including the closing down of the government over the debt ceiling, and so on, took effect, even US growth began to falter once more. And, the further factor in that was the introduction of even greater money printing by Ben Bernanke at the Federal Reserve.
In analysing the financial crises of 1847 and 1857, Marx and Engels showed how all that was required, in those cases, for the ending of the credit crunch was that the central bank suspend the 1844 Bank Act, so that liquidity was put into circulation sufficient to enable commodity circulation. Today, because the commercial banks are a major source of liquidity, and because the majority of payments pass through the banking system, rather than on the basis of cash payments, a seizing up of the banking system – not because of its money-dealing functions, but because of its money-lending, and speculative functions – is bound to lead to a credit crunch, which flows over into the real economy. That is one reason that proposals to separate these two functions were brought forward. It is one argument in favour of blockchain, as the basis of a payments system that could continue to operate independently of the banks, though not an argument in favour of crypto-currencies, which have no value, and represent only the latest manifestation of the speculative bubbles, and Ponzi Schemes that have developed over the last thirty years.
As Marx points out, in relation to the purely financial crises, there is no reason why they should affect the real economy, because they only represent the transfer of paper wealth out of the hands of one group, into the hands of another. As I have set out earlier, and elsewhere, in fact, to the extent that property prices crash that reduces the cost of shelter for workers, reducing the value of labour-power, raising the rate of surplus value and rate of profit, and thereby facilitating real capital accumulation and growth. Similarly, a crash in stock and bond markets means that pension contributions by workers and employers, each month, buy more of these stocks and bonds, to increase the capital base of the worker's pension funds, which creates the basis for the future revenues (dividends and coupon) required to meet future pension liabilities. By reducing the cost of pension provision, thereby, it also reduces the value of labour-power, with the same consequent rise in the rate of profit, facilitating capital accumulation and economic growth.
It is only by seizing up payments systems, and creating a credit crunch that such a financial crisis flows over into the real economy. There was no need, therefore, in 2008/9, for states and central banks to bail-out the banks and financial institutions that had become insolvent as a result of their reckless lending and speculative activities. All that the state, and central banks needed to do was to ensure that there was sufficient liquidity in the system to enable commodity and capital circulation to continue unimpeded. The banks and financial institutions could have been allowed to go bust, and all of the owners of fictitious capital, whose paper wealth had been inflated on the basis of that reckless lending and speculative activity, would have lost the majority of that paper wealth, making it cheaper for workers themselves to acquire, and for those workers and managers, collectively, as the “associated producers” within firms that represent socialised capital, to have acquired, were they to be able to actually exercise democratic control over that property. It would have represented the demise of the financial power of the top 0.01%, and the transfer of a huge amount of wealth and power out of their hands, and into the hands of the workers.
The bailing out of the banks and financial institutions had nothing to do with saving the economy, and everything to do with saving the paper wealth of the top 0.01%. The saving of the economy, by the use of Keynesian fiscal stimulus, in the immediate aftermath of 2008, was only implemented, because a full blown financial and economic crisis, at that time, would have threatened the system itself, and thereby the paper wealth and political power of that top 0.01%. That fact is abundantly clear from the fact that, once the credit crunch was over, central banks continued pumping hundreds of billions of Dollars, Pounds, Euros and Yen into circulation, directed immediately into the purchase of government and commercial bonds, and thereby feeding through into the purchase of shares, property and their derivatives, whilst at the same time, governments were proposing fiscal austerity!
As I pointed out, in 2010, as conservative governments came to power, in which their reactionary wings were dominant, they would necessarily be limited in the extent to which their reactionary rhetoric advocating austerity, and a small state could be implemented. The modern social-democratic state depends upon the accumulation of socialised capital, and that depends upon all of those other elements of social-democracy that creates the macro-economic conditions of a planned and regulated economy, including the maintenance of the use of state spending, as a means of achieving that. That fight continues to be fought out, as manifest in the Brexit wars inside the Tory party, between its reactionary right-wing, and its conservative social-democratic wing. But, the reactionary wing of these conservative parties can only succeed, if they push through the equivalent of a counter-revolution, that overturns the social-revolution that took place in the late 19th century, when socialised capital, became the dominant form of capital, replacing the monopoly of private capital.
That is not going to happen, because any country that attempted to go down that route would quickly find its economy shrinking rapidly. Moreover, as Lenin pointed out, in Imperialism, the whole process of concentration and centralisation, described by Marx, ensures that such a rewinding of the movie is impossible. However much reactionary elements attempted to recreate some kind of lost golden era of liberal free market competition, that very competition would lead to an even more intensive process of concentration and centralisation of capital, and the resultant, large-scale, socialised capitals would require that very same state provision of a planned and regulated, macro-economic environment that the reactionaries seek to overturn. The same is true in relation to Brexit, which, if it happens, will quickly see the UK economy shrink relative to that of the EU, and other economies, making it easier for foreign capital to asset strip the UK economy, making it essentially a vassal, and subordinate to these larger, more powerful economies.
The conservative parties that came to power, in the UK, and inside the EU – as well as those conservatives that came to power in Congress and state legislatures in the US – on the back of a reactionary rhetoric to cut spending, therefore, found themselves trapped. On the one hand, they had let loose the rabid dogs of their reactionary wings – the Tea Party in the Republicans, the pro-Brexit, libertarian right of the Tories etc. - not to mention, the strengthening of the external representatives of those reactionary elements, that created a groundswell of support for right-wing populist ideas, which brought forward, Brexit, Trump, and fed the FN in France etc.
In the US, the Republicans could only act to constrain the attempts at fiscal stimulus introduced by the Obama Whitehouse, and inflict self-harm, by repeated political crises over the budget ceiling, and so on. By the time Obama left office, that right-wing populism, in the US, had morphed from its original manifestation of small state, libertarianism into Trumpist, anti-liberal, big state nationalism, mirroring the national-socialist economic policies of Trump's allies in the French FN, etc. It mirrors the process, but in different historical conditions, by which the conservatives, in the 1920's, opened the door for reactionary nationalism, in the form of Mussolini's fascists, and Hitler's Nazis. The politics of the various right-wing populists today, be it Trump, Putin, Orban, Le Pen, Wilders, Erdogan, Netanyahu, or Johnson is essentially the politics of National Bolshevism that sprang from the Strasserite elements in the 1930's.
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| Campo, Foggy Osborn and Clegg |
In the UK, when the conservative social-democrats of the Liberal-Tory coalition took office in 2010, they found themselves constrained by the reactionary rhetoric they had used during the election campaign, to oppose Labour. Even that rhetoric was enough to scuttle the economic growth that had been accelerating under Labour. The government had to continue to appear to be following through on its austerity agenda, whilst not doing so to an extent that would further undermine the economy. As I wrote at the time, that was not helped by the obvious incompetence of that government.
That Liberal-Tory government, pushed through what it thought were superficial cuts in capital budgets, amounting only to cuts in spending commitments that could be reinstated as soon as the opportunity arose, but instead it led to the collapse of a number of big companies involved in providing those capital projects. They were forced to reverse that course of action, in 2014, by restoring a range of capital spending projects, which enabled the economy to once more start to grow, after four years of stagnation. They front-loaded the cuts, in the expectation that the main, politically damaging cuts, imposed by the central government, could be dropped, as they expected growth and inflation would eradicate the deficit, before the next election was due in 2015. As I wrote in that post, referred to above, by March 2012, only 6% of the government's austerity programme had actually been implemented, and by 2015, only 40% of the austerity programme had been implemented, whilst the stagnant growth during that period had meant that far from the budget deficit being eradicated, as they had promised, they had only cut it by a third. They also front loaded the burden of those cuts on to local government, where the blame would be taken by largely Labour run councils. The failure of that strategy is seen today by the fact that 80% of councils are now in financial difficulties, including large Tory run councils.
In Europe, the 2010 Debt Crisis was merely a further manifestation of the underlying contradiction between the interests of fictitious capital as against real capital, that had led to the 2008 crisis. In much the same way that the Liberal-Tories in Britain could load the burden of austerity on to Labour run councils, so the conservative politicians of the EU, from their northern power bases in Germany, Austria, France, the Netherlands and so on, loaded the burden of the crisis on to the peripheral economies of Greece, Spain, Portugal and Ireland, again demanding the imposition of harsh, self-harming austerity, whilst at the same time, bailing out the banks and financial institutions across the EU, that had fed the creation of the crisis in the peripheral economy, by their reckless lending, and financing of astronomical asset price bubbles, particularly in their property markets, enhanced in many instances by political corruption, connected to huge construction projects.
The unfolding of the Eurozone Debt Crisis, after 2010, created the conditions whereby the ECB followed the Federal Reserve, and Bank of England in implementing quantitative easing, so as to pump liquidity into commercial banks, which they were then expected to use, to buy up the sovereign and commercial bonds of EU states and corporations, so as to reflate them, whilst at the same time, continuing the implementation of austerity, so as to restrain economic growth, and thereby restrain the growth of employment and wages, and restrain any rise in interest rates.
Of course, what was actually required, both in the UK and in the EU, once the initial financial crisis was over, was not the creation of additional liquidity to reflate the massive bubbles in asset markets, but was a continued programme of fiscal expansion, to rebuild the infrastructure and capacity of economies that had suffered from the process of de-industrialisation, and decay that had occurred during the 1980's and 1990's. Even Germany's infrastructure in relation to roads, and broadband requires large amounts of investment. Instead of fiscal austerity in the peripheral economies, it required a centralised EU state to be directing investment into those economies, so as to raise their productive potential, and levels of productivity, so as to be able to be globally competitive. It required, a centralised EU state, to be able to issue EU sovereign bonds, so as to borrow on behalf of each EU country, rather than the peripheral economies facing considerably higher borrowing costs than Germany etc.
That was never going to happen whilst the national governments of the EU, as well, therefore, as the Council of Ministers, and the Commission, as well as the ECB was dominated by conservative politicians, and bureaucrats. For one thing, those politicians had to look to their own conservative voter base, in considering promoting such policies; for another, any programme of fiscal expansion, or even continuation of existing fiscal programmes, would recreate the conditions prior to 2008, with strong economic growth, leading to rising interest rates, and a collapse of asset prices. The argument that austerity was needed to prevent interest rates rising too high, was entirely bogus, because interest rates were already at 300 year low levels. In the period after 2010, they have fallen to even lower levels, and in the case of some sovereign bonds, yields are now negative! According to Andy Haldane, at the Bank of England, we have today, the lowest interest rates in 5,000 years. It was not fear of high interest rates that was behind austerity, but fear of interest rates rising from their rock bottom levels, in conditions of astronomically inflated asset price bubbles, which are inevitably going to burst as interest rates rise.
The so called Great Recession, or Long Depression, or Secular Stagnation has been an entirely artificially constructed phenomena, by which states and central banks restrained growth, and diverted resources away from the real economy, so as to keep interest rates low, and diverted potential money capital into financial speculation, so as to quickly reflate asset prices, the main form of wealth of the top 0.01%, and thereby restore the basis of the power and influence of that class fraction.
It is no wonder, therefore, that over that period, large sections of the working-class across the US, and Europe that suffered as a consequence of that austerity, turned away from the social-democratic parties that had become dominated by their conservative wing, leading to the collapse of the political centre. On the one hand, it led to the growth of right-wing populism, and National Bolshevism, and on the other it led to the rebirth of progressive-social democracy, as witnessed by the growth of Syriza and Podemos, of the Left Bloc in Portugal, of Corbynism in Britain, and of Bernie Sanders in the US, and the growth of the US Social Democrats.
It meant that Corbyn was quite right, in 2016, not to simply fall into the camp of the conservative social-democrats who promoted membership of the EU despite all of its weaknesses, and defects from a social-democratic perspective. As I wrote at the time, what was required was a Socialist Campaign for Europe. The rise of reactionary nationalism, and right-wing populism, is the inevitable consequence of the failure of conservative social-democracy over the last 30 years. But, it is also the result of progressive social-democracy, and of socialists, during that period, failing to provide workers with a credible alternative around which they could rally.
As I wrote in my critique of Paul Mason's “Postcapitalism”,
““If you believe there is a better system than capitalism then the past twenty-five years have felt like being – as Alexander Bogdanov put it in Red Star – 'a Martian stranded on Earth'” (p 263)
What is worse, it has been obvious, during that period, that, not only is a better system, but even a better capitalism was possible, during that period.”
The weakness of progressive social-democracy stemmed from its failure to push through the necessary political reforms in the 1970's, to introduce industrial democracy, and to take away the unsustainable political and legal privileges of the parasitic money-lending class fraction, which led over the last thirty years to their interests dominating over the interests of real capital, and set in place the asset price, hyperinflationary spiral, which has continually come into conflict with the real economy, leading to successive asset price crashes, and a subsequent, ever larger draining of social resources, simply to reflate those bubbles.
That process has reached its culmination. Central banks have inflated their balance sheets to ridiculous levels, so as to provide the liquidity to purchase financial and property assets; governments have given successive subsidies for the purchase of property with ever more astronomically inflated prices; they have had to resort to providing billions of pounds of subsidy to landlords, in the form of Housing Benefit, so that they could continue to rent out properties to tenants, who otherwise could not have afforded, the astronomically inflated rents; they have had to provide state subsidies to cover the pension black holes that arose due to the hyperinflation of asset prices, which meant that workers' pension contributions no longer were able to purchase the required quantity of shares, and bonds to provide the capital base of those funds; governments have implemented self-harming policies of fiscal austerity, to slow the pace of economic growth, so as to thereby reduce the growth in the demand for money-capital, for real capital accumulation, and also to hold back the demand for labour-power, so as to constrain wages, and boost profits, as a means of reducing interest rates. But, despite all of those attempts to boost asset prices, and constrain the real economy, the underlying strength of the long wave upswing has still imposed itself.
Global growth continued during the last ten years, despite the attempts to constrain it. Employment has continued to rise, and as employment rose, it meant that even with stagnant wages, the total amount of wages rose, creating additional demand for wage goods. The investments in fixed capital in the early 2000's, and the fact that 80% of the economy is now based upon service industries, meant that the demand for these additional wage goods, translated significantly into an additional demand for labour-power. Many economies now, across the globe are starting to face relative labour shortages. The unemployment rate in the UK, is down to the level of 1975, the US unemployment rate, as announced last Friday, at 3.7%, is the lowest since 1969.
That is still some way above the lowest levels of unemployment seen in the post-war boom period, where it was between 1-2%, and which created the conditions for rising wages and the squeeze on profits that proceeded during the 1960's and 70's, as I set out recently. Yet, already it has seen Amazon raise its minimum pay rates to $15 an hour in the US, and to £9.50 an hour in the UK. Across the globe, despite Trump's global trade war, despite the uncertainty of Brexit, despite the continued policies of austerity, economic growth is rising. It is likely to rise more strongly next year. At the same time, Trump's populist programme has led him to massively increase US government spending, whilst slashing taxes, creating a large borrowing requirement, copying the process that led to the twin deficits crisis under Reagan in the 1980's. Populist governments can no longer promote austerity, if they hope to be elected, and consequently, any prospect that the even harsher austerity that would be required to derail current economic growth, and thereby stave off interest rate rises, and a collapse of asset prices, no longer exists.
The last few weeks, has, therefore, seen global interest rates rising at a more rapid pace. The process I set out a few months back, whereby global bond yields would gap higher, has already begun, with the US 10 year Treasury Yield surging to 3.23%, and a similar surge in yields is occurring with European bonds too. Central banks are way behind the curve, especially the ECB and Bank of England. They will have to quicken their pace to catch up, before the next financial crisis erupts, and the more they do so, the more they will in turn hasten the outbreak of that crisis. It will be a crisis that will be the continuation, and culmination of the crisis that began in 2008.
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