Italy - Popular Frontism Leads To Disaster Again - Part 5 of 5

The good news remains that the ruling class have no need, and no desire to see fascists in government. On the contrary, the fascists represent the interests of the petty-bourgeoisie, not the bourgeoisie, and their interests are antagonistic to those of the ruling class. It is why the state, which is the state of the ruling class, has acted to limit the damage that could be done by Brexit, and the Brexitories, as well as by Trump. It does so by typically bureaucratic and Bonapartist methods, rather than by open political conflict, mobilising class forces for such a struggle. It can use the courts, the financial markets, and so on as effectively against the far right and petty-bourgeoisie, as it can against the working-class.

Expect the Italian far right government to break apart very quickly under pressure of its own contradictions, along with the external pressure of markets that will be applied to it, just as the far right, Brexitory government of Truss has faced such pressure in its first days, with the removal of the Kamikwarzi Chancellor, his replacement by the prominent Remainer, Jeremy Hunt, and even for yet another leadership challenge.

But, that is fortunate for us, at this time, and those conditions will not last forever. The existing workers parties are worse than useless. They are riddled with opportunism and electoralism, itself a foundation for their popular frontism in search of purely electoral majorities at any cost. As in the 1950's and early 60's, the road forward for the working-class, now appears to be around, or over, those existing workers parties, pulling them along with us, in our slipstream, eroding them like stones in a fast flowing river, and, in the process, accumulating the material for new or renewed parties fit for the task.

Workers are on the move, as they feel firmer ground beneath their feet, as economies are again responding to the dynamic of the long wave, despite attempts to hold it back, now using the deliberate imposition of high energy costs, resulting from NATO's boycott of Russian oil and gas, to try to soak up workers' disposable income. Instead of accepting that, they are demanding higher wages to cover those higher energy costs and the rest of the inflation caused by the policies of "money" printing. They are refusing to accept the demands of politicians like Reeves that we simply put our faith in the election of a right-wing, Blue Labour government sometime in the future.

That does not mean making the mistakes that the syndicalists of the SWP made in that earlier post-war period, of ignoring politics, or Labour as the workers party.  A real solution can only be a political solution, which requires a political party to fight for it. For now, in Britain, that party is still the Labour Party, just as it is the Democrats in the US, SPD, PD in Germany, Italy and so on.

But, for Marxists, our focus, here and now, must be to concentrate on those real workers struggles, to turn the best elements of the workers' parties out towards them, whilst taking the most advanced elements of the workers direct struggles into those political arenas, and engaging them as allies, to transform those parties, to demand the removal, deselection and so on of the overtly pro-capitalist elements, or else, if that becomes impossible, to break them apart, and to establish new mass socialist workers parties from the material provided.

Such a focus requires us not to engage in any kind of conciliation and accommodation with forces to our right, of the kind proposed by Paul Mason et al, which amounts to liquidationism, let alone to continue the errors of Popular Frontism seen most recently in Italy, but quite the opposite, to sharpen, even more, the Marxist programme, and the solutions we put to workers, in contrast to the continued inevitable failures of the liberals, social-democrats and reformists. Rather than rotten electoral blocs to try to temporarily deny the far right parliamentary majorities, we propose a fighting unity, on the streets, in the workplaces, and in the communities. Our mantra is march separately, strike together.

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Italy - Popular Frontism Leads To Disaster Again - Part 4 of 5

Across the globe, and in the developed economies specifically, the stagnation of the 1980's and 90's created impotent embitterment. As the new global long wave upswing began in 1999, the conditions began to emerge in which workers could turn that embitterment into rebellion, and action, first to raise their wages and conditions, and then to rebuild their organisations, and assert their interests. 

As usual, they were constrained in the latter by the dead weight of the trades union bureaucracy, and the strength both organisationally and ideologically of social-democracy. The same was seen in the last similar period, the long wave upswing that occurred in the 1950's and 60's, and required workers to move forward via new, or restored grass roots channels such as the shop stewards movement, and to find, once again, the ideas of Marxism that had been lost during the 1930's and the war years, as well as being grotesquely bowdlerised by Stalinism, which continued to appear as the left-wing of the workers' movement in the following period. As I have set out elsewhere, even amongst the new left that emerged in the post-war period, the ideas of Marxism were distorted, owing more to the ideas of syndicalism and statism than Marxism.

Even as economies expanded at a more rapid pace, after 2000, creating the conditions for workers to advance, the workers' parties, like Labour, which had moved massively to the Right, compared to anything seen before in their history, could offer nothing to them, other than the delusion of benefiting from the rise of asset prices that had become the central pillar of conservative social-democracy over the previous 20 years. Forget about wage rises, let alone the idea of control of your workplace, the conservative social-democrats proclaimed, instead look at the rise in your house price, or the value of your 401k, or ISA. Of course, if you were one of those that had found yourself in precarious employment, or simply low value, low paid, service employment, who had not been able to buy a home, let alone have money left over to put into a pension or savings, such pronouncements appeared more as a kick in the guts, rather than a clarion of hope.

And, when the delusion itself fell apart in 2008, all those that had never benefited from it, must have had some sense of schadenfreude. It was short lived, as those same conservative social-democrats, so adamant in their refusal to propose state intervention on behalf of workers, were instantaneous in their response to provide state funding for the bankers and speculators whose paper assets had been turned into confetti. And to add to the kick in the guts, they followed up with a kick to the groin, as they then proposed to pay for all this largesse, by implementing a decade long programme of austerity on the workers, who had not benefited from any of the inflation of assets to begin with.

But, the fundamental material conditions had changed, and so, despite the austerity measures, despite central banks implementing QE to divert money from the real economy and into speculative assets, the global economy grew, with developing economies taking advantage of the imposed slower growth in developed economies to seize additional market share themselves. In so doing they illustrated, again, at a global level, what Marx had already explained in terms of capital at an individual level, which is that competition forces capital to accumulate, because, as demand rises, each capital must accumulate to expand their own production or lose market share, and become progressively less competitive.

And, global capital accumulation led to further employment of labour, establishing a virtuous circle. In the age of imperialism, you cannot understand capital in any single country without first understanding capital as global capital.  Bit, by bit, expanding global trade also fed into the developed economies that had sought to restrain growth via austerity. By 2014, despite austerity, even the developed economies were growing more rapidly again, and the large increase in investment in raw materials, food and energy production, initiated in 1999, had now led to large increases in their supply, sending their market prices much lower, and providing a boost to profits via a release of constant capital, and rise in the rate of profit.

In 2014, when I wrote my book – Marx and Engels' Theories of Crisis – I had envisaged this process unfolding in the same way that previous long wave cycles had done. On that basis, the turn from the Spring (prosperity) phase to the Summer (boom) phase was due to begin around 2013, and this turn, in 2014 seemed to confirm it. However, I had underestimated the extent to which a global ruling class whose wealth was now held entirely in the form of fictitious capital, was prepared, and able, to damage the real economy, to slow growth, in order to inflate the prices of its assets. And so, 2014 was a false dawn, as austerity continued to be implemented, to slow growth, whilst, at the same time, central banks doubled down on the printing of money tokens to inflate asset prices.

In 2012, as the Eurozone Debt Crisis rumbled on, and currencies came under attack, Mario Draghi, as President of the ECB, made his “whatever it takes” speech, in which he committed the ECB to the same kind of QE policies of infinite money printing that Bernanke had implemented in the US. What was actually required, in the EU, and is still required, was for it to back up its single market and single currency with a single fiscal regime, and a centralised debt management office, with fiscal transfers then being made to the component states. That way, each state would borrow on capital markets at the same rate. Without that, a centrifugal force lies at the heart of the EU structure itself, and the promise of money printing to buy up the worthless sovereign bonds of members states in trouble, was always a poor alternative to it, which would blow up, having itself created the dynamic for higher inflation.

When Greece elected a progressive social-democratic government, in the form of Syriza, the scene was set again, and once more, the conservative social democracy that defines the majority of EU states, as well as the EU itself, ensured that the full weight of economic pressure was put on it to buckle. It again sent the clear message to workers, across Europe, that the sate had endless capacity to intervene on behalf of the speculators, and an equal amount to intervene against the interests of workers, should they begin to make their voices heard.

All of those failures of conservative social-democracy to provide answers in changed material conditions, led to advances of the far right all along the way, and as I have set out elsewhere, that advance of the far right, was also a concomitant of the rise in the social weight of the petty-bourgeoisie since the 1980's, itself resulting from the slow down of growth of large-scale socialised capital. As the far right advanced, so sections of the Left and Centre, instead of defining actual solutions for workers problems, responded only to their own electoral fortunes, by seeking broader coalitions and alliances, which meant even less chance of presenting a distinct and clear alternative, as the third way mantra that elections can only be won from the centre asserted itself, but with that centre itself moving ever further to the Right.

The trouble is that, no matter how wide the definition of “the centre” is made, including sections of the Tories in Britain, and so on, so as to sew up electoral seats, it can provide no solution to the problems that exist that conservative social democracy, let alone those to its right can accept, because those solutions, required by workers, even as progressive social-democratic solutions, require greater economic growth, capital accumulation, and that means rising interest rates that will cause a massive bursting of asset price bubbles, much greater than 2008, and, to bring about that capital investment, the current executives that control that capital, but operate on behalf of shareholders, would have to be removed, and widespread industrial democracy introduced, so that workers and manages used profits to reinvest rather than pay out as dividends and inflated stipends to directors, or to buy back shares to inflate their prices and so on.

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Italy - Popular Frontism Leads To Disaster Again - Part 3 of 5

The reason Marxists oppose Popular Fronts was set out by Marx as far back as 1850, and Marxists have had plenty of experience since then to see Marx's warning played out time and again. A Popular Front involves the Marxists effectively dissolving their own independent organisation and programme. Superficially, they may continue to exist, but, in practice, the Marxists subordinate themselves to the organisation and programme of the Popular Front itself. Given that the whole point of any tactic of Marxists, in making alliances with centrist, reformist, let alone bourgeois forces, is to expose them, and to win a majority of workers to their own banner, anything that requires you to abandon your own organisation and programme is to be avoided at all costs.

As Marx pointed out, in 1850, the liberal petty-bourgeois, when they are engaged in a class struggle against the old landlord class, need the support of workers. But, they have no interest in achieving the specific interests of workers, quite the contrary. As soon as the struggle has achieved their ends, they want to bring it to a halt, and particularly, if it continues, and the workers seek to push on to the fulfilment of their own ends, the petty-bourgeois will certainly want to bring proceedings to a halt, even doing deals with their old enemies, against the workers to achieve it. The same is true of the liberal bourgeoisie when it comes to fascism. Generally, the ruling class has no need of fascism, because its rule is secure via the operation of social-democracy.

Its only at specific times, such as in the 1920's and 30's, when capitalism enters a period of crises of overproduction of capital, resulting from shortages of labour reaching such a point that wages have risen to squeeze profits, and when powerful workers organisations resist attempts to replace labour with capital, resulting in workers occupying factories, and introducing workers' control (Italy), or electing mass Communist Parties to parliament that could form Workers Governments to challenge capital, and support workers (Germany et al), that the ruling class looks to the fascists, and their specific talents, to physically break-up the workers organisations, and, thereby, to push through the attacks on the workers, to break their resistance, and enable labour to be thrown out of production, pushing down wages, and raising profits.

So, when the ruling class itself resorted to the fascists in the 1920's (Italy) and 1930's (Germany et al), it is ridiculous to propose a Popular Front alliance of workers and bourgeois parties, to fight it, because the bourgeoisie, and specifically the petty-bourgeoisie, has already gone over to the fascists! To the extent that some liberal politicians continue to act as though they are still the representatives of those classes, is simply a delusion on their part. As Trotsky pointed out, in relation to the Spanish Popular Front, those liberal politicians actually only represented a “ghost class”.

For those who are enamoured of parliamentarism, that, of course, is of no concern, because they view politics only in this limited sense of winning parliamentary votes, and parliamentary elections. But, as Italy, Germany and Spain showed, amongst others, when it comes to fascism, what happens in parliaments and elections is more or less irrelevant. What is important is not the superficial alliance of politicians and parties, but the actual line up and alliance of social, i.e. class forces. In France and Spain, in the 1930's, as the bourgeoisie and petty-bourgeoisie had gone over to fascism, the bourgeois liberal politicians themselves owed their election only to the fact of standing under the cover of the Popular Front, and the votes they obtained from communist and socialist workers. That was of no advantage to the actual Communist, Centrist and Socialist Parties, who could just as easily have stood under the banner of a United Front.

What the Popular Front did was to limit the ability of the revolutionaries to put forward their own Marxist programme, and, instead, subordinated them to the programme of the liberals, who would withdraw from it if it adopted any more radical programme. The same thing has been seen with other Popular Fronts, and even Popular Frontist organisations, such as the SWP's creation of the Anti-Nazi League, or its Respect abomination. Starmer's coup inside Labour is a reflection of the same thing, as the search for votes from the Right, inevitably, leads to a subordination even of social-democratic ideas to the ideas of the reactionary Right.

The processes which lead to the growth of far right and fascist forces are not ones that arise overnight, or during an election campaign, but are created over many years, as the social-democrats, liberals and reformists fail to offer the masses any solution to their problems. The more the liberals, social democrats and reformists view things purely in electoral terms, the more they seek to unite in popular fronts to bolster their votes, thereby, creating a momentum to the right. As they adopt ever more right-wing policies to draw in additional parties to their right, the more do they emphasise their own bankruptcy, and concern only to hang on to their lucrative parliamentary careers.

What happened in France was also an example of that. The Left and the social-democrats, after years of offering no solutions, were reduced to rumps, and, in response to the advance of Le Pen, they were left with no alternative but supporting Macron as such a catch all. But, inevitably, Macron also failed to provide any way forward, and so strengthened Le Pen even more, whose party, now, also has sizeable representation in the Assembly.

And, the same is true in Italy. For years, the liberals, the social democrats and the Stalinists (who are themselves merely social-democrats) have provided no real answers for Italian workers, and they have repeatedly fallen into Popular Frontist alliances and coalition governments, each one failing to provide any solution, and falling apart, as some new crisis erupts. The most obvious manifestation of that is the Democratic Party itself. Wikipedia describes this popular frontist hotch-potch as follows,

“The PD was established in 2007 upon the merger of various centre-left parties which had been part of The Olive Tree list in the 2006 general election, mainly the social-democratic Democrats of the Left (DS), successor of the Italian Communist Party and the Democratic Party of the Left, which was folded with several social-democratic parties (Labour Federation and Social Christians, among others) in 1998, as well as the largely Catholic-inspired Democracy is Freedom – The Daisy (DL), a merger of the Italian People's Party (heir of the Christian Democracy party's left wing), The Democrats and Italian Renewal in 2002.  While the party has also been influenced by social liberalism and Third Way progressivism, especially under Matteo Renzi's leadership, the PD's main ideological trends are social democracy and the Christian leftist tradition.”

In other words a Popular Front of Stalinist, social-democratic and liberal parties all combined in the one party. But, in line with the strategy proposed by Paul Mason, in which even these broad, catch-all, parties are still not broad enough, and need to form an alliance with parties even further to their right, the PD, did just that. In the period 2013-18, it was in government as part of an even wider “centre-left” Popular Front, and remained in that alliance in 2016-2018, whilst the alliance itself failed to win a majority.

Feeling the need of all such Popular Fronts to reach out to ever wider layers to their Right, they then allied with the right-wing populists of the Five Star Movement, in 2019. In 2021, the logic of this Popular Frontism reached a peak, as they joined the National Unity government of Mario Draghi. Draghi himself, of course, as a technocrat, fresh from having stoked astronomical inflation across Europe by the printing of vast quantities of Euro money tokens, during his time as President of the ECB, as well as having crucified the economy of Greece, was not even elected, but simply imposed as Prime Minister from above, in a government that included even the far right forces of the Northern League and Forza Italia that are part of the new far right government! That is Popular Frontism, lesser-evilism, and “my enemy's enemy is my friend” taken to the level of absurdity.

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Italy - Popular Frontism Leads To Disaster Again - Part 2 of 5

Whilst asset prices rose astronomically from 1980 onwards, conservative social-democrats, be it Clinton in the US, or Blair in Britain, offered nothing to workers as even crumbs from the table. In the US, it led to the defeat of Gore in 2000, and the installation of a right-wing Bush Presidency, followed by a right-wing Obama Presidency that continued the same conservative-social democratic policies of Clinton and Bush, the same bailing out of speculators, and printing of money tokens to inflate asset prices.

To be fair, Obama did try to use the power of the US economy to introduce fiscal stimulus after 2008, but was beaten back by right-wing Republicans in state legislatures, who imposed fiscal austerity, showing the weakness of federal states, as against unitary states, and also by Tea Party Republicans who won control in Washington, illustrating the problem of Presidential as against parliamentary system. But, the Democrats failed to mobilise anything other than verbal opposition to these Republican wrecking tactics, despite having control of the Presidency.

Obama's failure to provide any real solutions for US workers led to the election of Trump. In Britain, the failure of the Blair/Brown government to meet workers needs had seen its support continually fall since 2001, and as Brown/Darling bailed out the bankers and speculators, in 2010, again providing no answers for workers, they too were kicked out, and replaced by a Cameron Tory Party, itself moving to the right under pressure from its petty-bourgeois base, in coalition with an Orange Book Liberals, themselves moving rapidly rightwards in search of support from the petty-bourgeoisie.

The US Democrats and UK Labour Party are already, effectively Popular Fronts, contained within one party. In relation to Labour, it is basically the meaning of Lenin's characterisation of it as a bourgeois workers party. That is a party based upon the working-class and its organisations, the party that they look to to represent their interests, but whose ideology is itself bourgeois, itself reflecting the bourgeois nature of the trades unions, of bargaining within the system, rather than seeking to overthrow it. But, that description applies equally to the US Democrats, as it does to the German SPD, and so on. It is always only a question of the degree to which these parties reflect the alternating strength of conservative as against progressive social-democracy, which itself is a reflection of the comparative strength of real socialised capital, as against fictitious capital.

Given the weakness of Marxists, they have been left with no real alternative but to operate within these bourgeois workers parties, as recognised by Trotsky, in the French Turn of the 1930's. This amounts to nothing more than the position that Marx and Engels pursued in 1848, when, again, given the reality of the tiny size of Marxist forces, they joined the German Democrats, which was an overtly bourgeois party, in order, in Engels' words, to “gain the ear of the workers”. There is, however, a difference between this tactical operation of revolutionaries, forced upon them by their numerical weakness, in operating inside bourgeois parties, and the joining of revolutionary parties, or centrist and reformist parties with openly bourgeois parties, in a formal or even informal alliance.

The revolutionaries, in adopting the “entryist” tactic do not abandon their criticism of the reformists and centrists, let alone that of the overtly pro-capitalist elements within those parties, today represented by Starmer and Reeves, in Labour, Biden and Harris in the Democrats, and so on. Nor, do they give up their own independent organisation, and programme within those parties, around which they seek to mobilise additional forces. As Engels put it, in relation to this tactic adopted inside the German Democrats,

“When we returned to Germany, in spring 1848, we joined the Democratic Party as the only possible means of getting the ear of the working class; we were the most advanced wing of that party, but still a wing of it. ... I think that all our practice has shown that it is possible to work along with the general movement of the working class at every one of its stages without giving up or hiding our own distinct position and even organisation, and I am afraid that if the German Americans choose a different line they will commit a great mistake.”

(Engels to Florence Kelley Wischnewetsky)

If the revolutionaries do have to hide their own independent organisation, as they have had to do, from time to time, as the bourgeois leaders of the parties have conducted witch hunts against them, they do so, in order to continue the tactic, all the while, arguing the case for turning these parties into united fronts of parties representing the workers interests, and, thereby, expelling the pro-capitalist elements that constitute them as popular fronts instead. It is a version of Lenin's demand, in April 1917, directed at the Provisional Government, of “Down With The Capitalist Ministers”.

Applying the tactic, particularly, in conditions of working-class advance, does not prevent Marxists from becoming MP's, Councillors or other such elected representatives in parliaments, because that enables them to use these positions as more elevated platforms from which to argue the revolutionary case against the official programme of the reformists, centrists and pro-capitalist elements, thereby, gaining the ear of an even wider number of workers. What it does mean is that Marxists cannot join the government and shadow cabinets of any such parties, which would make them equally responsible for the inevitably anti-working class measures such parties implement and advocate. In short, the entryist tactic is one forced on us by material conditions, whilst our aim is to break up these parties as Popular Fronts, and to build a mass revolutionary party.

Even the United Front, as a combination between workers parties is a compromise we enter into given existing material conditions in which the revolutionary party does not have a clear majority. As Trotsky set out in his speech on The United Front, if the revolutionary party had a clear majority of support from the working-class, it would not propose a united front with the reformists and centrists, ploughing its own course, and forcing those minority parties to support it, or else become even more irrelevant. We are clearly, a very, long way from any such condition, today.

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Italy - Popular Frontism Leads To Disaster Again - Part 1 of 5

The Italian elections have delivered a huge win for the far right. Whether you define the Brothers of Italy as fascist or not (they are the descendants of the party of Mussolini), the fact remains that they are a far right, nationalist party, that has won a majority as a result of a coalition with other far right parties, such as the Northern League, and others such as Berlusconi's Forza Italia. 

The basis of the win for the far right is the popular frontism of the majority of Leftist parties in the preceding years. It blows out of the water, the advocacy of such Popular Frontism, as the way to fight fascism, promoted by rapidly rightward moving pundits, such as Paul Mason, and of other former Trotskyists that have collapsed into, at best, centrism, and more frequently simple liberalism. All experience of the Popular Front, as set out by Trotsky, in relation to China in the 1920's, and Spain, Brazil and elsewhere in the 1930's, is of disaster, and the facilitation of the victory of fascism.

As Trotsky noted, in the 1930's,

"Fascism is a form of despair in the petit-bourgeois masses, who carry away with them over the precipice a part of the proletariat as well. Despair as is known, takes hold when all roads of salvation are cut off. The triple bankruptcy of democracy, Social Democracy and the Comintern was the prerequisite for fascism. All three have tied their fate to the fate of imperialism. All three bring nothing to the masses but despair and by this assure the triumph of fascism."

(Phrases and Reality)

It, is of course, not just Italy, where these conditions have been created. During the 1980's and 90's, as the world economy went through its phase of long wave stagnation, workers in much of the globe were in no position to improve their condition relative to capital. That is not to say that their living standards did not, on average, rise. They did, as a result of huge rises in productivity that cheapened wage goods, but those same increases in productivity, were what meant that labour itself was weakened in the first place. It meant that gross output rose, but at a slower rate, whilst net output, the amount going as surplus product and surplus value, rose at a much faster rate. That provided a surplus of money-capital (from realised profits), which led to a secular decline in interest rates, which inflated asset prices, such as property, share and bond prices and their derivatives (fictitious capital).

So, not only did capital strengthen relative to labour, as output expanded faster than employment, but, along with it, profits increased relative to wages, and the amount going to interest and rents increased relative to the amount going to productive investment. The ruling class that owns all its wealth in the form of fictitious capital saw its wealth rise spectacularly on the back of the inflation of these assets, with the Dow Jones rising by 1300% between 1980 and 2000, whilst US GDP rose by only 250% during that time. But, it was not just the ruling class that saw its paper wealth increase spectacularly during that time. The middle class, and even some workers, who owned their own homes, or who had pension funds, or had had enough disposable income to buy into shares or mutual funds, also saw their paper wealth increase substantially, even as their wages were being reduced relative to profits.

Of course, also, the 1980's and 90's was a period of deindustrialisation in many already developed economies, as a new international division of labour was established, with mature manufactured commodities, now being produced in newly industrialising economies, where the use of large amounts of fixed capital, required only cheap, unskilled labour to mind the machines, or to assemble components endlessly on an assembly line. China was the classic example, and the result was that, in these economies, the living standards of hundreds of millions of labourers increased substantially, during that period, as they went from being more or less subsistence peasants to being industrial wage labourers. But, as this manufacturing moved to China and elsewhere, to the benefit of workers there, so, too, it meant that labour in developed economies became even more bifurcated, as I had predicted would be the case, back in the early 1980's, as this process unfolded.

In developed economies in North America, and in Europe, jobs increasingly fell into two categories a) very high skilled, high value service industry jobs, and b) low skilled, low value service industry jobs, as service industry itself accounted for 80% of employment, and new value and surplus value produced. Looked at from the perspective of the world working class, the creation of hundreds of millions of new wage labourers, which made the working-class the largest class on the planet, by the early 2000's, and the raising out of the idiocy of rural life, was a great step forward. From the perspective of the workers in the developed economies, who saw jobs disappear, and an increasing divide within their own societies, not so much.

But, during all that time, workers in these developed economies were constrained. There was unemployment caused by the labour-saving technologies introduced in the late 70's and early 80's, and by the fact that its continued effect was to increase gross output faster than employment ensuring a continued relative surplus population. And, as one commodity after another became mature, so its large-scale production could more profitably be undertaken in China, or, later, in Eastern Europe. It ensured a growth of resentment, but growing impotence to channel it. As Trotsky put it, in the 1920's, warning those catastrophists who relish the thought of crises,

“In all capitalist countries the working-class movement after the war reached its peak and then ended, as we have seen, in a more or less pronounced failure and retreat, and in disunity within the working class itself. With such political and psychological premises, a prolonged crisis, although it would doubtless act to heighten the embitterment of the working masses (especially the unemployed and semi-employed), would nevertheless simultaneously tend to weaken their activity because this activity is intimately bound up with the workers’ consciousness of their irreplaceable role in production.”

(Flood Tide)

On TV the other day, Blue Labour's Rachel Reeves, refused to give support to workers forced into striking for pay rises to compensate for rampant inflation. She claimed that the best answer for those workers was a Labour government. But, if she wants a Labour government, I suggest she does actually start supporting workers on strike, now, and getting down to their picket lines, because, otherwise why would any of those workers bother to vote Labour anyway? Fobbing them off with something that may or may not happen in two years time, when an election is called, does nothing to deal with their immediate problem of rampant inflation caused by money printing that Labour itself supported, and by NATO's boycott of Russian energy supplies, which has caused global energy prices to soar, which again Labour has championed!

Reeves claimed that the strikes being seen, now, were not seen under the last Labour government. That of course, skirted around the issue of the anti-working class policies of the Callaghan government that attempted to hold down wages in a period of soaring inflation, which led to the Winter of Discontent, and ultimately to the election of the hard right Thatcher government in 1979. But, Reeves is also wrong in relation to the last Labour government. It is always the case that, after a period of economic stagnation, such as that of the 1980's and 90's, it takes time for workers to feel firmer ground beneath their feet, to rebuild their organisations and so on, before they flex their muscles. After 1999, the global economy entered a new period of long wave upswing, and by 2007 that was manifest, as workers also began to demand higher wages to meet rising living costs.

But, in 2008, when UK tanker drivers struck for a 14% pay rise, to compensate for rising inflation, and the falls in their wages over previous years, Labour's then Chancellor, Alistair Darling pleaded with workers not to demand wage rises in line with inflation. The media, basing itself on the conditions of the previous 20 years, said the tanker drivers demand was ludicrous, and unattainable, but within 48 hours, the employers had capitulated. Similar strikes and pay rises were won by workers in Germany and elsewhere. But, of course, 2008 was the year when the global financial happened too. It was caused by rising interest rates, themselves reflecting the fact that global economic growth had risen, causing the demand for capital to rise, and with workers now demanding pay rises to cover rising prices, the supply of capital from realised profits was beginning to be squeezed.

So, just as workers began to translate that “embitterment”, Trotsky describes, into industrial action, it was cut short. After 2010, governments introduced austerity to slow economic growth, to prevent the demand for capital rising, which would cause interest rates to rise, and asset prices to fall. They printed even greater quantities of money tokens to buy up worthless paper assets, so as to inflate their prices, and simultaneously drain money from the real economy. So, even as workers saw the real economy deliberately slowed, they also saw conservative social-democratic governments inflate already massively inflated asset prices, even further, to the benefit of the rich. And, now, for millions of workers, the most visible manifestation of that became that any prospect even of being able to buy a house, despite artificially reduced mortgage rates, and other bribes, became impossible. And, as they were forced into privately rented accommodation, so they saw those rents rise relentlessly too.

Forward To Part 2

From Worse To Bad

A week ago, I wrote that global bond yields were set to gap higher.  Typical of the way these things happen, in the days that followed,  US Bond yields instead of rising towards 3.50% fell back.  Today they have fallen back to around 2.86%.  But let's look at why.

In the post, I wrote that, as I had suggested at the start of the year, we are either at, or approaching a number of inflexion points.  One such point here is that contrary to what has been the case over the last few years, rises in official US interest rates are now likely to act to strengthen the Dollar.  I set out the reasons for that in the post.  Now look at what has happened.  In the last few weeks the Dollar has been strengthening.  The Pound has already fallen from over $1.40 down to just over $1.32 today.  But, inevitably, the most notable effect has been on emerging market currencies, which have started to drop significantly against the Dollar, a problem for them, as many of their imports are denominated in Dollars, so a rising Dollar means imported inflation for them.

Turkey, has been one such country.  But, it has other factors.  It is sliding ever closer to dictatorship under Erdogan.  He has recently spoken about taking direct control over the Turkish central bank.  The Turkish Lira then began to fall precipitously, and Turkish bond yields spiked higher.  Eventually, as the Lira continued to drop, the Turkish central bank was forced to step in to defend it, reminiscent of Britain in 1992, and raise official interest rates.  Turkish rates have risen now to over 16%, just as the UK raised rates in 1992 to 15%.

But, Turkey is not alone,  The latest example is Italy, where the election of the right-wing nationalist coalition of Five Star and the neo-fascist Liga already spooked the markets.  Protected by being a member of the Euro, there is no Italian currency to be attacked, but as with the Eurozone Debt Crisis of 2010, that has meant the focus has centred on Italian government bonds, and now given that over the last 8 years the ECB has stuffed the mouths of commercial banks with cheap money, encouraging them to buy their country's sovereign bonds, that has also fed through in to an attack on the already shaky Italian banks who are likely to go bust, if all of the Italian bonds sitting on their balance sheets get turned into toilet paper.  What makes that situation worse, is the very fact that over the last few years, the ECB's LTRO, and then outright QE programme has meant that all of these worthless bonds have been pumped up to ridiculous levels, to the extent until this crisis, Italian bond had lower yields than UK Gilts!

The situation in Italy has highlighted the situation in Spain, once more, especially given its own political crisis surrounding the corrupt government of Rajoy.  And, that, in turn has flowed over to a sell off of Portuguese bonds.

In short, the rise in the price of US bonds, fall in their yield, is not a reflection of them being a good place to be, only that they are a relatively safe haven compared to all these absolutely awful other places.  The rise in the price of US bonds, is simply a reflection that hot money has rushed out of all these other places, causing their currencies to drop, and bond yields to surge, and into the relatively safe haven of the US.  For all the reasons previously set out, that will not last either.

Back in 2015, I wrote that the new Syriza government could not bend.  If it did, I argued, the result would not be some return to a centrist government, but a turn by the Greek people to the only other option - Golden Dawn.  In the event, Syriza did bend, and they are now facing being wiped out at the next elections.  But, in the meantime, the ECB effectively arranged for the Greek debts to be wiped out, and short term loans have been provided.  But, as Syriza themselves initially recognised, none of that resolved the underlying structural problems of the Greek economy, which requires capital not liquidity.  For now, Golden Dawn is not waiting to take over in Greece, the Greek people seem to have the good sense to have rejected them, and to recognise that life for them outside the Eurozone, let alone outside the EU, would be much worse, despite the unnecessary suffering imposed on them by the irrational programme of austerity, demanded by the EU's conservative leaders.  Instead, its across the EU that those irrational conservative polices of austerity have had their effect, in that direction.

The conservative EU leaders have wasted the eight years since 2010.  They should have recognised, particularly after the crisis in Greece, Cyprus and elsewhere that those old conservative economic policies were dead.  What Greece, and other EU countries required was not austerity, but bold fiscal expansion, to create the kind of 21st century infrastructure that would bind the EU together as a modern state, and create the networks, and foundations for balanced economic growth.  Instead, intent on the delusion of being able to reflate asset price bubbles, and thereby protect the illusory paper wealth of the richest private capitalists, they pressed ahead with austerity to restrain economic activity and investment, alongside massive money printing to further hyper inflate the prices of bonds, shares, and property - the very policy that had led to the 2008 financial crash, and the 2010 Eurozone Debt Crisis, in the first place.

The result has been Brexit, rising support for right-wing nationalists like Le Pen, Wilders, the AfD, the Austrian Freedom Party, Orban in Hungary, Law and Justice in Poland, and Five Star and the Liga in Italy.  Its time the EU leaders woke up and smelled the coffee.  Italy is not Greece, and now they have a problem.

Italian Banks Reprise Irish Experience

Renzi lost the referendum. He went, and another technocrat was appointed in his place. The Italian banks are still bust, and now the Italian government is seeking to bail them out, and nationalise them, so as to protect the interests of the owners of fictitious capital, which was why the referendum was really called in the first place. Once again, its amazing how conservative politicians always tell us that there is no money to be able to finance decent public services, or pay decent wages and instead impose damaging policies of austerity, but when it comes to propping up the prices of astronomically inflated asset prices, and protecting the paper wealth of the top 0.001%, money is apparently in limitless abundance!

Italian workers should oppose any bail-out of the Italian banks, which really means bailing out the shareholders and bondholders in those banks. Let the banks fail, let asset prices collapse, and then workers can take them over, and run them, under their ownership and control, for their interests. They should not be fooled by those on either left or right, who try to deceive them into believing that ownership by the capitalist state is the same thing as their own direct ownership and control. As Trotsky put it,

"It would of course be a disastrous error, an outright deception, to assert that the road to socialism passes, not through the proletarian revolution, but through nationalization by the bourgeois state of various branches of industry and their transfer into the hands of the workers’ organizations."

(Nationalisation and Workers Control) 

And Pannakoek also illustrated the difference.

“The acknowledged aim of socialism is to take the means of production out of the hands of the capitalist class and place them into the hands of the workers. This aim is sometimes spoken of as public ownership, sometimes as common ownership of the production apparatus. There is, however, a marked and fundamental difference.

“Public ownership is the ownership, i.e. the right of disposal, by a public body representing society, by government, state power or some other political body. The persons forming this body, the politicians, officials, leaders, secretaries, managers, are the direct masters of the production apparatus; they direct and regulate the process of production; they command the workers. Common ownership is the right of disposal by the workers themselves; the working class itself — taken in the widest sense of all that partake in really productive work, including employees, farmers, scientists — is direct master of the production apparatus, managing, directing, and regulating the process of production which is, indeed, their common work…

“As a correction to State-managed production, sometimes workers’ control is demanded. Now, to ask control, supervision, from a superior indicates the submissive mood of helpless objects of exploitation. And then you can control another man’s business; what is your own business you do not want controlled, you do it. Productive work, social production, is the genuine business of the working class. It is the content of their life, their own activity. They themselves can take care if there is no police or State power to keep them off. They have the tools, the machines in their hands, they use and manage them. They do not need masters to command them, nor finances to control the masters.

Public ownership is the program of “friends” of the workers who for the hard exploitation of private capitalism wish to substitute a milder modernized exploitation. Common ownership is the program of the working class itself, fighting for self liberation….”

As Pannakoek says, it is impossible for workers to exercise control unless they exercise their own direct ownership. To suggest that workers can obtain any real control whilst ownership is in the hands of capital, particularly state capital, is to deceive the workers cruelly. As Trotsky says,

"... a bourgeoisie that feels it is firmly in the saddle will never tolerate dual power in its enterprises. workers’ control consequently, can be carried out only under the condition of an abrupt change in the relationship of forces unfavorable to the bourgeoisie and its state. Control can be imposed only by force upon the bourgeoisie, by a proletariat on the road to the moment of taking power from them, and then also ownership of the means of production. Thus the regime of workers’ control, a provisional transitional regime by its very essence, can correspond only to the period of the convulsing of the bourgeois state, the proletarian offensive, and the falling back of the bourgeoisie, that is, to the period of the proletarian revolution in the fullest sense of the word."

Outside those conditions, real workers control can only be implemented as part of direct workers ownership of the means of production, i.e. the kind of transitional property forms that Marx describes in Capital III,

“The co-operative factories of the labourers themselves represent within the old form the first sprouts of the new, although they naturally reproduce, and must reproduce, everywhere in their actual organisation all the shortcomings of the prevailing system. But the antithesis between capital and labour is overcome within them, if at first only by way of making the associated labourers into their own capitalist, i.e., by enabling them to use the means of production for the employment of their own labour...The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other.”

Every instance of state capitalist ownership has turned out badly for workers. It resulted in massive rationalisation at the expense of workers jobs, and ultimately with the newly capitalised, and rationalised industries being handed back to private capital. The British mining industry was a classic example, where even a mighty trades union like the NUM was incapable of introducing any kind of "workers control" over production during the whole period after 1945, and rather suffered attack after attack, such as the year long strike of 1984-5, prior to the complete decimation of the industry. As Kautsky recognised long ago,

“If the modern state nationalizes certain industries, it does not do so for the purpose of restricting capitalist exploitation, but for the purpose of protecting the capitalist system and establishing it upon a firmer basis, or for the purpose of itself taking a hand in the exploitation of labour, increasing its own revenues, and thereby reducing the contributions for its own support which it would otherwise have to impose upon the capitalist class. As an exploiter of labour, the state is superior to any private capitalist. Besides the economic power of the capitalists, ii can also bring to bear upon the exploited classes the political power which it already wields.

The state has never carried on the nationalizing of industries further than the interests of the ruling classes demanded, nor will it ever go further than that. So long as the property-holding classes are the ruling ones, the nationalization of industries and capitalist functions will never be carried so far as to injure the capitalists and landlords or to restrict their opportunities for exploiting the proletariat.”

(The Erfurt Programme)

Italians are being fed the same lies today that the Irish workers were fed prior to the nationalisation and bail-out of the Irish Banks. Italian workers are being told that the banks require around €20 billion to recapitalise them. That is a ridiculously low estimate, and follows what happened in Ireland, as was described nicely some time ago by Irish Marxism. That is lies were told about how much capital was required by the banks, so as to bring about the initial government bail-out. Once that process was underway, and the state took ownership of the problem, it was on the hook to follow through with the provision of the capital actually required. The fact was that the capital actually required was many, many times what had first been stated, and was so great as to nearly bankrupt the Irish state, leading to its subsequent introduction of harsh measures of austerity that destroyed real capital, and undermined the growth of the Irish economy for several years.

This is the way, at times, the owners of fictitious capital are able to push their own narrow interests, via their conservative political representatives, even where that means destroying real capital and undermining the interests of real productive-capital, and the economy. As Marx put it,

"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)

Italy's oldest bank, Banco de Monte Pasci de Sienna (BMPS) is quite visibly busted, with its share price having collapsed by more than 90%. It has been given until the end of the year to recapitalise so as to meet the requirements of the ECB's stress tests, which despite the lax requirements of those tests, it failed. But, the owners of fictitious capital are not themselves willing to risk losing more of their paper wealth, and have turned down the opportunity of throwing more money down the throat of this turkey prior to Christmas. Instead, Italian workers are again being asked to stump up the cash via their taxes. They should actively refuse.

The Italian banks on past experience need trillions of Euros to cover their bad debts, and to cover the fact that the fictitious capital on their books is next to worthless if properly valued. Once the Italian banks start to actually shut their doors, it will be a very short pause before the German banks that have lent to them, and which have an even larger stock of astronomically inflated, but essentially worthless paper assets on their balance sheets, follow in behind, with the other EU and UK banks falling like dominoes in the aftermath. It was the tie up between Irish banks and UK banks, and then UK banks with banks across Europe that led to the demands by the owners of fictitious capital, for the Irish banks to be nationalised. The same is now happening in Italy.

Italian workers, supported by workers across the EU should organise demonstrations and action to prevent workers taxes being used to bail-out the owners of fictitious capital. We should say a loud "No" to socialism for the rich. If states have ready cash in the billions to give to the bankers and owners of fictitious capital, we should demand instead that those billions be used to end austerity, to invest in real productive capacity and infrastructure, especially in those parts of Europe like Greece, Spain, Portugal and Italy that need real capital investment so as to begin creating viable long-term jobs.

Italian Referendum

It looks like the Italian Government of Matteo Renzi will lose today's referendum on constitutional reform.  It shows the problem of plebiscitary democracy, as also seen in the Brexit vote, and the election of Trump.  That is given a stark binary choice, voters may vote one way or the other for reasons completely at odds with the actual question being put to them.  In the case of Renzi, he made the mistake of threatening to quit if he lost, and so now, voters see the referendum as a means of kicking the government.

The actual basis of the referendum is to introduce constitutional reforms into Italy's Byzantine political system.  The aim is to reduce the power of Italy's second chamber, The Senate, which would give more power to the government to push through economic reforms, and to be able to provide state support for Italy's bankrupt and fast collapsing banks.

In part, Italy's experience shows the problems with the proposals of those in Britain who advocate a similar set up of elections based on proportional representation, along with an elected second chamber.  Proportional Representation tends to lead to a large number of parties in parliaments, which then have to engage in back-door deals to stitch up coalitions and alliances to form governments.  Add to that a second elected chamber, which then claims its own democratic mandate to frustrate or overturn any decisions eventually made by the first chamber, and you end up with the deadlock faced in Italy.

Its not surprising that the Italian government is then seeking these reforms to limit the power of the Senate.  That would be okay, were it not for the fact that in the Italian system, the Prime Minister has the same kind of powers that in other systems the President would have, the President in Italy being merely a figurehead, with limited powers, like the Queen in Britain.  Given that in the recent past, Italy has had technocratic Prime Ministers, imposed on it, like Mario Monti, therefore, its also clear why many Italians are also loathe to hand over too much power to the Prime Minister, given their memory of the past, and of Mussolini.

The real problem, in Italy, however, as in much of the EU, is the banks and financial system.  For thirty years, asset price bubbles have been blown up, giving the appearance of wealth, whilst all the time, they undermined the production of real wealth.  The inflated asset prices be it of bonds, shares or property, were used as the shaky foundation upon which to borrow ever more money to continue to finance consumption, whilst the same paper chase of speculation to push up those asset prices, diverted potential money-capital from real investment in productive capacity.  When 2008 globally, and 2010 more specifically in Europe, threatened to obliterate all of the paper wealth of the top 0.001%, held in these fictitious assets, central banks intervened to reflate them with massive money printing, whilst governments in Britain and across the EU, inflicted further pain via austerity measures.

That is the real problem facing Italy, just as in 2010 it faced Greece, Ireland, Portugal and Spain.  The ECB has printed money to lend to EU banks, who used it to buy the bonds of their governments, which led to the ridiculous situation whereby the yields on the bonds of countries like Spain, Italy and Portugal fell to levels even below those of the UK and US, which themselves has been manipulated lower by their own central banks printing money to buy them.  The debts have continued to grow, the inflated prices of assets have become ever more ridiculously inflated, whilst productive investment required to provide the profits to justify the payment of interest on those assets, was constrained.

Italy's banks are reported to have non-performing loans amounting to €360 billion.  If past experience is anything to go by, the real figure will be two or three times that figure.  Renzi wants the reforms so as to be able to bail out the banks in the same way that the US, Britain, Ireland and other EU countries bailed out their banks, and thereby bailed out that top 0.001% whose wealth is tied up in these paper assets.  Socialists should oppose such bail-outs.  It is a good thing for us if financial markets and the astronomical prices of these paper assets crash, so long as that is not allowed to interfere with the provision of credit and liquidity into the market, to enable the circulation of real capital and commodities to continue.  If the prices of bonds and shares tumble, it means that our pension fund contributions can buy much more of them, thereby reducing the cost of providing for our pensions; if the price of property collapses, it means we can again begin to afford to buy or rent houses at reasonable costs; if banks go bust, it means their workers can begin to take them over, and run them as co-operatives in workers interests.

The crisis in Italy, like the crisis caused by Brexit, and the potential crisis of a fascist winning the election in Austria, of Le Pen being in the running for President of France, and of a string of right-wing populists gaining support, comes down to the fact that conservative politicians across Europe have defended the paper wealth of that top 0.001%, whilst inflicting austerity and the real economy. The EU could have introduced a policy of fiscal expansion to stimulate economic growth across the EU, politicians like Hollande, came to power promising such policies, but instead they did the opposite creating the situation we have now.

The last thing the French socialists need is an equivalent of Blair, but at this late stage, even an equivalent of Corbynism sweeping the French Party might be too late to turn things around.  The EU might be forced into action, as the message seems to be getting through in global forums that monetary policy has hit the buffers, and fiscal stimulus is required.  But again, they may be too late to avert the imminent crisis.

The Italian banks look set to collapse next week if the referendum goes against Renzi, and he resigns.   Following Italy, the German banks look set to follow.  It's rather like I foretold some months ago.  In fact, the more 2016 has unfolded, the more its events have mirrored the scenario depicted in my novel 2017.

Markets Rise Strongly On Centre-Left Win In Italy

Exit polls indicate that the Centre Left will win around 38% of votes in the Italian elections, putting them in power in both houses of the Italian Parliament.  On the back of that news, meaning that policy will move away from austerity and towards growth, Italian markets soared by around 3.5%, and global markets rose strongly too.  That comes on the back of Moody's giving a similar signal of where Capital seeks to move policy.  Their decision to downgrade Britain's Triple A Rating cited clearly the detrimental effect austerity was having on growth, and the effect a lack of growth was having on Britain's ability to repay its debts.

That illustrates just how wrong Britain's Liberal-Tory Government is in persisting with its illiterate economic policies, not just in the face of what experience is once more illustrating, but in the face of what is even in the interests of the Capitalist Class they seek to serve.  But, it also demonstrates once again how wrong those on the Left are, who operate with a crude economic determinist view whereby  the policies adopted by Governments always have to be read back as mechanically meeting the needs of Capital.

Under some circumstances such as those of the 1920's and 30's, and those of the 1980's and 90's, economic policies that seek to boost profits by squeezing workers, and limiting government spending might meet the needs of Capital.  Yet, in fact, even during the 1980's and 90's, Government Spending actually continued to rise.  What is more specifically the case during those periods, is that Keynesian fiscal stimulus cannot act as a means of providing a sustainable boost to the economy.  But, in other periods, periods of Long Wave Boom, policies of Keynesian fiscal stimulus can fulfil that function, and so it makes no sense for Capital to create, or lengthen periods of recession by failing to use them, because such recessions by their nature mean lower profits, and even destruction of Capital Value.

The global economy, since 1999, has been in a period of Long Wave Boom, likely to last until around 2025-30.  That is manifest in the huge increase in global GDP during that period, similar increases in global fixed capital formation, and a 30% increase in the size of the global working-class.  A large part of that growth has come in the new dynamic centres of the global economy in China, Asia, Latin America, and increasingly Africa.  Even as North America, and Europe suffered from the Financial Crisis of 2008, and its aftermath, these other new centres of economic activity have continued to grow strongly.

The US, which suffered severely from the Financial Meltdown of 2008, has not grown as strongly as these new economies, but by using Keynesian stimulus it has at least managed to continue growing, and as a consequence the profits of US companies have continued to grow too.  That is in stark contrast to the performance of those European economies that have followed an Austerian economic policy.  Greece on the basis of those policies has become a basket case, Spain is experiencing a 1930's style Depression that is getting worse, and Britain's economy under the Liberal-Tories has stagnated, now falling into a Triple Dip Recession.  The only thing these policies are doing is weakening the economies that pursue them, and thereby weakening the position of the Capital based in them relative to Capital in other parts of the global economy.

Those right-wing populist parties that insist on pursuing these disastrous policies are not doing so in the interests of Capital, but in order to meet the interests of their own core membership and voter base.  In general that is not the dominant section of Capital, but those backward sections of Capital, the small businesses, alongside the backward sections of the middle class that have a parochial, nationalistic outlook.

For more than 100 years the interests of the dominant sections of Capital have been represented, not by these right-wing populist parties but by Social Democracy.  That is why they are welcoming the victory of the Centre-Left in Italy.

P.S.

In the half hour since I wrote this post events have further confirmed its thesis.  New exit polls suggest that the Centre-Left might only have won control of the Lower House, with Berlusconi having a majority in the Senate.  On the back of that, the FTSE MIB not only lost all of the 3.5% gtain it had made during the day, but went into negative territory.  Other markets that had been showing solid gains on the day, also went into negative territory.

Euro Debt

This week has been the first week of the new year that Eurozone economies have gone to the Bond Markets. They seem to have dodged a bullet for now.

Earlier in the week, Portugal, thought to be the next country in the sights of the markets for a bail-out, managed to find buyers for its Bonds, and on its Ten Year Bond maturing in 2020, it managed to sell it with a slightly reduced Yield, 6.716 percent from 6.806 percent in the previous sale in November. The October 2014 bond yielded 5.396 percent, up from 4.041 percent in October's auction.

But, in the weeks preceding these auctions, the ECB had been intervening considerably in an attempt to ensure that the Portuguese debt auction was succesful. One reason for that was the fact, that a much larger Spanish and Italian auction was due just days later. The Portuguese auction was quite small compared with the funding that Spain and Italy need to raise.

The ECB has been buying Bonds in the market for some time, and we do not know how much of the success of the Portuguese auction was due to the ECB buying the debt, by one means or another. But, given the level of intervention to ensure its success, the slightly reduced yield on the ten year from 6.8 to 6.7, is hardly stellar. Moreover, the increase in yield from 4 to almost 5.5% on the 2014 Bond represents an increase of more than 25%!

Its thought that any rate over 7% is crucial, because over this level interest charges become so significant as to make it almost impossible to finance debt out of income. It had been feared that the Yield might have gone over 7%, but even at 6.7%, the interest burden on Portugal is considerable given that it has been hardly growing for the last decade, and the austerity measures introduced by the Government, far from improving that situation are sending its economy back into recession.

In fact, Portugal's problems contrast with those of Spain. Portugal did not run up a massive deficit as other countries did. Its problems arise not from accumulated debt, but from a stagnant economy, unable to cover the debt it does have. Although, Spain, as a much larger economy than Portugal, has some advantages, and its economy grew rapidly over the last ten years or so, in some ways its problems are greater. A large part of the growth it enjoyed was based on a bubble in its property market, which sparked a boom in its construction industry. The property market is no longer bubbling up, and with 1 million empty houses, its cosntruction industry come to a grinding halt, and is one reason that Spain's unemployment rate is at depression levels of 20%, and youth unemployment of 40%.

In an interview with CNBC, Spanish Finance Minister,Elena Salgado, said,

" “We are confident on them because as you know we have gone through a big strong restructuring process, we have gone from forty-five savings banks to seventeen and of course we have gone through a stress test, very tough stress tests I have to say,”,

but, of course, these are the same stress tests that irish Banks passed last year, the same Irish Banks that have now essentially collapsed, and been taken over by the Irish State. She went on,

“Transparency is going to increase because at the end of this month all savings banks are going to say what assets they have,”

“I think you have always to consider the level of our non-performing loans in Spain is very low. The mortgages are paid differently than in other countries, you respond not only with the house but with all the properties you have so this is one of the reasons of course that the level of non-performing loans is very low,"

But, this is reminiscent to the delusions that were perpetrated with the sub-prime crisis. The reality is that although the property bubble has ended in Spain, and there have been some reductions in prices, those reductions do not in anyway reflect the dire state of the economy or the property market. In fact, there is an incentive for the Banks and other finance houses to perpetuate fictional valuations of the property on their books, so long as they can use it to provide a pretence of economic strength, and thereby to continue drawing money from the ECB's funding arrangements. But, sooner or later, the dam will burst on that, and the pretence will collapse. When it does, there will be a rush to get rid of that 1 million empty properties at almost any price, and the assets on the Spanish Banks' books will no longer look very safe. That may not affect the big Spanish Banks like Santander, which operate on a global basis, and have very profitable operations in Latin America, but many of those small cajas that have provided the loans for the property bubble, and which the Spanish government is trying to shore up with mergers and other measures, will be seen to need massive recapitalisation.

That is likely to be on a scale much greater than the recapitalisation of the Irish Banks, and the question is, at a time when the Spanish State is itself facing increasing questions about how it can sustain its own sovereign debt, where will that recapitalisation come from? Its possible that the big Spanish Banks might step in, but the experience of the Finanical Meltdown, shows how easy it is for even solid banks to land themselves in big trouble by taking on the unknown debts of others.

In the meantime, the actions of the European political leaders resemble the moving of deckchairs on the Titanic, as they continue to combine attempts to deny the severity of the crisis with continued wrangling and attempts to obtain political advantage as the price of agreeing to any measure that might actually provide a longer-term solution.

Liberal Re-Writing Of History

In interview after interview, Liberal spokesmen have responded to questions, about why they changed their position, over the Cuts, by saying that it was a pure co-incidence that their change of position was simultaneous with their negotiations, with the Tories, to get their grubby hands on a share of power. The real reason they changed position, they claim, was that the crisis, in European debt markets, so changed conditions that they had to change their position. Besides being economically illiterate, and unsupported, this also represents a re-writing of recent history.

Anyone, looking back, knows that their claims are simply untrue. For example, some time before the election, the situation in Greece, and the other PIIGS, was so severe that, even in April, I wrote a blog, which opened with the sentence "Greece has gone bust!", and featured a CNBC interview with Jim Rogers to that effect Beware Of Greeks In Need of Gifts. How bad did the Liberals need the situation to be before they felt that they had to change course??? Or are they so incompetent that they were unaware of what was happening in the European economy? What does that tell us about the confidence we should have in Comrade Vince?

But, its a re-writing of history for another reason. At the time the Liberals were involved in these negotiations, with the Tories, and claiming that the situation in Europe had changed, so significantly, as to require them to change their policy, I was in Spain, and watching things unfold at first hand. In that previous blog, I'd spelled out how the crisis could be resolved, through debt monetisation, and the establishment of a centralised European Debt Management Office, as part of a single European State, with control over Fiscal Policy. While I was in Spain, and at the time the Liberals claim this game changing event took place, the first part of that was what European leaders did. They announced a huge package of European aid, to bankroll the PIIG economies, to avoid the danger of immediate default, and the ECB announced that it would begin buying the Bonds of the PIIG economies i.e. monetising their debt, in the same way the Bank of England had done in the UK, and the Fed has started to do in the US. I was writing about this while I was away, but could only blog it when I got back, towards the end of May, in my blogs The Return Of Illiterate Economics. But, as I wrote in that blog, the initial response, to the announcement of the package, was that the Yield on Greek Bonds fell from 15%, to 8.5%. Stock Markets soared in Europe, and around the globe, and the Euro rose against the dollar. Why, because the monetising of the debt was precisely the solution that Global Capitalism needed, to avoid an immediate crisis, to provide breathing space, and to provide the basis for the long-term debt problem to be dealt with via restructuring and growth.

But, as I also wrote in that blog, a week later, all that had been dramatically reversed. Why? because the ECB had announced that it was sterilising the money, it had pumped into the economy, to buy Government Bonds, by withdrawing money through selling commercial bonds, it was holding, and because, partly as a result of pressure from Germany, who had resisted providing any assistance to Greece in the first place, the PIIGS were being asked to implement precisely the kind of fiscal austerity that would lead to their economies being cratered, and the potential for the very growth required to solve the problem undermined. In other words, the very policies the Liberals claim they had to change to, were precisely the policies, which had led to a big sell-off on European Markets - and then world markets - and the dramatic fall in the Euro! If anything the experience in Europe during that period should have led to the exact opposite of the conclusion the Liberals say they were led to. It should have led to the conclusion that what was needed was further Quantitative Easing, and at least no tightening of fiscal policy to ensure that this additional liquidity found its way into the economy!

But, even if none of that were the case, the Liberals argument makes no sense. As I wrote, in my blog, Britain Is Not Greece, and Britain had many options not available to individual Eurozone economies. For one thing, at the time, the yield spread between Greek Bonds and German Bunds was more than 12 points. By contrast between Bunds and UK Gilts it was only 2 points! There was a considerable chance that Greece might have defaulted on its debt - and that risk still exists, and has been increased with the austerity measures - but there is absolutely no chance that Britain is going to default on its debt, and the traders in the Bond and Currency markets, who are pretty savvy people, when it comes to not losing their shirts - know full well that there is no chance that would happen, which is why UK Gilt Yields were less than 4%, which is historically low - itself hardly a suggestion that the markets were going to refuse to buy UK debt, or push interest rates to unspeakable levels!

And the irony is that, in the intervening period, as a result of the austerity measures, introduced in the PIIG economies, the weak recovery, they had been experiencing, has been reversed, as a direct result of the Cuts, and, in consequence, just as borrowing had to increase, in Britain, in the 1980's, under Thatcher, as Tax revenues fell, and welfare payments rose, so the PIIG economies are facing a similar scenario, and as a consequence yields on their debt are now back almost to the level they were at in April! If the Liberals want to learn from the experience in Greece, then they should learn that lesson, that if the policy of Cuts was intended to reduce interest rates, it hasn't worked! All it has done is to increase misery, and make it more difficult to resolve the crisis through growth.

But, the Liberals are not that stupid or ignorant. They know that nothing really changed that justified them changing their stance of opposition to immediate Cuts. The only thing that changed was that, if they wanted to get jobs for themselves in Cameron's Government, they had to be prepared to sacrifice whatever principles they might have had, as well as sacrificing the jobs of hundreds of thousands of workers, and maybe more if the idiocy of this policy is persisted with.