Jingle Jangle Morning Post: 3 Parallels and a Funeral (very belated)

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Joined: 6-03-08
Aug 17 2010 20:37
Jingle Jangle Morning Post: 3 Parallels and a Funeral (very belated)

Jingle Jangle Morning Post
3 Parallels and a Funeral (very belated)

Having realised that the tripling of its back-up funds last year will be inadequate to cope with the next leg of the economic crisis, the International Monetary Fund is seeking in November’s G20 meeting at Seoul to raise its firepower from $750bn to $1 000bn. At the same time, the IMF wishes to fine tune its “global stabilisation mechanism” for the specific needs of individual countries. The most risky states would have the most rigorous (read: painful) demanded with any IMF support; for the least risky, intervention would be available with virtually no conditions attached, and could be provided even prior to a crisis. As the IMF managing director, Dominique Strauss-Kahn, phrased it: “Even when not in a time of crisis, a big fund, likely to intervene massively, is something that can help prevent crises”. (1) The unspoken words shriek: worse, much worse, is on its way.

By way of illustration. European banks’ liabilities are estimated at more than 30 trillion euros. (2) $2.6 trillion of this is short-term, and must be repaid or rolled-over within 2 years; worldwide, there are another $2.4 trillion owed to bondholders and other creditors, according to the central banks’ bankers, the Bank for International Settlements, with a further $1.3 trillion to be refinanced by US banks. The Bank of England says UK banks’ bond issuance must come to £800 billion, or about £25bn each month – twice the rate for the current year. (3) The UK Office for National Statistics has clarified that the current public sector net debt figure is an “open-ended concept”, once off-balance sheet liabilities (such as unfunded state and public sector pension schemes, and private finance initiatives) are taken into account. These bring a potential debt of £4.84 trillions. This dwarfs the national debt and is 400% of gross domestic product. (4)
Doug Noland, the seasoned watcher of fictitious capital (though he would be unlikely to recognise the term), has homed in on the Greek financial crisis as being a “point of inflection”. He recognises that it represents a key moment in the gyrations of what he refers to as “Credit Bubble Dynamics”, in which the inability of a capitalist pygmy to repay its equally puny government debts set off a chain of confidence-shattering events threatening to paralyse Europe’s debt markets and government payment mechanisms. More than this, he argues it brought about a fundamental alteration in finance capital’s outlook. In his own words:
“Today, I believe global faith in government policymaking has been badly shaken. There is now an appreciation that policymakers are running out of options. Confidence that fiscal and monetary stimulus ensures a sustainable global recovery has waned. There is recognition that massive stimulus can’t assure market stability; in fact, profligate fiscal and monetary measures will likely prove destabilising. There is appreciation that global central bankers can’t guarantee normally-functioning markets.” (5)

This recognition has not been a once-for-all process nor a linear development.

Having staved off the Eurozone crisis by allowing the markets to “luxuriate in destabilising policymaking-induced liquidity excess and dysfunctional markets” – Nolan’s elegant words for showering debt-stricken Euro states with money and guarantees of money - European governments in coordinated fashion began to institute draconian “fiscal consolidation” (the oh-so-dignified euphemism for attacking workers’ wages and conditions). Capitalism teeters on the edge of bankruptcy in 2008; governments rescue the system by assuming the debts – and thereby the risks - of the system; then, over a weekend in May of this year, the less-threatened European states rescue the other sovereign European states threatened with immediate bankruptcy because of their vast and unredeemable debts – otherwise the Eurozone would relapse into crisis, followed in short order by the rest of the capitalist system.

In a parallel noted by Nolan, a central bank bailed out sovereign states, similar to the intervention by the US Federal Reserve in August of 2007 to retrieve the situation when the subprime crisis began at Bear Stearns. In both, temporary confidence was restored – not immediately, perhaps, but normal business seemed to resume.
Not everything became hunkydory all at once. The initial benefit of the measures when they were first announced soon evaporated, and after only a day or two Portugal, Ireland, Italy, Greece and Spain (going under the unfortunate acronym of “PIIGS”) again had difficulties with debt markets and high interest rates. Eventually, after considerable pressure from Tim Geithner, US Treasury Secretary, it was agreed to run “stress tests” on Eurozone banks. In a parallel with the tests used in the USA a year earlier, a range of banks went through a series of tests to analyse how they would cope with various untoward events, in order to demonstrate to the markets that they were “crisis ready”, hoping this would calm all fears. Despite the fact that the results (in which all banks passed, other than a handful of known suspects) were greeted as having been “reverse engineered to ensure a pass mark” (as Patrick Jenkins of the Financial Times put it), (6) the markets responded with a display of resolute determination that all must be well, and put on a big show of improved confidence. The awkward fact that the tests specifically excluded the effect of a sovereign default – precisely the prospect which had instigated the Eurozone seizure - was widely noted but determinedly ignored.

For a couple of weeks, our Euroleaders were able to relax during the lull generated by the tests, after the turbocharged events of the Eurozone crisis (7) which they thought had been put to rest. Still smarting from the blows to their collective ego in being forced to create a “moral hazard” in the biggest sovereign bailout in history to a Greek nation whose people they deem profligate and thriftless, many feel uneasy that they have compounded the problem by setting up a trillion dollar bailout facility for European economies whose needs for loans have been spurned by the debt markets.

Euroleaders have been determined to root out moral hazard by imposing fiscal discipline, possibly in the shape of penalties for transgressors; also under consideration are bank levies and more stringent rules for banks, in compensation for failing to persuade the G20 meeting in Toronto to agree to a financial transaction tax. In prospect is an IMF for Europe, a more permanent replacement for the 440bn euro European Financial Stability Facility so hurriedly formed in May. Jean-Claude Trichet, president of the European Central Bank, may have rejected Germany’s demand that the Eurozone should take on powers to expel any “fiscally incontinent” or improvident country, but the financial sector seems to think Angela Merkel may get her way in the end: derivatives traders have discreetly set up a group to make contingency plans to minimise the effect of a Euro member being thrown out. (8) The significance of this is underlined by the notable fact that the international derivatives casino is worth at least (it is a very shadowy world) $615 000bn : some ten times the value of global GDP. (9) Such is the nature of fictitious capital in today’s world of fantasy capitalism.

The special purpose vehicle created for the European Financial Stability Facility aims at a AAA credit rating for its $440bn euro fund, which can sell bonds so as to enable it to provide loans to Euro states at their request. All member countries have agreed to act as guarantors for the bonds. Unfortunately, the sovereign debt crisis means the word of some governments cannot be their bond: their ability to guarantee the enormous sums involved cannot be depended upon. Even worse, there is a contamination effect for all the other guarantees of those who can (allegedly) be trusted. “Like sharing dirty needles, the risk of infection for all has drastically increased.” (10) This bears obvious comparison to the subprime mortgage crisis, which also induced an infection risk by pooling different risk categories, from the reliable to those who had no hope of ever repaying their mortgages, into packages deemed to be AAA rated. When Bear Stearns announced in July, 2008 that two of their subprime hedge funds had lost nearly all of their value, the credit crunch began, because all securities were suspected of infection and nobody would risk transacting business. The question arises: which “subprime” sovereign state is going to trigger the next phase of the crisis with a default then a credit crunch of hitherto unimagined proportions?

Now that all the major economies (except the USA) are busy with their schedules for cutting deficits, some have commented on a major consequence of their efforts. If domestic demand is thereby being restrained, businesses must look elsewhere for markets in which to sell their products and invest their capital. This must inevitably lead to far more intense international competition between these businesses, in markets which are already in a depressed condition. It is all very well for the Obama administration to aim at doubling its exports, and for the UK’s David Cameron to become a globetrotting salesman to former colonial outposts. In William Keegan’s caustic words: “Where are all these exports destined to go? Mars, Venus, Jupiter?” (11) There has already been increasing evidence of outbreaks of protectionist sentiments. Both China and the USA have incorporated domestic preference arrangements in their stimulus measures; Russia wishes to see more import-substitution occur; globally, over 443 instances of protectionist measures have been recorded. The last G8 meeting in Toronto (prior to the G20 conference) abandoned any attempt to coordinate free-trade policies: bilateral and regional trade agreements are now the only options. (12) Protectionism will increasingly prevail, congealing into contending free-trade blocs. Endless possibilities for friction between countries and blocs over rival claims for market access are now very much in prospect, in which fractious negotiations can break down into open hostilities and military conflict. In a nuclear age, with economic pressures building up and ever-fewer release valves, the records set in the tea parties of the two world wars are likely to be broken.

The events of the past two years have dramatically highlighted some of the mechanisms of state capitalism today. In the most basic of terms, global capitalism would have collapsed utterly into absolute depression and chaos had it not been for the combined efforts of capitalists internationally to stem the tidal wave which was on the verge of engulfing it: not just the nationalisations, but also the bailouts, state guarantees, stimulus measures, coordinated loosening of fiscal policy – all on a scale which visibly shook their instigators alongside their immediate beneficiaries. The fact that states have had to take over the debts and worthless assets of what would otherwise be bankrupt corporations has created a major dilemma.

One of the principal requirements for politicians these days is an advanced degree in bionics. Like the fictional astronaut, Steve Austin, of the TV series “The Six Million Dollar Man”, whose mangled limbs and organs were replaced with bionic implants after a near-fatal accident, capitalism has only survived its near-fatal entry into decadence, in the early years of the last century, by resorting to state capitalist techniques. “Capitalism: barely alive. We can rebuild it. We have the socio-technics”. As rates of profit collapse and significant sectors of the economy prove unable to function, the state is forced to intervene, practising prosthetic surgery, compensating for the system’s inadequacies. Prosthetic capitalism becomes “better than it was before. Better, stronger, faster.” The state and private capital became an integrated whole, sometimes in a fusion of both into nationalised industries, or more usually taking the form of a convenient mix of private and state enterprises, with the regulatory state assuming the strategic direction of the economy. A collapsing coal industry is nationalised, or subject to regulations and directives – in either case it is rationalised with the support of massive injections of new capital and plant, courtesy of the state. An education system is built up by the state in response to the imperative needs of the system, even though it is beyond the means of the system to create one unaided; to ensure it operates effectively, artificial market forces are introduced by decree, because real market forces could not succeed. And so it goes on, until we now find state budgets have mushroomed from a meagre 3% of GDP up to a massive 40% plus.

The present crisis has occurred even despite all this, and even despite the arsenal of economic weapons at the disposal of the ruling class. Herein lies the dilemma. State capitalism, the single most important innovation of the last century, which was crucial to the survival of the capitalist system, is now under attack by the very states which conceived it. In order for state capitalist regimes to survive the threat posed in its most immediate form by the sovereign debt crisis, they must chop and slice the organs so assiduously established over so many decades. To reduce government debts, state capitalism has to hack at its own vital organs.

Not only will states become leaner and perhaps meaner; they will be compelled to become cruder. The time is passing when the more “enlightened” and “progressive” variants of state capitalism will be able to rely on simple exhortation and a panoply of incentives to supply the prosthetics. Instead, they will have to rely on less beneficent techniques for ensuring cooperation. They have no alternative: capitalism has no future without the prosthetic state. We can therefore expect to see, at some point, greater resort to the traditional, well-tried authoritarian techniques for gaining the compliance of the unwilling.

Recent developments appear to be confirming Noland’s diagnosis referred to earlier, and also that of the International Communist current in its latest analysis, written at the beginning of July:
“We can expect a fall in production in most countries of the world, and of world trade, by the end of 2010 and the beginning of 2011, with all the consequences this will have for the development of poverty and the degradation of working class living standards.....If a new policy of revival is adopted, it will mean resorting to the printing press in a big way (some say that the US is already getting ready to do this).” (13)

The calm registered after the results of the stress tests were announced has proved to be merely another lull in the storm. Not only has Greece’s economy shrunk by 1.5% in the third quarter: it is set to contract by 4% for the year. (14) Borrowing costs for Spain’s regional governments are climbing steeply: Catalonia, responsible for 20% of the Spanish economy, has had no access to the bond markets since March and the extra interest it pays compared to the national debt has tripled during the year. As one analyst comments: “If investors focussed more on the problems in the regions, they would....see that the rally in July was a bit overdone”. (15) The European Central Bank is widely rumoured to have intervened to support Ireland’s debt, due to the Irish government now having to pay twice the interest rate of Germany because of anxieties about the rescue of the Anglo Irish Bank. (16) This despite Ireland being celebrated for its exemplary and speedy response to the crisis (cutting wages by 13%, pensions levy...). With Britain, the USA and China all lowering their predictions for growth, and Japan set to lose its position as second biggest global economy to China after Japan revealed its growth rate had shrunk to an annualised 0.4%, (17) one analyst commented tartly: “The trouble is, we believe Mr Bernanke’s magic is all but used up. There is not much more fairy dust left to sprinkle on this economy. And the ugly true situation is beginning to re-emerge”. (18) The US Federal Reserve may have signalled it still has the final monetary crutch of Quantitative Easing in its armoury, but “the risk is that helicopter drops of money into the economy from central banks simply lead to more debt reduction and hoarding”, (19) which is, of course, precisely what happened with the first resort to the printing press.

Meanwhile, the learning process for the victims of the crisis is well underway. Cabin staff at British Airways, along with countless others undergoing unreported industrial disputes in Britain, will no doubt have come to question the independence of the judiciary when BA used detailed technicalities in legislation on unions to disrupt and delay their strike action. Similarly, Greek truckers must now appreciate how much their (“socialist”) government cares for their interests when their strike action, which had shut down almost four in every five petrol stations, banned the strike using an emergency mobilisation order which would have compelled drivers to go back to work as forced labour. (20) Although this may have been a significant lesson to them, they have a little way to go as yet: they ignored the mobilisation order initially, but then returned to work “because people are starting to suffer from food and fuel shortages”. (21) As the crisis grinds on, especially once the cutbacks take effect, such episodes may begin to cohere into class consciousness .

No doubt, blind alleys will be explored along the way. Hopefully this will not repeat the experience of a couple in Japan, called in for questioning about the body of a relative which had been discovered in their Tokyo house. (22) The inquiries are focussed on the pension which they may have been fraudulently receiving, on behalf of a relative whose death thirty years ago at the tender age of 81 had not been notified to the appropriate authorities. Negligence is also suspected. Such can be the individualised responses of those enduring Japan’s Lost Decades, in a country with at least 60 unlocated centenarians.

1. FT 19 July, 2010, p8
2. FT 29 July, 2010, p33
3. New York Times, 11 July, 2010
4. Daily Telegraph online, 14 July, 2010
5. prudentbear.com, 7 August, 2010
6. FT 26 July, 2010, p9
7. See my previous posts:
8. FT 29 July, 2010, p33
9. FT 12 August, 2010, p9
10. FT 13 July, 2010, p32
11. Observer 25 July, 2010, p40
12. New York Times (Observer supplement) 18 July, 2010, p2
13. International Review 142
14. Daily Telegraph online, 12 August, 2010
15. Bloomberg.com, 12 August, 2010
16. Daily Telegraph online, 11 August, 2010
17. Bloomberg.com 17 August, 2010
18. FT, 11 August,2010, p30
19. James Mackintosh, FT, 15 August, 2010, p 22
20. http://libcom.org/news/truck-drivers-defiant-despite-conscription-orders-greece-29072010
21. FT 2 August, 2010, p5
22. FT 7/8/10 p 5


Joined: 29-07-05
Aug 17 2010 21:12

Good analysis Berrot showing that not only is the economic crisis not being ameliorated but it is getting progressively more problematic. The relationship between crisis, protectionism and imperialism weighs on a world already riven by geo-strategic wars and the control of raw materials. There was a report recently that under the soils of Afghanistan there was a wealth of trillions of dollars of some, rare raw materials as well more well-known ones. There's not a chance in hell of any work being undertaken to attempt to extract these.
Good analysis of state capitalism and I agree with the tendency to a more militaristic, authoritarian society. The US today is a good example of this tendency.