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Thiranjala Weerasinghe sj.- One Island Two Nations
?????????????????????????????????????????????????Sunday, July 30, 2017
Why is global economic recovery so tardy?
There is more to the recession than the toxicity of finance capital
Perceptions of risk of a recession (Source: Legal & General Investment Management)
by Kumar David-July 29, 2017
by Kumar David-July 29, 2017
My
‘Dummies Guide to Solar & Wind Power’ two weeks ago elicited
encouraging responses. Obviously, there is a market for simple pieces.
Since I know even less about economics than electrical engineering maybe
I can risk straying into the territory of this essay. It’s a dummies
guide written by a dummy and the target is again the 100% layman. I want
to provide a primer on finance capital, why it rose to prominence in
the last two decades, what led to the 2008 debacle, why this was
unavoidable (you will not hear about that from bourgeois ‘experts’), and
how capitalism bailed out its banks and financial institution. I will
touch on why ‘recovery’ from the Great or Global Financial Crisis is
still absent despite limitless massaging since Q4-2008 and why a second
recession is likely.
Everybody is in debt – amazing! Surely if some are in debt others must
be creditors. What’s the secret? Sovereign debt is rampant; the US
government is in hock to the tune of $17 trillion; US corporate and
household debt (mainly mortgages and credit cards) add to another $30
trillion. Governments, corporations and households in Britain, France,
Brazil, Russia, nearly all of Europe, most of Asia and all of Africa are
saturated in debt. Aside from the oil rich Gulf, Singapore and New
Zealand, I can’t recall any sovereign (government) not drowning in red
ink. This is true of China if you include the 26 provinces, state
enterprises and private companies; in China, it is domestic borrowing.
In the West households are up to their neck and savings rates are low or
negative. Some businesses are in debt; others cling to cash like
limpets and refuse to invest.
If everyone is in debt, who the devil is the creditor? Whose money do
these wretches borrow? The IMF, global funds and banks (except central
banks) do not print money; they acquire it from elsewhere and lend.
[After 2008 central banks went on a printing binge, Quantitative Easing
(QE)]. You have heard of the richest 1% and 10% owning more than 60% and
90%, or whatever, of global, American or European wealth. Well that
stuff is hired as bonds, deposits and investments to banks, mutual and
hedge funds. It is this vast pool of loot that the rest of the world is
in hock to. Global bank and fund assets amount to $ 150 trillion (world
GDP is $68 trillion). Pension and social security funds and post office
savings, that is ordinary people’s money, accounts for maybe a third (I
am not sure) of the $150 trillion. The rest is the filthy lucre of the
ugly rich. That’s where the stuff comes from and that’s why the elite,
the banks and global bureaucrats fight to get interest paid and debt
repaid.
Finance capital
The
rise of finance capital to superpower status, divorced from the real
economy of business, material investment and households, is recent. At
the turn of the nineteenth century, finance capital facilitated global
expansion (Ceylon’s tea plantation, Suez and Panama Canals). It was
handmaiden to investment in an age of classical imperialism. It is
different now; finance capital is the senior partner.
Behind this change lies stupendous capital accumulation that cannot be
profitably invested in manufacturing, agriculture, services and
traditional activities. Bernanke called it the savings glut because he
doesn’t know his Marx. The old Moor would not have raised an eyebrow;
excessive accumulation and the limits of surplus value generating
reinvestment are intrinsic to the lifecycle of capitalism. The very
growth of wealth produces gigantic slush funds. The 1991 recession and
the dot-com bust of the late 1990s revealed that there was nowhere left
to invest profitably. High savings generated by China’s industrial
revolution and explosion of exports created another leviathan. This
monster needed safe parking and found its way back as dollars stacked in
American Treasuries, the Bank of England and Frankfurt. Such is the
genesis of finance capital, which then flexed its muscles as a powerful
new global player. It is crucial for getting a command of this essay
that you appreciate that finance capital did not emerge sui generis; it
was an overgrowth of capitalism’s life cycle.
It was then inescapable that finance capital would begin to play with
itself; a naughty and dangerous pastime. Unless capital is employed for
generation of surplus value it is merely a board game like Monopoly.
Money going round and round creates no real value; otherwise the making
of wealth would need only a printing press and a game board and Indrajit
Coomaraswamy could turn us all into millionaires. Wealth creates wealth
only in productive activity. That’s common sense, but it underpins the
theory of capitalism’s collapse under the weight of its own internal
contradictions.
Two features of modern finance capital: (i) Now banks (and finance
houses) are intricately interconnected. One failure has a knock-on
effect across the system. (ii) Highly complex financial products known
as ‘derivatives’ have emerged, some to serve needs (futures contracts,
hedges) and others to enable finance capital to play with itself
(CDS-credit default swaps, CDO-collateralised debt obligations, risk
tranches and subprime mortgages); risky, opaque and at times verging on
fraud. Proven risk analysis has given way to complex algorithms invented
by ‘bright’ mathematicians newly minted by elite universities. (Rather
like some of my pie in the sky, computing besotted, ‘brilliant’ PhD
students). George Soros and Warren Buffett described derivatives as
weapons of mass destruction whose purpose is speculation to conjure up
profit out of thin air. Denied profits in conventional economic activity
by capitalism’s sclerosis, finance capital has no option but the
casino.
A feature of modern finance capital is staggering leverage ratios.
(Leverage is the ratio of bank deposits plus market borrowing to the
equity base).
The ratio in Q3-2008 was invariably 20 to 30; in Iceland and Ireland
nearly 50! If a liquidity run was fortuitously set off, banks lacked the
asset depth to weather it, and liquidity problem transformed into a
solvency issue. (Solvency: Is a bank’s balance sheet strong enough for
it to survive a short-term liquidity challenge?)
The 2008 tsunami and after
Mistakes may have been made, Fed governors Greenspan and Bernanke, Bank
of England’s Mervyn King and ECB and BoJ governors may have made slips,
but there is no way they could have prevented the 2008 catastrophe. Can
the cleverest seismologist foil a gigantic earthquake? That is my
punchline in this essay. The size and structure of the forces that had
evolved within capitalism by the first decade of the twenty-first
century were too big to subdue by higher or lower interest rates, more
or less money injection, bank legislation or central bank intervention.
To prevent the crisis would have required a lobotomy of the logic and
laws of capitalism itself.
The 2008 story is well known; an incident here (BNP Paribas in August
2007), a difficulty there (bankruptcy of subprime borrowers in 2007-08),
a convulsion in New York (Lehman Brothers bankruptcy, September 2008),
then insolvency of Royal Bank of Scotland and Halifax Bank. This was a
runaway train, the saga of the collapse of finance capital.
How the state intervened to bail out banks and tottering industries is
also a known story. The state and central banks – that is the public,
future debt burdens, taxes, earnings, and current pension and savings
funds – were pressed into service. In the name of QE some $5 trillion
has been injected into banks world-wide. Interest rates have been
slashed to hover effectively at zero to encourage investors. The public
purse has been ravished to resuscitate morbid capitalism.
Still not risen from the dead
Jesus Christ did it in three days; capitalism has not been able to
repeat it in a decade. The Resurrection is the cardinal event of the
Christian faith; in contrast, a second recession in the wake of
continuing inability to rise again from the fall of 2008, will prophesy
the demise of capitalism in the decade of the 2020s.
But why is capitalism unable to rise again; because nothing has changed
in the fundamentals. What has been done is banks have been strengthened
by new regulations on reserves, certain activities have been outlawed
and ‘stress tests’ to ensure ability to withstand shocks have been
implemented. Yes, banks are stronger and more secure. But this is all
shooting at the wrong target, or at least shooting the aide-de-camp
instead of the champ.
The principal contradiction lies in investment, profit, accumulation and
competition as per the established model. Despite central banks gorging
the economy with money and pushing monetary stimulus as far as it can
go, there is no climate of investment. Interest are near-zero, hence the
10-year US Treasury Bond yield has been declining like a ski-slope;
still no robust recovery. To put it in market jargon "there is absence
of confidence, there is fear that investment will be stranded". Risk and
uncertainty terrify post-2008 investors. The exceptions are social
media and IT. All US economic indicators pop up and down like a
jack-in-the-box. Global capitalism is in the doldrums of investment
blight despite a structural surplus of capital.
What 2008 has displayed is a classic contradiction in the real economy
manifesting itself as crisis and crash in the financial economy; a rash
as symptom of internal pathology. I don’t see a way out on a simple
all-capitalist road. But social democratic medications may alleviate it
since fascism and austerity are ruled by the balance of social and
political forces.