US GDP up but…profits down

November 25, 2014

The US GDP revised data for the third quarter of 2014 came out today. US economic growth was revised up from a 3.5% annual pace to 3.9%. The US economy had expanded at a 4.6% rate in the second quarter. So it has now experienced the two strongest back-to-back quarters of growth since the second half of 2003.


This was the fourth out of the past five quarters that the economy has expanded above a 3.5% pace, although bear in mind that the economy contracted during the first quarter after a ‘bad winter’. So year-on-year growth, a much better guide to the pace of expansion was up only 2.4% in Q3’2014, actually a slight slowdown from Q2 yoy growth of 2.6%.

Nevertheless, 2014 annual real GDP growth looks like reaching at least 2.4%, or slightly higher than the 2.3% recorded in 2013 – if still well below the long-term average of 3.3%, or even the average of 2.7% achieved between 2002 up to 2007, before the Great Recession.

Looking at the underlying data, the main driver of the slight acceleration in real GDP growth in 2014 so far has been business investment and state and local government spending – from a low base. In today’s data, the pace of annual growth in business investment was raised to 7.1% from a 5.5%. That sounds good and year on year growth in business investment reached 8.5% in the third quarter.

However, that may not last. What was also to be found in the revised data were the first figures for corporate profits in Q3. Corporate profit margins, the difference between what businesses charge per unit of production and their costs per unit, reached a record high, at 15.6%

US profit margins

But corporate profits as a whole have virtually stopped rising, up only 0.4% year-on-year in Q3’2014, while after-tax profits are contracting and have been throughout the year.

US profit BT and AT
It is my argument in previous posts and papers that where profits go, business investment will eventually follow and then economic growth and employment. The relatively strong US real GDP growth figures announced today are backward looking. Profits call the tune for the future and they are now stagnant (before tax) and falling (after tax). If we lag the change in business investment (blue line) by a year behind the change in profits (red line), then it looks like this.

US profit and investment

The graph suggests that business investment growth is likely to contract and disappear during 2015, if corporate profits stay stagnant or contract further.

I’m a celebrity – get me out of here!

November 22, 2014

Myleene Klass is a sort of B-list celebrity in Britain ( She comes from a family of musicians, quite well-off, went to private school, studied at the UK’s prestigious Royal Academy of Music, became a professional musician and pianist, eventually joined a successful pop band and is now a model for various food and clothing brands. She has appeared on B-class TV programmes like I’m a celebrity – get me out of here!, where you are parked in a jungle for several weeks with other celebrities and have to undergo various humiliating tests. She is apparently worth about £11m ($18m) in net worth and no doubt earns at least six figures a year.

She has attacked the proposed introduction of a wealth tax on British homes worth more than £2m that the current opposition Labour leader Ed Miliband wants to introduce. This so-called ‘mansion tax’ would mean around an annual payment of about £3000 a year by those who have such properties. In the UK, given the huge property boom of the last 20 years, these homes are mainly in central London. On a second rate TV show, Klass railed against Miliband, that this was attacking ‘poor grannies’ who may have big houses but no income.

Miliband was non-plussed, but could easily have answered this charge. First, most of these £2m houses are owned not by poor grannies but by very well off people, 40% don’t live in them and a sizeable number are owned by rich foreigners who have bought them in order to get a windfall from the London property boom (prices rising at 12% a year currently) and rent them out or leave them empty. Second, under the planned tax, those with £2m plus homes and low incomes would not have to pay each year, as the tax would be rolled up until that person kicked the bucket. Indeed, if a £2m house increases in value by 10% a year, that would add £200,000.  A mansion tax of £3000 is just 1.5% of that boost to wealth.

Klass’s attack (and the whining of other ‘celebrities’ like Griff Rhys-Jones, who says he will leave the country – although he lives in a big ranch in Wales and only uses his huge mansion in London on visits) is not to protect ‘grannies’. Klass has not complained about another tax, the so-called ‘bedroom tax’ that is actually being applied by the government, which reduces the benefits received by ‘poor grannies’ and other single people who have a ‘spare bedroom’ in their flats. These grannies are being forced to move into smaller accommodation or be even poorer. Klass had nothing to say about them.

Of course, Klass and Rhys-Jones are really complaining about paying any tax at all. The rich see paying tax as almost immoral – it takes away what they have ‘earned’ through hard work, talent and being clever – although usually it is just luck or being born rich. Anyway, I’m not sure that a 50% increase in the value of a home has anything to do with hard work or talent. But tax is immoral – or so says British PM David Cameron when recently announcing that the ruling Conservatives will cut taxes after the next election

Actually, if you think about it, taxes are the most moral social thing you can do – paying your contribution to the social good and to help others. The problem is that the spending by governments that kow-tow to the rich is often on military hardware, subsidies to large companies to invest and handouts to rich landowners and farmers – and of course taxes on the rich (like a mansion tax) are kept to the minimum.

And wealth may bring ‘happiness’ but it certainly does not bring morality and a ‘help thy neighbour’ philosophy. There are often well-publicised stories about rich philanthropists who set up trusts for the sick, for the arts etc. Actually, trusts are good tax havens for money that rich people don’t know what to do with. And there is way more money that goes to financing lobby organisations and politicians who aim to protect the interests or the rich and the super-rich.

In a great new book, Billionaires: reflections on the upper crust,  (, Darrel M West outlined various social surveys that show the richer a person is, the less likely they are to redistribute some of their wealth and earnings to those less lucky or ‘talented’.  A University of California study found that people driving expensive cars were four times more likely to cut in front of other drivers or ignore pedestrians right of way than those in cheap cars. They considered themselves kings of the highways. In another study, the richer the person, the more likely they were to take candy from a jar left outside a laboratory, despite a sign saying that it was for children only! The New York State Psychiatric Institute surveyed 43,000 Americans and found that, by some wide margin, the rich were more likely to shoplift than the poor. Independent Sector found that people with incomes on an average of $25,000 a year gave away 4.2% of their income while those on over $150,000 a year gave away only 2.7%.

As a UCLA neuroscientist put it: “As you move up the class ladder, you are more likely to violate the rules of road, to lie, to cheat, to take candy from kids, to shoplift, and be tightfisted in giving to others”. Apparently, the richer you get the more you want and the less you want to give. Mike Norton at the Harvard Business School found that, when asked, rich people still felt that they were two or three times short of the money they needed to be really happy!

But so it goes on. There is never too much for some. For example, the world’s most famous bond trader is Bill Gross. He was head of the largest bond fund company in the world for years, PIMCO. But recently, he had been making some bad investment decisions and PIMCO started to lose money for its clients (banks, insurance companies etc). The clients started to withdraw their money and Gross was sacked for failure. But failure came nicely wrapped up in a going away present. He was paid $290m to leave! Bill Gross’ take-home pay was huge but he is not the wealthiest bond fund manager in the world. He is worth only $2bn, while the far less well known David Tepper is worth $11bn and Carl Icahn is worth over $20bn.

Indeed, there are more super-rich people in the world today than ever before. According to a new survey from Wealth-X and UBS (, the number of people with more than $30m in assets jumped 6% to hit a new record of 211,275 in 2014). Among them, they hold a staggering $30trn, or nearly twice the size of the US GDP. Those 211,275 people account for just .004% of the world’s population but hold 13% of the world’s wealth.   Most of these uber-rich hold their wealth in the companies and properties they own and the income they make they hoard up in cash. North America remains number one when it comes to population and wealth. 74,865 people in North America hold some $10bn between them. 69,560 of the ultra wealthy call the US home and hold $9.6bn. Europe has the second-largest concentration of ultra high net worth individuals, followed by Asia, but Asia will overtake Europe by 2027. The ultra wealthy are overwhelmingly male, 87%.

A mansion tax would not be even noticed by these people – although if it were brought to their attention, they would still complain about it being unfair.

The hidden crime of capitalism

November 21, 2014

A recent estimate was made of the economic cost of varied human action globally. The annual economic burden of smoking on health services, shortened life expectancy and illness was found to be the greatest at $2.1trn a year, closely followed by the losses from wars and armed violence around the world and by obesity.

Global economic burdens

These burdens are not just from ‘human action’ but really come from the crimes and waste of capitalism: tobacco companies promoting cigarette smoking, wars provoked by imperialism and nationalism; food companies selling ‘affordable’ junk food with high concentrations of sugar, salt and fats – and of course global warming and climate change.

But one economic burden not recorded in this list is the waste from economic recessions and depressions. The loss of jobs, incomes and assets like homes is no small beer. And the longer the slump, the greater the loss.  This is a hidden crime of capitalism.

The current ‘recovery’ from the Great Recession of 2008-9 has been so weak and so drawn out that the overall loss of value compared with potential output if there had been no slump and/or a quick recovery is huge – probably close to $10trn over five years for the US alone. That ‘damage’ easily matches the damage from smoking over the last five years.

This crime of capitalism is ignored by mainstream economics. For example, Robert Lucas is a Nobel prize winner and leading exponent of the view that modern capitalism is an efficient manager of human resources and the output of labour. He is infamously quoted as saying in 2003, that the problem of depressions had been solved by modern mainstream economics ( In 2010, he argued that there can be ‘shocks’ to the steady equilibrium growth path of capital investment, but they would usually be temporary. Very quickly, growth would return to its previous trend (

Lucas presented the following chart of US economic growth over the last 140 years.  The red line represents trend economic growth and the blue line shows the actual growth rate. In this bird’s eye view, growth has been inexorable and mostly pretty much along the equilibrium trend path.

US real gdp

Or has it? The Great Depression of the 1930s stands out a huge deviation from this scenario, even at this height of observation. Also what is subtly missing from view is the gradual slowdown in trend growth especially since the 1980s. And a closer inspection of the blue line in the last six years reveals a distinct gap from the red line. And there appears to be no quick ‘return to normal’ (see my posts,

Lucas noted this gap too.  For him, the problem this time was that “government is doing too much,” and he specifically highlighted the “likelihood of much higher taxes, focused on ‘the rich’” and a “large increase in the role of government”.  Well, none of those things happened except for the government bailing out the banks and the US economy still has not made up time from those ‘shocks’.

Recent research by economists Robert F. Martin, Teyanna Munyan and Beth Anne Wilson of the US Federal Reserve examined the experience of 23 countries since 1970 ( They found that economic output doesn’t return to normal following a recession, especially a major one like the Great Recession.

Indeed, the gap between potential growth and actual output just gets wider. As a result, the trend growth rate also falls as a consequence. As the chart below shows, a deep slump followed by a weak recovery steadily lowers the long-term growth rate in each successive year.


So there is no return to normal and there has been a permanent loss of value and output for the American people as a result of the housing bust, the global banking crash and the subsequent collapse in investment, incomes and employment.

According the Fed economists research, on average, GDP remains well below its previous trend, even for short and shallow recessions.  On average, there is a permanent loss of output equivalent to nearly 15% of potential GDP growth in deep recessions more seven years later.


As the economists sum it up: “that recessions tend to depress the long-run level of output may imply that demand shocks have permanent effects. The sustained deviation of the level of output from pre-crisis trend points to flaws in the way the economics profession models the recovery of output to economic shocks and raises further doubts about the reliance on measures of output gaps to determine economic slack. For policymakers, the results also point to the cost of recessions, especially deep and long ones”.

So much for Robert Lucas’ confidence in recovery as long as governments don’t interfere. Slumps anyway have lasting damage: incomes, jobs and homes that can never be recovered. And right now that damage is still rising.  It is another economic crime of capitalism.

Red warning lights

November 17, 2014

Speaking at the close of the G20 summit of world leaders in Brisbane Australia, British Prime Minister David Cameron exclaimed that “red warning lights are flashing on the dashboard of the global economy”, threatening another recession.

Of course, Cameron was not talking about the UK economy, which is going great guns, according to the British government, with six months to go a general election. Instead, he was covering his back, so that if any downturn in the British economy took place it could be blamed on the rest of the world. You see, as Cameron put it in an article for the Guardian, don’t blame me, you lefty liberals. If things go wrong from here, it will be because of the Eurozone that you all like so much. “The Eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too.”

But he had to admit also that “emerging market economies which were the driver of growth in the early stages of the recovery are now slowing down. Despite the progress in Bali, global trade talks have stalled while the epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty.”

In effect, Cameron was accepting that capitalism is now global and no one country can escape if there is a crisis or slump in another large one or neighbour. If the Eurozone stays in depression and other major economies in the G20 also slip back into a slump, the UK economy will join them.

The G20 leaders announced that they were pledging to boost real GDP growth in the world economy by an extra $2trn, or a cumulative 2%, by 2018. This pledge was full of holes. First, growth is expected to be very weak over the next four years, at least compared to the rate of world growth before the Great Recession (see my post, So an extra 2% cumulative, or about 0.4% a year, would still mean slower growth than the global average in the last 20 years. Second, this was just a pledge: none of the G20 leaders were committed to implementing any of the measures necessary to achieve it.

The main method for doing this was to increase infrastructure investment (i.e more roads, railways, bridges, dams, broadband and other key long-term projects). A “Global Infrastructure Hub” is to be set up to promote more spending to close what is calculated as $70trn gap in such investment, or 100% of world GDP.

Again, this is likely to be pie in the sky. Throughout the neoliberal period (1980-2007), public investment has been viewed as a dirty word. So it has been systematically cut back.

Public investment

Now the IMF has been calling for action to boost infrastructure spending in its reports for the last year. But when you read the data on this, you find that the main method for the very necessary ‘austerity’ programs made by the governments of the leading economies to manage the extra borrowing and debt built up from bailing out the banks and the loss of income from the Great Recession was by cutting infrastructure spending! Most of such spending is financed by public investment as private capitalist companies are reluctant to fund such long-term risky projects unless backed by governments (the taxpayers). And it is public investment that has been slashed as the first way of getting government spending down (followed by cuts in welfare spending).

Take Japan. In order to try and control its government spending and get its large budget deficit down, the government just stopped its investment programs for the country.

Japan govt inv

Talking of Japan, as Cameron warned the world of a possible new global slump, we got the shock news that the Japanese economy had contracted by another 0.4% in the third quarter of this year and was thus technically in a new economic recession, while the fall in Q2 was revised down further. This was a shock for the mainstream economic forecasters, who had expected an expansion, although some of us had seen it coming (see my post

It seems that the huge jump in sales tax imposed by the Abe government as part of its ‘three arrows’ of reform has driven real incomes for average Japanese households down so much that they have stopped spending. Private consumption is down since April at an annual rate of 10%, buying homes is down even more and most worrying for growth, business investment fell. And we have seen above that government investment has also been cut.

The Abe government now look set to delay its proposed second round of sales tax increase and probably call an early election so that the government can get a suitably long time to impose further measures on the population.

Paul Krugman has piped up in his blog to argue that it was good news that Abe was going to delay the sale tax hike – indeed he should drop it altogether ( Krugman reckons that the Japanese economy is in a typical Keynesian liquidity trap and with interest rates ‘zero bound’ more quantitative easing won’t be enough to get the economy out of dreaded deflation.  What was needed was “a credible promise to be irresponsible”. The government should spend more and not worry about the budget deficit and the government’s debt level. More spending will boost growth and inflation and the deficits and debt will then look after themselves.

Krugman did not tell his readers that just a few years ago he reckoned that more monetary easing and fiscal spending would get Japan out of its hole, when this blog argued that it would not. Who was right? (

As it is, Japan has been running huge budget deficits to try and boost the economy and has not imposed any serious measures of austerity. According the IMF, Japan’s government deficit stood at 7.1% of GDP in 2014, nearly double the OECD average. Japan has reduced its deficit by 30% since the peak of the Great Recession in 2009. But the OECD average reduction is 60%. If we exclude the effects of the cyclical recovery since 2009 on government revenues and spending, then Japan’s austerity program has cut the deficit by 15%, but the OECD austerity average is 60% and Greece’s is over 100%!

What is holding back the Japanese economy is not a lack of government spending or more credit but the unwillingness of the capitalist sector to invest.

Japan Investment

The Abe government has made huge efforts to get the profitability of Japanese capital back to pre-crash levels. And by reducing real wages, it has succeeded somewhat.  But not yet enough it seems.

This is the common story of the weak recovery. The share of new value going to labour has been squeezed through unemployment, low wage jobs that are temporary, casual or part-time, along with cuts in welfare, pensions and higher taxes. So the share of new value going to profit has rocketed. But not enough to get kick-start capitalist investment. So, while Cameron turns the red warning lights on, the IMF now calls for government investment, while governments try to keep spending down.  It’s a funny old mess.

How capitalism survives

November 13, 2014

Last weekend, I attended this year’s London version of the Historical Materialism conference (, which for those who don’t know is an annual gathering of mainly Marxist academics, students and activists organised by the Historical Materialism journal. A host of papers and book launch presentations are made, often bringing out new ideas in the analysis of capitalism.

This year’s main theme was How Capitalism Survives and was apparently attended by over 750 scholars, academics and activists. It’s not possible to attend all sessions, of course, so my review concentrates on the economics papers and even there is sometimes based on reading the papers presented rather than on actually attending the session (so be forewarned!).

How does capitalism survive? Well, according to John Weeks, emeritus professor at SOAS, it’s because the capitalist mode of production has had very few of what could be called proper crises (2014 Weeks_Crisis_Izmir). Weeks reckons that only the Great Depression of the 1930s and the recent Great Recession could be considered generalised crises (“episodes of severe contraction”) that affected the world capitalist economy for any length of time or to any depth. Other so-called crises were merely mild recessions or financial crashes that were short and limited to the national economy concerned.

As for the causes, Weeks argues that it was the breakdown in the circuit of capital and the realisation of money that was the problem and had nothing to do with the accumulation of value in the production process, as advocated by the ‘falling rate of profit’ theorists. As he puts it: “The typical “falling rate of profit” mechanism fails to get out of the starting gate as a candidate for generating cross-country crises, much less global ones.” This is because Marx’s law of a rising organic composition of capital would only generate a gradual fall in profitability and there is no mechanism that decides “a critical value” of profit that could provoke a sudden collapse in production or investment or its simultaneous spread globally.

Well, I beg to differ. Starting with Henryk Grossman ( and continuing with the work of many scholars very recently, such as Tapia Granados (, including my own work and that of G Carchedi (The long roots of the present crisis), we find that there is a causal connection between the movement of profitability, profits and slumps in investment and GDP (and see my paper, The nature of current long depression).

It’s true that many financial crises are not accompanied by a slump or economic recession, as in the stock market crash of 1987, cited by Weeks as an example. But in that case, profitability in the major economies including the US was on the rise. So the crash was short-lived and quickly reversed. But that was not the case in 1974-5, the first worldwide simultaneous slump, triggered by the oil price jump, but after a decade or more of a profitability slide; or in 1980-2, again triggered by energy prices, but again after another decline in profitability. Anyway, I could go on, but I refer you to my paper here (Presentation to the Third seminar of the FI on the economic crisis).

In the same session as Weeks, young economist Juan Pablo Mateo Tome from Kingston University presented a paper on Spain that showed the causal role that falling profitability in the productive sectors of the Spanish economy played in the Great Recession and the subsequent weak recovery (JPMT_Crisis Spain_HM_2014). Similarly, in another session paper, Aberlardo Marina Flores and Sergio Camara Izquierdo, analyse the development of the Mexican economy in the post-war period and find that Mexico’s immediate high post-war profitability deteriorated (The structural causes of the severity of the crisis in Mexico_AMFySCI_GEConLA). The neo-liberal period was designed to counteract that fall through the opening-up the economy to US investment, weakening the labour movement and expanding control of the surplus to the financial sector. The recessions in the US had a deep impact on Mexico as a result, contrary to Weeks’ view above, while ‘financialisation’ weakened the productive sectors.

Financialisation was a theme of another session where Tony Norfield presented his incisive analysis of the dominance of US and UK finance capital in the hierarchy of imperialism ((Norfield-Tony-Finance_the_Rate_of_Profit_and_-Imperialism). The apparently huge profits of the late 1990s and early 2000s were really appropriations from the productive sectors of the major economies and were largely fictitious. Francois Chesnais, the French Marxist economist ( and still going strong at 82 years, argued that finance capital cannot be separated from capital in general, as ‘financialisation’ theorists suggest. Contemporary finance capital is a combination of productive capital lodged in transnational corporations, money capital centralised in very large financial conglomerates (financial capital) and merchant and commercial firms. This facilitates the distribution of surplus value generated by productive capital on a global scale. Both Norfield and Chesnais emphasised the parasitical nature of finance capital in modern capitalism. It helps capitalism survive but at great cost to profitability and investment in productive sectors.

Finance capital at the centre of imperialism was a theme of other papers that looked at hitherto unpublished (in English at any rate) manuscripts and notebooks by Marx on his developing ideas on imperialism and finance capital. Lucia Pradella launched her new book on Globalisation and the Critique of Political Economy: New Insights from Marx’s Writings (, in which she argued that, as imperialism and finance capital became an increasing feature of modern capitalism (with its productive potential becoming exhausted in the mature capitalist economies), Marx still preserved the continuity of his key categories in the capitalist mode of production. Imperialism and globalisation were counteracting factors to the deterioration of profitability and the extraction of more surplus value in the mature capitalist economies.

This seemed to me to be an important answer to the question of how capitalism survives: through a global search for more labour to exploit and through the centralisation and concentration of capital in finance. Both developments have a finite end, however, while causing increasing recurrent crises of production.

The attempt to claim that Marx did change his theory of crisis in later years as capitalism matured and finance capital grew in dominance has been a familiar theme in recent years, based on the scholarship of those Marx’s manuscripts and notebooks in the MEGA project. It is claimed that Engels’ editing of Marx’s Capital was a distortion and, in particular, Marx’s law of the tendency of the rate of profit to fall had been dropped by him in later works, but Engels reinstated it in his editing. See Michael Heinrich’s work ( and the reply to (and debate with) Heinrich by Carchedi and me (

Well, Fred Moseley introduced a new translation into English of Marx’s four drafts for Volume 3 of Capital by Regina Roth, where Marx’s law of profitability is developed and showing how Engels edited those drafts for Capital (Moseley intro on Marx’s writings). Contrary to the view of Heinrich and others, Moseley shows that much maligned Engels did a solid job of interpreting Marx’s drafts and there was no real distortion. “One can, therefore, surmise that Engels’ interventions were made on the basis that he wished to make Marx’s statements appear sharper and thus more useful for contemporary political and societal debate, for instance, in the third chapter, on the tendency of the rate of profit to fall.”

Talking of scholarship on Capital, after the end of the HM conference, I spoke as part of a panel that included Chris Arthur, the renowned Marxist philosopher, at the launch of Alex Callinicos’ new book, Deciphering Capital.  I reviewed Callinicos’ book in a recent post ( At the launch, I concentrated on Callinicos’ account of Marx’s theory of crisis and how that could be ‘deciphered’ pretty clearly in Capital (my speech is here, Callinicos speech).  And

Every year, at the HM conference, the Isaac and Tamara Deutscher memorial prize for the best Marxist book of the year is awarded ( And the author of last year’s winner delivers a lecture. Last year’s winner was The making of global capitalism: the political economy of the American Empire by Leo Panitch and Sam Gindin ( Gindin is the former Research Director of the Canadian Autoworkers Union and Packer Visiting Chair in Social Justice at York University and Panitch is Canada Research Chair in Comparative Political Economy and Distinguished Research Professor of Political Science at York University. The two have worked together on many books and publications.

I missed their speech but from the book I can glean their main arguments. Panitch and Gindin challenge the widespread notion that globalisation has led to the retreat of the state. The argument that states still have a role in directing global capitalism is obviously right. America is still the leading imperialist power and leads the other imperialist powers in an ‘informal empire’. But in addition, Panitch and Gindin maintain that workers are generally weaker now and the American state has greatly strengthened since the post-1973-83 crisis.

I disagree. Is American imperialism is actually stronger now than 50 years ago? Contrary to Panitch and Gindin’s view, the neoliberal period was not a Golden Age like the post-war period, if we mean by that fast growth in GDP, high profitability and productive investment. Sure, growth in the 1980s and 1990s was faster than in the crisis period of the late 1960s and 1970s, but it was still slower than in the first Golden Age and investment was way less productive. Just because in the neoliberal period the finance sector had a bonanza and thus so did American imperialism does not mean it was a golden age.

Another area where I have a strong disagreement is with Panitch and Gindin’s explanation of capitalist crisis as expounded in their book. They argue that the crisis that erupted in 2007 was not caused by a profit squeeze or collapse in investment due to overaccumulation. Instead, the authors prefer to explain the Great Recession as a result of stagnating wages, rising mortgage debt and then collapsing housing prices, causing “a dramatic fall in consumer spending”. In my view, as I have expounded in several posts (, this common and dominant view (in the mainstream and post-Keynesian economic circles) about the Great Recession being caused by rising inequality and debt does not bear up to the facts.

That this view has become mainstream is confirmed by the news that Thomas Piketty has won the FT best business book of the year for his monumental Capital in the 21st century, a title pinched from Marx but actually not a critique of capital or the capitalist mode of production at all, but an analysis of the recent rising inequality of wealth in modern capitalist economies (see my post, Inequality, not crises, is the buzz word about capitalism.

This year’s Deutscher prize winner was entirely different. It went to Roland Boer for his book, In the Vale of Tears, ( the concluding volume of a five volume series, The criticism of heaven and earth, a critical commentary on the interactions between Marxism and theology in the work of the major figures of Western Marxism. Boer is from Australia, now a professor at Renmin University Beijing, and considers himself a Christian Communist. His speech next year should be interesting.

By the way, Piketty gets £30,000 for his prize, Boer £500.

From Poroshenko to Putin – it’s all downhill

November 10, 2014

The temporary truce between Ukraine and Russia seems over, with the news that the Kiev government has launched a new offensive against the separatist enclaves in eastern Ukraine, which are backed by the Russians.

This military upsurge has followed quickly after the two elections in Ukraine. The first was in the bulk of the country, where the pro-EU parties won a significant majority in a new parliament in Kiev, dividing the bulk of the vote between the party of President Poroshenko, the chocolate manufacturing oligarch and the neo-liberal party of the current prime minister Arseniy Yatsenyuk. The second was in the separatist areas, where the pro-Russian militia groups rule by the gun. This provoked the new action by the Ukraine military and the corresponding mobilisation again across the border by Russian forces.

Ironically, just before this Ukraine and Russia had finally agreed a deal for Ukraine to get its energy supplies for the winter, with Ukraine agreeing to pay its back debts of $1bn and to pay for future energy in instalments. The issue here, however, is whether Ukraine is really going to find the money to pay for it. It is going to need a substantial commitment from the EU and the IMF, both of which are stalling on stumping up more money because the Ukraine economy is on its knees and both the government and Ukraine’s private sector are close to defaulting on their debts.

Ukraine’s central bank reserves have fallen to a near decade low of just $12.6bn, after the country spent billions servicing foreign debts, protecting the currency and repaying parts of a Russian gas bill.

UKraine reserves

The decline in reserves from $16.3bn at the end of September pushes Ukraine perilously close to a danger zone where its reserves only cover a few months of imports and Ukraine is unlikely to receive the second tranche of its $17bn loan programme from the IMF. Kiev had expected that a second tranche, worth $2.7bn, would come in December after the Fund’s mission later this month. But that now looks unlikely because, despite the election of a new parliament, a new coalition government has not yet been formed.

And $17bn anyway is not likely to be enough. That’s because the Ukraine economy has imploded, as predicted last August (see my post, The economy has contracted by nearly 10% in one year, as a result of the collapse of production in mining and other basic industries, much of which are in the separatist areas, and, of course, the ‘collateral’ damage from the war has been significant. So it is more likely the IMF will have to cough up nearer $20bn, and with the real risk that it may never see that money paid back.

So Kiev only has €760m in aid from the EU this year. The finance ministry says it has enough funds to cover its external debt obligations until the end of January, but Kiev has asked Europe for an additional $2bn euros to cover its gas company Naftogaz’s bills for the current heating season. And the Russians are expecting $4.5bn in payments for energy supplied.

Ukraine’s currency, the hryvnia, continues to dive to new lows against the dollar and the euro, making payments for imports and existing debts ever more difficult. Ukraine’s public don’t want to hold hryvnias and desperately look for dollars and other foreign currencies.  Earlier this year, the IMF estimated that if the hyrvnia dropped below 13 to the US$, then Ukraine’s debt burden would be too much to manage on its own. The currency is now below that level.


And the government is still supposed to honour its existing debts, repaying bonds that mature in 2015. Usually governments just issue new bonds to pay for old ones maturing. But who wants to buy Ukraine government bonds now?   And who has the greatest burden of foreign currency debt among emerging capitalist economies? First, Romania (within the EU) and then Ukraine.


Ironically, the existing bonds are mostly owned by Russian banks. In addition, an American hedge fund Templeton owns about $5bn worth, or 40%, which they bought last year as a punt on Ukraine getting IMF support and turning things round. Both the Russians and the Americans are looking sick right now.

What’s worse is that the former ousted pro-Russian president Viktor Yanukovich had arranged a special €3bn bond from Putin to help out before he was booted out and there is a clause in that contract that allows Putin to ask for his money back if Ukraine government debt rises above 67%, or two-thirds of GDP. Well, given the fall in GDP this year and the collapse of the currency, that debt ratio has been reached now.  The EU could bail Ukraine out but wants Ukraine to sign a free trade deal first. The Russians say if the trade deal is signed, they will call the bond in. So the EU has postponed a trade deal until the Russian special bond expires at the end of 2015.

Putin could engineer a default by calling in that bond. The problem is that it would mean the Russian banks taking a big hit to their balance sheets. Indeed, Russia itself is in serious economic trouble. With falling oil prices and sanctions imposed by the EU and the US on Putin, the Russian rouble has taken an almighty plunge too. Last week the rouble fell 8%, the biggest weekly fall in eleven years.

The Russian central bank has been trying to prop up the rouble by selling its FX reserves of dollars. Russia has built up a sizeable arsenal of dollars and gold over the years of high energy prices, but now it is leaking these like a boat with a big hole. So bad was the recent leakage that it decided to stop selling its reserves and let the rouble slide. And slide it did – to a record low against the dollar. And nobody wants Russian government bonds or to invest in Russian companies any more. On the contrary, Russia’s oligarchs want to get their money out. But as they rely on Putin’s support, they must be careful.


Russia’s FX reserves have fallen to $439bn from $509bn at the start of the year and Russia’s former finance minister and current chairman of the Committee of Civil Initiatives Alexei Kudrin reckons that available reserves now barely cover six months of imports at current prices. Six months is the critical level to insure the Russian population against the possibility of severe hardship in case the crisis deepens and the Russians are deprived of foreign goods. (Russia imports a large amount of staples including butter, cheese, and meat.)

Oil and gas revenues still account for almost half of Russia’s federal budget along with 10% of the country’s GDP and with prices dropping, Putin looks set to impose a big round of austerity on the Russian people. Russia’s Ministry of Finance is proposing a 10% cut in the budget over the next three years.

The Russian economy is virtually in recession now and Russia’s ‘empire’, the so-called Commonwealth of Independent States and the oil-rich Kazakhstan and not so rich Tajikistan, Kyrgyzstan, Uzbekistan, Belarus, Armenia and Azerbaijan, are also taking the pain. The problem is the massive trade dependency these countries have on their former soviet master. Kazakhstan, the second largest of the ex-Soviet economies, already devalued its currency, the tenge, last April by 19%. But now it faces another devaluation with the rouble dropping 30%. The Kazakh government also slashed its growth estimates last month.

CIS loss

Putin may have weakened the ability of the neoliberal, pro-EU leaders in Kiev to join ‘Europe’ so Ukraine will remain an economic disaster, but, in turn, American and European imperialism is inflicting significant economic pain on Russia.

Addendum: Tuesday 11 November from the FT:

“Ukraine’s hryvnia has dived 6.7 per cent to a new record low of 15.85. The IMF programme now looks wildly off-track, and an increasing number of analysts and fund managers predict the country will have to default on its sovereign debts and restructure.

The world economy in low gear

November 8, 2014

Next week, all the leaders of the top G20 nations meet in Brisbane Australia. The OECD has issued its latest forecast for global economic growth for that meeting to consider ( It’s the usual mantra from the all the international agencies, namely that global growth is still “stuck in low gear” i.e. well below the trend growth before the Great Recession; BUT don’t worry, next year things are going to pick up.

low gear

As the OECD puts it in its report, the world economy “is expected to accelerate gradually if countries implement growth-supportive policies”. Note the caveat, IF the G20 leaders  adopt more ‘growth-supportive’ measures.

The OECD reckons that global real GDP growth will be just 3.3% this year, but will “accelerate” to 3.7% in 2015 and 3.9% in 2016. But even that will be “modest compared with the pre-crisis period and somewhat below the long-term average.”

This mild acceleration, assuming it is achieved, and that is open to serious doubt, will be led by the US economy, forecast by the OECD to grow by 2.2% this year, jumping to 3% in 2015 and 2016. The OECD recognises that Europe and Japan will be lucky to grow more than 1% over the same period.

The stagnation in Europe, particularly the Eurozone, was also confirmed by the latest forecasts from the EU Commission, also released last week ( The Commission cut its forecasts yet again, saying the Eurozone would expand by only 0.8% this year, 1.1% next year and by 1.7% in 2016 – a level the Commission said six months ago would be achieved next year. So once again, the Commission has cut its more optimistic forecasts: it always jam tomorrow.

revised forecasts

The OECD commented in its report that “we have yet to achieve a broad-based, sustained global expansion, as investment, credit and international trade remain hesitant,” And the the EU’s economics commissioner, Pierre Moscovici, repeated much the same thing: “There is no single and simple answer. The economic recovery is clearly struggling to gather momentum”.

What puts some doubt about even the modest acceleration in growth that the OECD expects globally and the EU Commission expects for the Eurozone is that the high frequency indicators about future economic activity are beginning to turn down.  The Markit purchasing managers indexes are increasingly used as indicator of future activity. They unreliable because they are only surveys of corporate executives about their activity, not hard data. But the latest outcomes for October show a slowing of expansion (index above 50) for the world as a whole, led by the developed economies.

business activity

Why has the recovery since 2009 in the G20 economies been so weak? Well, the EU Commission ventured some reasons. As it put it: “recoveries following deep financial crises are more subdued than recoveries following normal recessions…recent estimates suggest that it would take about 6½ years (median) or eight years (mean) to return to the pre-crisis income level in the wake of a deep economic and financial crisis”… but in fact, “the recovery from the recession in 2008-09 has been slower than any other recovery in the post-World War II period on both sides of the Atlantic.”

So the global financial crash is the biggest factor to make recovery slower than normal. And it is true that the crash and the subsequent bailout by governments across the major economies by raising more debt has left a heavy burden of debt financing, despite near zero interest rates. As the OECD shows, advanced economy overall debt levels are actually higher now than they were in 2007. And China too has built up debt that is close to many advanced economies.

debt levels

The EU Commission makes the point that a possible reason why the US economy has recovered better is that “US corporations have cut debt more than those in the euro area. This has been supported by positive profitability trends providing companies in the US with the internal funds necessary for adjustment of balance sheets.”  The EU Commission argues that “delayed deleveraging in Europe can be expected to weigh on investment activity and thus to explain partly the gap between the contributions to GDP growth in the euro area and in the US.”

Better profitability has enabled US corporations to hoard cash, buy back their own shares to boost the market value of the company and thus executive bonuses and share options, but it has also allowed a relatively faster rise in productive investment, albeit still poor compared with before the Great Recession. Investment in productive assets per head of population still has not reached the peak levels of 2007 in any of the major advanced capitalist economies, but at least the US has done better.

investment and consumption
Interestingly, the OECD shows that private consumption per head has not fallen at all since 2005. The Great Recession was not triggered by a collapse in consumption but in investment – an argument against the Keynesian view of crises, which I have raised in several posts (  Indeed, there is a very high correlation between US business investment and US real GDP growth as the graph below shows.

US investement and growth

Where investment goes, so will growth. And, in my view, investment follows profits. And not just my view, as I remind readers again of the empirical work of Tapia Granados and others (see my post,  Profits call the tune.

But in the US, where the economic recovery has been greatest relatively, corporate profit growth has now ceased.

US profits

In the graph below, I have lagged investment growth (blue line) by one year against profit growth (red line). It shows that when profits turn down and eventually go negative, one year later or so, business investment collapses and when profits expand, investment follows within a year.

profits and investment

Currently with profits not growing, investment will follow by mid-2015, this suggests. And with investment closely correlated with GDP growth, the risk of recession in one year or so looks high. The world economy would then be in reverse gear.

Who won the US congress mid-term elections? – the no vote party again

November 6, 2014

Who won the elections? The Republicans! Well, yes. But the real winners were yet again the no vote party. We don’t yet have the turnout of voters for the 2014 mid-term Congressional elections, but it is probably around just 40% of those of voting age.

voter turnout

That means that 60% of adult Americans did not reckon that it mattered who won. A plague on both your houses – Republican or Democrat; Senate or House – that was their’ cry. This is the real message of the election. For most voters the failure of the Obama administration to restore the incomes of average Americans since the end of Great Recession in 2009 is only matched by the incompetence and downright complacency of the previous Bush administration to see the slump coming and do anything about it, except to bail out the bankers and other crooks who triggered it.

There has been a steady disillusionment with their ‘democratic’ representatives for several decades. Back in the 1960 and 1970s, more than 55% of potential voters turned out in the mid-term elections. In 2010, despite new technology, better regristration and postal voting, that percentage reached a record low of 41%. If we just consider those eligible to vote and exclude ‘non-citizens’ and prisoners, there has been a similar fall in voting shares, in both presidential and congressional elections.

VEP turnout

Despite the optimistic noises from the media of a ‘high turnout’ in some areas, I reckon that the 2014 election is likely to reveal a new low, or something close. This will be especially so in the strong Democratic states like California and New York (36%), where working-class disillusionment with Obama’s compliance with the bankers and the rich, while living standards stagnate or even decline, has been strongest – although Republican Arizona polled just 36%.

The growing strength of the ‘no party’ is not unique to US congressional elections. It has been the same in presidential elections (see my post, And it has been the same in elections in all the major capitalist economies, from the UK in 2010 when the Conservatives took office with the lowest share of the vote for a governing party ever to Germany in 2012
( and Japan in 2012
( with Europe in 2014

The ‘democratic deficit’ gets wider.


“…as of today, according to numbers from the Associated Press, a bit over 83 million people voted. As a share of the voting-eligible population, that is 36.6 percent … if the national turnout rate doesn’t reach 38.1 percent, it would be the lowest turnout since the midterm elections of 1942  in the middle of the Second World War.”

CLASS and inequality

November 4, 2014

Last weekend, I attended a symposium hosted by CLASS, the Centre for Labour And Social Studies (clever acronym, eh?). This is a left-wing think-tank in the UK funded by various large left trade unions in Britain ( It aims to promote a better analysis of the nature of the capitalist crisis in the UK and policies to defend the interests of the majority.

I have referred to the activities of CLASS before when it was first started up. See my article in Socialist Review in April 2013 ( My main complaint then was that CLASS, in its excellent attempt to oppose the ideas and policies of mainstream economics and the right-wing UK government, relied entirely on the Keynesian ‘alternative’. For this criticism, I got some flak from the radical wing of ‘post-Keynesian’ economists in Britain (see my post,

Well, the latest conference was no different. Entitled What Britain needs, the main theme was to challenge the “inequalities in wealth and power”. Inequality has become the buzzword among leftist thinking in the major economies in the recent period. That’s for two reasons.

The first is that inequality of wealth and income has risen significantly in the past 25 years in the major economies to levels not seen since the 19th century. Thomas Piketty has demonstrated this development in magisterial detail in his best-selling book, Capital in the 21st century (see my numerous posts, And the recent Credit Suisse report on global wealth, among others, has shown the extreme extent of inequality globally

But the other reason is that mainstream economics and much of heterodox economics, including post-Keynesians, want to see inequality of income and wealth as the contradiction in modern capitalism ( and, more than that, as the main cause of the Great Recession that hit capitalism globally in 2008-9 (see my post,

I have dealt with these arguments in various places on my blog and in various papers ( It is my contention that, while inequality is part of all class societies and thus is also endemic to capitalism, it is not the central contradiction of the capitalist mode of production and so not the reason for recurring capitalist slumps and the failure of capitalist production to meet the needs of the majority. The central problem is not the distribution of wealth and income after it has been created by labour. Instead it is the mode of production itself: production for the profit of the owners of the means of production against the social need of the majority. A profit-making mode of production is the key contradiction, not inequality.

This Marxist view gained no voice at the CLASS symposium at all. The main speakers at the plenary session outlined the shocking state of Britain: inequality; failure to grow; falling incomes for the majority; the decimation of the welfare state and public services through privatisation and austerity etc. But what was the alternative solution?

For Professor Doreen Massey it was to get out into the streets and buses etc and combat the ruling neoliberal propaganda that dominated the minds of the public and led them to support immigration controls, reduced welfare benefits and balancing the budget. The assumption here was that we ‘left academics’ knew that neoliberal ideas were nonsense but that the media has brainwashed the masses. Yet all proper public opinion polls in Britain show overwhelming opposition to privatisation; for a defence of the national health service and state education; and even for renationalisation of transport, energy and other utilities (see my post, It is not the British people who have been brainwashed into accepting ‘neoliberalism’, but the leaders of the labour movement.

This was confirmed when Angela Eagle, the Chair of UK’s opposition Labour Party, spoke to tell us that the rising inequality and neoliberalism of the last 29 years (since Thatcher) was appalling, quietly forgetting that since 1979, Labour had been in government for 13 out of those 29 years. Under PMs Blair and Brown, Labour governments supported deregulation of the financial sector, bringing market forces and private capital into the NHS, reducing taxes for the rich (Labour leader, Peter Mandelson: “we are intensely relaxed about people getting filthy rich…. as long as they pay their taxes”).

Eagle admitted that Labour had accepted the neoliberal consensus in the past, but now we must build a ‘new consensus’. You might ask: surely we must aim to break with the ruling consensus not build a new one? But there was a clear hint in what Eagle and another main speaker, Will Hutton, the former editor of the Observer and now a principal of an Oxford college, said, namely that, such was the terrible levels of inequality now in Britain, that some members of the ruling class or the establishment (that they had been talking to) were also worried. So it may be possible to form a new ‘consensus’ with them against the Tory government and neoliberal policies. Presumably this would be an alliance with ‘good-thinking’ rulers and the working class against ‘bad-thinking’ rulers.

Hutton did say that the reason for the crisis in the British economy and its failure to deliver for the needs of the majority was not so much inequality per se but the question of ‘ownership’, i.e. how companies are owned and controlled. He exclaimed that Clause 4 in the Labour Party constitution that called for a socialised economy and had been dropped by the Blairite leaders of New Labour was correct and should be restored. That sounded promising but then Hutton explained what he meant by social ownership, namely better company law so that workers and shareholders control their bosses and “designing markets for the people”. You see what was wrong was that Britain was a “dysfunctional” capitalist economy. By implication, he was saying that if we could get it ‘functioning’, capitalism would be fine. This was a familiar theme from Hutton, who had put a similar position at the recent Rethinking Economics conference in London (see my post,

In the many working papers written by various economists and others for CLASS, one by Stewart Lansley came into view ( Called Rising inequality and financial crises: why greater equality is essential for recovery, Lansley argues that there is a strong link between rising inequality and instability in capitalism, citing the examples of rising inequality just before the Great Depression of the 1930s and now before the Great Recession. The reason Lansley presented is the classic one floated by Keynesians and even mainstream economists that, if wages are held down and all the income goes to the rich, consumer spending falls, causing a collapse in ‘effective demand’. Also households resort to borrowing more, creating debt or credit bubbles that eventually cause a financial crash. Again, I have dealt with this view of the cause of the Great Recession in several posts (

One of the implications of this ‘inequality’ view is that each major capitalist crisis can have a different cause. As Lansley admits, the crisis of the 1970s was not due to a lack of wages, but in that case because “wages have grown too quickly”. This neo-Ricardian view of crises revolves round the idea that it is the wage/profit share that matters: so some crises are caused by workers having ‘too high’ wages. It is very much the same idea that we get more sophisticatedly from post-Keynesian economists like Ozlem Onaran, who also spoke at the CLASS symposium, namely that the Great Recession was a ‘wage-led’ crisis (i.e. wages are too low) while the 1970s crisis was ‘profit-led’ (wages too high?) – see her new paper for CLASS, ( There is no mention here of the law of profitability that Marx expounded to explain recurring crises under capitalism.

The ‘wage-led’ distribution theory leads to what Lansley concludes: that if we get the ‘right’ level of wage share, then capitalism will be fine. As he puts it: “the great concentrations of income and wealth need to be broken up and the wage share restored to the post-war levels that brought equilibrium and stability”. Apparently, British capitalism was fine just after the war due to the right ‘wage share’ and level of inequality – ah, those golden years of enforced 1940s austerity.

In one of my posts on this view of inequality, I asked the question: do the proponents of inequality as the main cause of crises (or at least this crisis) think that redistributing income or wealth would be sufficient to put capitalism on the road to growth without any further catastrophic slumps? Or do they agree that only replacing the capitalist mode of production through the expropriation of the owners of capital and the establishment of a planned economy based on ownership in common can do the trick? Lansley apparently thinks the former and so do the speakers at CLASS it would seem.

The story of QE and the recovery

November 2, 2014

There were two interesting developments in the world economy last week that some have called a sea change. First, the US Federal Reserve bank ended its programme of what is called ‘quantitative easing’ (QE). This is the purchase by the central banks of government, corporate and real estate bonds paid for by ‘printing money’, or more precisely creating reserves of money in banks.


This ‘unconventional’ monetary stimulus was adopted by the Fed and other banks after they had cut their interest rates for lending to commercial banks (the ‘policy rate’) to zero and the major economies were still struggling to get out of the Great Recession. The argument was that once interest rates were ‘zero-bound’, further stimulus to the economy would have to be ‘quantitative’, based on more money quantity rather than just being cheaper to borrow (lower interest rate).

Well, at its meeting last week, the Fed announced that its QE programme had finally ended and there would be no more further purchases of bonds paid for by printing money. Just a couple of days later, the Bank of Japan announced the opposite in a surprise move (the vote to do so was just 5-4). The BoJ is going to expand its current QE programme by increasing the annual rate of purchases of government bonds and other private sector bonds.

Why the different policies? Well, the Fed thinks that the US economy and, in particular, its labour market, is recovering sufficiently to manage on its own and any further stimulus might even be inflationary. On the other hand, the Japanese economy is still on its knees and may even slip back into recession (see my post,
So the BoJ is trying to get the economy out of its mire with an extra injection of QE in 2015.

But has QE worked and will it work in getting capitalist economies back to levels of real growth achieved before the Great Recession hit in 2008? The answer is clear: no.

Since the end of the Great Recession in mid-2009 and the use of QE since 2010 by various central banks, the Fed, the BoE, the BoJ and to some extent, the ECB, global growth has remained weak and below trend and the recovery in employment and investment has been poor.

In Japan and the Eurozone, recession and deflation (not inflation) are spectres haunting their economies. Indeed, there is talk currently in mainstream economics of ‘secular stagnation’ taking over in the major economies (see my post, and the major economies will never ‘return to normal’ (see my post,

Now the argument against this might be that, at least in the US and the UK, where QE has been employed the most, there has been an economic recovery. Well, I have discussed the frail and imbalanced nature on the UK economic recovery in various posts (see And if we consider the US, average real GDP growth since the end of the Great Recession has been only about half the rate than before (graphs from Doug Short’s site).


The gap between where US real GDP per head should have been (red line in graph) and where it is now after the Great Recession (blue line) is widening, not narrowing.

GDP per cap

Also last week, the latest (advanced) figure for US real GDP growth for the third quarter of 2014 was released. It showed a rise of 3.5% qoq after a rise of 4.6% qoq in Q2, after a fall of 2.1% qoq in the ‘winter’ Q1 (see my post, That looks good, until you consider the underlying data.

In Q3, year-on-year growth was still more or less where it has been for years, at 2.3%.  And it seems that in Q3, growth was supported mainly by more government spending and better trade figures. US domestic private sector growth actually slowed.  The contribution to the growth figure from private consumption fell from 1.75% pts to 1.22% pts, or from 38% of total growth in Q2 to 35% in Q3. The contribution from business investment fell from 1.45% pts to 0.74% pts, or from 32% of total growth to just 21%. What kept growth going was extra defence spending, where the contribution to growth nearly tripled; and a huge rise in the contribution of trade overseas, as oil imports plummeted in both price and volume, and so provided a boost to domestic gross product.

GDP contributions

Most important, business investment (as a share of GDP) has still not returned to levels seen before the Great Recession after six years.  US businesses have used the sharp recovery in the mass of profit from the end of 2008 mainly to hoard cash abroad, or to pay larger dividends to shareholders or buy up their own shares to boost the market value of the company. Investment in new technology or plants to employ people has come last. And now there are just some signs that corporate profits may have peaked and, as profits lead investment, investment growth could slow sharply or even reverse next year (see my post,

So what has been the effect of QE? Well, the theorists of the quantity theory of money, the 20th century exponent of which was the right-wing economist Milton Friedman, argue that by a judicious control of the right amount of money in the economy by a central bank, an economy can be kept on an even keel and grow steadily (as long as, of course, governments and trade unions don’t interfere with markets).

Former Fed Chair Ben Bernanke has been a lifetime supporter of Friedman’s monetarist solution. In a speech in 2012, Bernanke reiterated his longstanding claim that “purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero”. Bernanke reminded us that “Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan’s deflationary trap.” (see my post,

The famous monetarist formula is MV=PT, where M is the total money in circulation, V is the velocity or rate of turnover of that money (changing hands) and P is the level of prices in an economy and T is the level of transactions (activity or sales) in an economy. The monetarist argument is that an injection of more M (with V steady) will either raise prices (inflation) or boost the real economy (transactions).

Well, there certainly has been a huge injection of M. In the US, the Fed has increase the monetary base from 3% of GDP to 15% and the BoJ has raised it to over 30%.

monetary base growth

But real economic growth has not responded. And we can see why when we look at the ‘money multiplier’, the ratio of the amount of money printed by the Fed and the amount of money flowing into the wider economy.

money multiplier

During the Great Recession, the money multiplier plummeted as the economy shrank and the quantity of money out there fell accordingly. But the injection of more money by the Fed has done nothing to reverse that since the end of the slump. To use the famous phrase, the Fed has been pushing on string and the other end of the string (the wider economy) has not moved.

The quantity theory of money and its policy instrument, QE, has been shown to be unrealistic and a failure. In the monetarist formula, M has been increased hugely but P (prices) has hardly moved up and T (transactions) has also stagnated. What has happened is that V (velocity or the turnover) of money has dropped accordingly.

The reason is because the quantity theory is back to front (see my post,
An endogenous theory of money (of which Marx was an early exponent) would start the other way round: it’s demand for credit or money that drives the supply of money, not supply creating demand. And the demand for money has been weak because economic activity is weak. To use another cliché: you can bring a horse to water, but you cannot make it drink.

QE has not worked in raising rates of economic growth back to pre-crisis levels. So where has all the money gone? It has gone into the banking system to shore up their balance sheets and restore their profits. And it has engendered a massive bubble in financial assets; and the prices of government and corporate bonds and most of all, stock prices, have rallied over 73 months to record highs.

As I write, the US stock index has hit a new high (after the short ‘correction’ in early October – see my post,
Despite the end of QE by the Fed, the decision of the BoJ to expand QE and the possibility that the ECB will soon follow has fuelled another leg up in the stock markets.

A Keynesian economist, Robert Farmer, wrote some books a few years ago, arguing that the best way to kick-start the economy was for the Fed to buy stocks and shares directly as part of a QE programme. Farmer reckoned this would restore ‘animal spirits’ and business ‘confidence’ and get businesses to invest more (see my post, Well, the experience of the last few years has refuted that idea. The real economies of world remain in the doldrums while stock markets reach rocket highs. The only beneficiaries are the top 1% everywhere, who own the bulk of financial assets, rather than homes, like the middle classes.

assets stocks

The latest BoJ expansion, contrary to the expressed views of the mainstream economists (Bernanke, Krugman etc), won’t get Japan out of its stagnation (see my post, The US and the UK appear to gaining some traction, but if profits stop rising next year, that could turn round. And the rest of the major economies globally have been slowing down significantly. Forecasts for global growth next year have been consistently lowered by the major international agencies (see my posts,
That means continued unemployment for millions and stagnant real incomes in many major economies.

And the risk is that if the Fed has now ended its QE programme and does implement a hike in interest rates in 2015, then the financial boom will also collapse and profits will begin to fall, increasing the risk of a new slump (see my post,


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