The end of QE

It’s an historic day in global central bank monetary policy since the end of the Great Recession.  The US Federal Reserve Bank feels sufficiently confident about the state of the US economy and, for that matter the rest of the major economies, to announce that it has not only ended quantitative easing (QE)  but that it is now going to reverse the process into quantitative tightening.

QE was the policy of pumping money (by creating bank reserves) into the financial sector by buying government and corporate bonds (and even shares) in order to create enough cash in the banks to lend onto households and companies and keep interest rates (the cost of borrowing) to near zero (or even below in some countries).  QE was the key monetary policy of the financial authorities in the major economies, particularly in the light of little fiscal or government spending as a second or alternative weapon.  Fiscal austerity was applied (with varying degrees of success) while monetary policy was ‘eased’.

But QE was really a failure.  It did not lead to a revival of economic growth or business investment.  Growth of GDP per head and investment in the major economies continue to languish well below pre-crisis rates.  As I have argued in this blog, that is because profitability in capitalist sector remains below pre-crisis levels and well below the peaks of the late 1990s.

What QE did do was fuel a new speculative bubble in financial assets, with stock and bond markets hitting ever new heights.  As a result, the very rich who own most of these assets became much richer (and inequality of income and wealth has risen even further).  And the very large companies, the FANG (Facebook, Amazon, Netflix and Google) in the US, became flush with cash and doubled-up on borrowing even more at near zero rates so that they could buy up their own shares and drive up the stock price, hand out big dividends to shareholders and use funds to buy up even more companies.

But now eight years after QE was launched in the US, followed by the Bank of Japan, the Bank of England and eventually the European Central Bank, the US Fed is preparing to reverse the policy.  It has announced that it will start selling off its huge stock of bonds ($4.5trn or 25% of US GDP at the last count) over the next few years.  The sell-off will be gradual and the Fed is cautious about the impact on the financial sector and the wider economy.  And it should be.

Financial markets won’t like it.  The drug of cheap (virtually interest-free) money is being slowly withdrawn.  The plan is to avoid ‘cold turkey’, but even so the stock and bond markets are likely to sell off as the supply of free money begins to fall back.  More important is what will happen to the productive sectors of the US economy and, for that matter, to the global economy, as this cheap money slowly declines.

The Fed sounds confident.  As Janet Yellen, the head of the Fed put it in the press conference yesterday: “The basic message here is US economic performance has been good; the labour market has strengthened substantially.  The American people should feel the steps we have taken to normalise monetary policy are ones we feel are well justified given the very substantial progress we have seen in the economy.”

This confidence is being increasingly backed up by the mainstream economic forecasters.  For example, Gavyn Davies, former chief economist at Goldman Sachs and now columnist at the FT, reports that his Fulcrum ‘nowcast’ activity measures reveals the “growth rate in the world economy is being maintained at the firmest rate recorded since the early days of the recovery in 2010. The growth rate throughout 2017 has been well above trend for both the advanced and emerging economies, and the acceleration has been more synchronised among the major blocs than at any time since before the Great Financial Crash.”  He has the advanced economies growing at 2.7% and the world economy at 4.1%, with the US growth rate now around 3%.  This all sounds good.

And yet the long-term forecasts of the Fed policy makers for economic growth and inflation remain low.  Indeed, there are some important caveats to this seeming confidence.  First, there is little sign of any recovery in business investment.

Second, far from profits in the productive sectors racing ahead, overall non-financial corporate profits in the US are falling.

And equally important, as the recent Bank for International Settlements quarterly review has highlighted, corporate debt is very high and rising, while the number of ‘zombie’ companies (those hardly able to meet their debt payments) are at record levels (16% in the US).  At $8.6 trillion, US corporate debt levels are 30% higher today than at their prior peak in September 2008.  At 45.3%, the ratio of corporate debt to GDP is at historic highs, having recently surpassed levels preceding the last two recessions.  That suggests that increased costs of debt servicing from rising interest rates driven by the Fed’s ‘normalisation’ policy could tip things over, unless profitability recovers for the wider corporate sector.

As the BIS summed it up, “Even accounting for the large cash balances outstanding, leverage conditions in the United States are the highest since the beginning of the millennium and similar to those of the early 1990s, when corporate debt ratios reflected the legacy of the leveraged buyout boom of the late 1980s.  Taken together, this suggests that, in the event of a slowdown or an upward adjustment in interest rates, high debt service payments and default risk could pose challenges to corporates, and thereby create headwinds for GDP growth.”

And this is just at a time when the US Fed has decided to hike its short-term policy interest rate and cut back on the lifeline of cheap money to the banks.  As I have pointed out before, during the Great Depression of the 1930s, the Fed did something similar in 1937, reversing its policy of cheap credit when it thought the depression was over.  That led to a new slump in production in 1938 that only the second world war ended.  The risk of repeat remains.

 

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Blockchains and the crypto craze

The cryptocurrency craze seems to have taken a dive in recent weeks since the Chinese authorities clamped down on speculation in the bitcoin market. The history of financial markets is littered with asset price bubbles, from tulips in the early-1600s to more recent examples, such as internet stocks in the late-1990s and US house prices before 2008. This looks like another.  The ascent of the virtual currency bitcoin, which recently neared $5,000 and has risen about 350% this year, has now turned round, dropping back to $3000, if still hugely above its initial start.  But it may be heading for a reckoning now.

Bitcoin aims at reducing transaction costs in internet payments and completely eliminating the need for financial intermediaries ie banks. But so far its main use has been for speculation. So is bitcoin, the digital currency that operates on the internet, just a speculative scam, another Ponzi-scheme, or is there more to the rise of all these cryptocurrencies, as they are called?

Money in modern capitalism is no longer just a commodity like gold but instead is a ‘fiat currency’, either in coin or notes, or now mostly in credits in banks.  Such fiat currencies are accepted because they are printed and backed by governments and central banks and subject to regulation and ‘fiat’.  The vast majority of fiat money is no longer in coin or notes but in deposits or claims on banks. In the UK, notes and coin are just 2.1% of the £2.2 trillion total money supply.

The driver of bitcoin and other rival crypto currencies has been the internet and growth of internet-based trading and transactions.  The internet has generated a requirement for low-cost, anonymous and rapidly verifiable transactions to be used for online barter and fast settling money has emerged as a consequence.

Cryptocurrencies aim to eliminate the need for financial intermediaries by offering direct peer-to-peer (P2P) online payments. The main technological innovation behind cryptocurrencies has been the blockchain, a ‘ledger’ containing all transactions for every single unit of currency. It differs from existing (physical or digital) ledgers in that it is decentralized, i.e., there is no central authority verifying the validity of transactions. Instead, it employs verification based on cryptographic proof, where various members of the network verify “blocks” of transactions approximately every 10 minutes. The incentive for this is compensation in the form of newly “minted” cryptocurrency for the first member to provide the verification.

By far the most widely known cryptocurrency is bitcoin, conceived by an anonymous and mysterious programmer Satoshi Nakamoto just nine years ago.  Bitcoin is not localized to a particular region or country, nor is it intended for use in a particular virtual economy. Because of its decentralized nature, its circulation is largely beyond the reach of direct regulation or monetary policy and oversight that has traditionally been enforced in some manner with localized private monies and e-money.

The blockchain’s main innovation is a public transaction record of integrity without central authority. Blockchain technology offers everyone the opportunity to participate in secure contracts over time, but without being able to avoid a record of what was agreed at that time.  So a blockchain is a transaction database based on a mutual distributed cryptographic ledger shared among all in a system. Fraud is prevented through block validation. The blockchain does not require a central authority or trusted third party to coordinate interactions or validate transactions. A full copy of the blockchain contains every transaction ever executed, making information on the value belonging to every active address (account) accessible at any point in history.

Now for technology enthusiasts and also for those who want to build a world out of the control of state machines and regulatory authorities, this all sounds exciting.  Maybe communities and people can make transactions without the diktats of corrupt governments and control their incomes and wealth away from the authorities – it might even be the embryo of a post-capitalist world without states.

But is this new technology of blockchains and cryptocurrencies really going to offer such a utopian new world?  Like any technology it depends on whether it reduces labour time and raises the productivity of things and services (use values) or, under capitalism, whether it will be another weapon for increasing value and surplus-value.  Can technology in of itself, even a technology that apparently is outside the control of any company or government, really break people free from the law of value?

I think not.  For a start, bitcoin is limited to people with internet connections. That means billions are excluded from the process, even though mobile banking has grown in the villages and towns of ‘emerging economies’.  So far it is almost impossible to buy anything much with bitcoin.  Globally, bitcoin transactions are at about three per second compared to Visa credit at 9000 a second.  And setting up a ‘wallet’ to conduct transactions in bitcoin on the internet is still a difficult procedure.

More decisively, the question is whether bitcoin actually meets the criteria for money in modern economies.  Money serves three functions under capitalism, where things and services are produced as commodities to sell on a market.  Money has to be accepted as a medium of exchange. It must be a unit of account with a fair degree of stability so that we can compare the costs of goods and services over time and between merchants. And it should also be a store of value that stays reasonably stable over time.  If hyperinflation or spiralling deflation sets in, then a national currency soon loses its role as ‘trust’ in the currency disappears.  There are many examples in history of a national currency being replaced by another or by gold (even cigarettes) when ‘trust’ in its stability is lost.

The issue of trust is brought to a head with bitcoin as it relies on “miners”, or members that contribute computational power to solve a complex cryptographic problem and verify the transactions that have occurred over a short period of time (10 minutes). These transactions are then published as a block, and the miner who had first published the proof receives a reward (currently 25 bitcoins). The maximum block size is 1MB, which corresponds to approximately seven transactions per second. In order to ensure that blocks are published approximately every 10 minutes, the network automatically adjusts the difficulty of the cryptographic problem to be solved.

Bitcoin mining requires specialized equipment, as well as substantial electricity costs and miners thus have to balance their technology and energy investment.  That means increasingly bitcoin could only work as alternative replacement global currency if miners became large operations.  And that means large companies down the road, ones in the hands of capitalist entities, who may well eventually be able to control the bitcoin market.  Also if bitcoin were to become as viable tender to pay tax to government, it would then require some form of price relationship with the existing fiat money supply.  So governments will still be there.

Indeed, the most startling obstacle to bitcoin or any other cryptocurrency taking over is the energy consumption involved.  Bitcoin mining is already consuming energy for computer power more than the annual consumption of Ireland.  Temperatures near computer miner centres have rocketed.  Maybe this heat could be ecologically used but the non-profitability of such energy recycling may well ‘block’ such blockchain expansion.

Capitalism is not ignoring blockchain technology.  Indeed, like every other innovation, it seeks to bring it under its control.  Mutual distributed ledgers (MDLs) in blockchain technology provide an electronic public transaction record of integrity without central ownership. The ability to have a globally available, verifiable and untamperable source of data provides anyone wishing to provide trusted third-party services, i.e., most financial services firms, the ability to do so cheaply and robustly.  Indeed, that is the road that large banks and other financial institutions are going for.  They are much more interested in developing blockchain technology to save costs and control internet transactions.

As one critic of blockchain points out: “First, we’re not convinced blockchain can ever be successfully delinked from a coupon or token pay-off component without compromising the security of the system. Second, we’re not convinced the economics of blockchain work out for anything but a few high-intensity use cases. Third, blockchain is always going to be more expensive than a central clearer because a multiple of agents have to do the processing job rather than just one, which makes it a premium clearing service — especially if delinked from an equity coupon — not a cheaper one.”  Kaminska, I., 2015, “On the potential of closed system blockchains,” FT Alphaville.

All this suggests that blockchain technology will be incorporated into the drive for value not need if it becomes widely applied.  Cryptocurrencies will become part of cryptofinance, not the medium of a new world of free and autonomous transactions. More probably, bitcoin and other cryptocurrencies will remain on the micro-periphery of the spectrum of digital moneys, just as Esperanto has done as a universal global language against the might of imperialist English, Spanish and Chinese.

But the crypto craze may well continue for a while longer, along with the spiralling international stock and bond markets globally, as capital searches for higher returns from financial speculation.

UK: full employment, but falling incomes

Britain’s unemployment rate has fallen to a new 42-year low of 4.3% in the three months to July. That’s down from 4.4% a month ago and the lowest since 1975.  That sounds good news for all – until we look at what is happening to average wages for British workers after inflation is deducted.  Average weekly earnings only rose by 2.1% per year in the quarter, weaker than expected and the same as last month.  But inflation jumped from 2.6% to 2.9%.  So real wages are falling and the decline is accelerating – for the average.

When adjusted for inflation, the real value of people’s earnings has fallen 0.4% over the last year.

Why is the UK’s unemployment rate so low and how is it possible that wages are not keeping up with prices when the labour market is at its tightest for over 40 years?

Well, as several posts on the excellent Flipchartfairytales blogsite show, British employers, rather than invest in new technology that could replace labour, have opted for cheap ‘unskilled’ labour, both British and immigrant, with the full knowledge that with little employment protection and weak trade union backing, they can hire and fire as they please.

Union membership has fallen to its lowest level since the government started counting in the 1970s. This is not just a feature of the UK. In most advanced economies, union density (the proportion of those in employment who are members of unions) has fallen over the last few decades

At the same time, much of the employment increase since the Great Recession has been in low-paid self-employment as people set up themselves on-line or take jobs as taxi drivers etc that do not involve wage employment.

As the recent report on the state of the British economy (Time for Change A New Vision for the British Economy The Interim Report of the IPPR Commission on Economic Justice) states: “The UK’s high employment rate has been accompanied by an increasingly insecure and ‘casualised’ labour market. Fifteen per cent of the workforce are now self-employed, with an increasing proportion in ‘enforced selfemployment’ driven by businesses seeking to avoid employer responsibilities. Six per cent are on short-term contracts, and almost 3 per cent are on zerohours contracts. More workers are on low pay than 10 years ago. Insecure and low-paid employment is increasing physical and mental ill-health.”

“There is a huge  sense of insecurity that has persisted since the recession. Even those in full-time jobs feel less secure than they did a decade ago and, when combined with the rise in more insecure forms of housing tenure, it is hardly surprising that people lack the confidence to ask for a pay rise.” – Flipchart.

The UK is the only major OECD country where GDP has risen since the recession but wages have still fallen.

Indeed, the UK is only one of six countries in the 30-nation OECD bloc where earnings after inflation are still below 2007 levels and the UK is the worst of the top seven G7 economies.

And what is also forgotten is that, if you allow for population growth (mainly immigration), the UK has barely seen any economic growth, with GDP per person only just above the level of 2007 and real consumer purchasing power still lower than in 2007.

Indeed, according to the Bank of England, UK workers are suffering from the lowest real wage growth in 160 years!

When you run of out more workers, then growth in output is dependent on raising the productivity of each worker.  In the UK, ‘full employment’ plus low economic growth has meant low productivity growth ie overall, output per worker is hardly rising.  UK productivity is 13% below the average for the richest G7 countries and has stalled since 2008.  According to the IPPR report, “UK leading firms are as productive as elsewhere, but we have a longer ‘tail’ of low-productivity businesses, in which weak management and poor use of skills leads to ‘bad jobs’ and low wages. A third of adult employees are overqualified for their jobs, the highest proportion in the European Union. This has been enabled by a labour market that is one of the most flexible, or deregulated, in the developed world. Too many sectors have effectively fallen into a low-pay, low-productivity equilibrium.”

The irony is that, since the Brexit vote, there has been a sharp reduction in immigration from the EU. With ‘full employment’ now achieved and the UK-born population no longer increasing, if EU labour stops coming to the UK, then serious shortages will appear in important sectors like hospitals, education, farm work, leisure staff etc.  And these ‘low-skilled’ jobs won’t be filled by British citizens or even those from outside the EU.

The reason that productivity has stalled is because British capital won’t invest in new technology.  Again, here is the IPPR report: “Public and private investment is around 5 percentage points of Gross Domestic Product (GDP) below the average for developed economies, and has been falling for 30 years. Corporate investment has fallen below the rate of depreciation – meaning that our capital stock is falling – and investment in research and development (R&D) is lower than in our major competitors. Among the causes are a banking system that is not sufficiently focussed on lending for business growth, and the increasing short-termism of our financial and corporate sector. Under pressure from equity markets increasingly focussed on short-term returns, businesses are distributing an increasing proportion of their earnings to their shareholders rather than investing them for the future.”

As I showed in a previous post, the rise in UK business investment since 2010, has mostly been in ‘real estate’ purchases and there has been no rise at all in hi-tech investment.  UK businesses have invested not in productive capital that could boost productivity and sustain economic growth and rising living standards but in speculative non-productive capital.  Total profits have risen as a result (red line in graph), but overall profitability against capital invested (orange line) is still below levels before the crisis.

The UK is probably at the peak in employment growth but not with inflation.  Real wages are set to fall further, while productivity and investment stagnates at best.

Towards a world rate of profit – again

Back in 2012, I was inspired by the work of David Zachariah on measuring national rates of profit in a consistent comparative manner using data from the Extended Penn World Tables.  These tables were compiled by Adalmir Marquetti who extended data from the Penn World Tables to allow Marxist economists to make more useful estimates of the level and movement in the rate of profit for many countries covering the period from the early 1960s to the point of the Great Recession of 2008-9.

Picking up on this database, I went further than Zachariah who showed rates of profit for individual countries and I compiled a weighted measure of the rate of profit for the top seven capitalist economies (G7) and also the so-called BRIC economies (Brazil, India, Russia and China) in order to compute a ‘world rate of profit’.

The concept of a ‘world rate of profit’ in Marxian terms is open to dispute.  But as we approach the 150th anniversary of the publication of the first Volume of Marx’s Capital (a work that will be analysed by top Marxist scholars at a symposium that I have organised in conjunction with Kings College, London), it is important to realise that Marx always looked upon the capitalist mode of production as a world system, even though any concrete analysis had to be based on national economies, in particular, Britain as the leading capitalist economy of Marx’s time.

Most measures of profitability on Marxian categories tend to be confined to the US, the still leading capitalist economy of the 21st century, or on individual capitalist states.  In our upcoming book, World in Crisis, G Carchedi and I have brought together studies by young Marxist economists from around the globe to show the movement of rates of profit in many countries in the last 50-100 years.  They provide in-depth empirical analyses and confirm the validity of Marx’s law of profitability.

But Marx had a world view of capitalism as one system and over the last 150 years that has proved to be correct as Capital has established itself as the dominant mode of production globally to the almost total exclusion of other earlier modes of production (slavery, absolutism, feudalism etc).  So the concept of a world rate of profit becomes more credible – even though national barriers on trade, capital flows and labour remain in place, so distorting the tendency for the equalisation of profit rates across borders into one.

Back in 2012, I went ahead with the concept of a world rate of profit by simply weighting an average rate for the G7 and BRICs. I updated this work in 2015 (Revisiting a world rate of profit June 2015) by using other sources, in particular, the EU’s AMECO database, the ground-breaking work of Esteban Maito who looked at 14 major capitalist economies in working out a world rate; and also the Penn World Tables themselves.

By comparing all four sources, I found that “it is confirmed that the world rate of profit has been in secular decline in the post-war period” but “Marx’s law of the tendency of the rate of profit to fall does not imply that the rate of profit will fall in a straight line over time. Counteracting factors come into play that for a period of time can overcome the tendency.”  My results show that this was the case between the mid-1970s or early up to the late 1990s or early 2000s (depending on the measure). The neoliberal period of recovery in profitability did take place, but it came to an end well before the Great Recession. World profitability was falling by the early to mid-2000s on most measures.

Most important, the results showed that “the changes in the rate of profit in the post-war period follow Marx’s law, namely that the secular decline was accompanied by a rise in the organic composition of capital that outstripped any rise in the rate of surplus value achieved by capitalists, at least in the G7 economies. Profitability rose in the neo-liberal period because the counteracting factor of a rising rate of exploitation dominated”.

Now a new paper has been published by Ivan Trofimov of the Kolej Yayasan Saad Business School, Malaysia in the PSL Quarterly Review of June 2017 called Profit rates in developed capitalist countries: a time series investigation.  (Trofimov on profit rates). As Trofimov says, his paper “revisits the hypothesis of the secular decline in profit rates (the tendency of profit rates to decline in the long-run) that has been recurrent in classical economics and attempts to validate empirically whether profit rates in developed economies have declined in recent decades”.

Trofimov uses the Extended Penn World Tables as Zachariah and I have done and looks at 21 countries over the 40-year period from the early 1960s.  As Zachariah and I also argued, Trofimov points out the value of this data series.  “The use of a broader sample and of a sufficiently long series is advantageous; it allows examining secular tendencies in profit rates beyond cyclical fluctuations; it helps us trace structural and policy changes that took place over the recent decades in the developed economies”.

Yes, there is a problem with the Penn data.  Given the nature of national accounts (no differentiation between productive and unproductive activities and the inclusion of government sector and residential capital), “such a methodological choice may be problematic, as far as a possible interpretation of empirical results from a Marxist political economy perspective”.  But this is compensated for by the coherence and consistency of results. Trofimov also contributes extra value to his study by using “a battery of econometric tests” to support with some degree of significance the direction and movement of various national rates of profit.

What does Trofimov find?  Well as he puts it, “visual observation suggests that over the study period (1964 to late 2000s) profit rates were likely to exhibit downward trends in Austria, Canada, Japan, Portugal, Spain, Switzerland and USA. Upward trends were likely in Luxembourg and Norway. In other economies either there was no distinct trend, or trend reversals and random walk behaviour were likely.”

And “visual inspection of this figure also suggests two distinct patterns for profit rates in most economies – decline until the mid or late 1970s, followed by partial or complete reversal.”  In other words, Trofimov confirms what most studies of individual national accounts have found for the movement in the ‘Marxian’ rate of profit in the US and many other leading capitalist economies.

However, Trofimov points out that visual evidence (looking at a graph) can be misleading about whether a rise or fall in the rate of profit has taken place over time.  And when he applies a range of statistical tests, he concluded that “there is no firm evidence supporting the hypothesis of secular decline in economy-wide profit rates in all developed economies. Instead, a diverse pattern of movements in the profit rates has been identified, including upward or downward deterministic trends, staggered declines, random walk, or stability and reversion to the mean.”

That sounds bad news for the generally accepted view that the profitability of capital in most major economies was lower in 2009 than in 1964.  Yet Trofimov does say that “statistically significant positive trend coefficients were, however, only present for Greece (at 10% significance level), the Netherlands and Norway (at a 5% level). A negative trend was observed in 10 cases (Australia, Austria, Canada, Denmark, France, Japan, Portugal, Spain, Switzerland, and the USA). A statistically significant negative trend coefficient was present for Canada, Portugal, Switzerland and the USA (at a 5% significance level).” 

Thus nearly all the major economies had lower profitability in 2009 compared to 1964 and the only ones that did not were smaller economies like Luxembourg or Norway or Greece.  The tiny tax haven financial centre of Luxembourg is not hard to consider as an exception to Marx’s law and, as Trofimov says, for Greece and Norway, “In the first case this could be attributed to the rapid transformation of the economy in the 1960-1980s from a relatively low level; in the second case, the increase in economy-wide profit could have been boosted by the growth of the oil sector.”

Actually, I find the result for Greece puzzling.  Works done by Greek Marxist economists do not find this overall rise in Greek profitability over the whole period and Trofimov’s own graph for Greece does not visually show that.  In our upcoming World in Crisis book, Maniatis and Passas find the Greek rate of profit was lower in the early 21st century than in the 1960s, even though there was strong rise in the 1980s.

Of course, their measure uses different categories than Trofimov.  And, as Trofimov explains, “There is no perfect correspondence between national accounts and Marxian variables (e.g. constant and variable capital, and surplus value).”

Nevertheless, in the case of the US, comparing the results from the Extended Penn tables and those from the US national accounts (work done by me previously), there seems to be a close correspondence.  There is the well-established profitability crisis from the mid-1960s to the early 1980s; then a period of recovery in the neo-liberal period up to 1997 and then a new period of profitability decline culminating in the Great Recession.

While the US may be the most important capitalist economy, what was the trend across all the major economies?  Is Trofimov correct to conclude that “overall, the behavior of profit rates has proven to be rather diverse, therefore it is unlikely that “universal profit rates’ laws” hold, or that only one hypothesis is correct.”?

Well, I went back to the Extended Penn Tables and redid my weighted average rate of profit for the G7 economies.  Trofimov’s definition of the rate of profit from the tables is:

Y-Nw-D/K; where Y is the chain index of real GDP in 2005 purchasing power parity (PPP), K is the net fixed standardised capital stock in 2005 PPP, D is the estimated depreciation from K, w is the average real wage in 2005 PPP, and N is the number of employed workers.

I followed the same formula except that in the denominator I added in variable capital (Nw) to match Marx’s formula exactly, s/c+v.  Was this correct?  It remains a matter of debate (see here Measuring variable capital and turnover for the rate of profit).

After weighting the data by GDP, I came up with a rate of profit for the G7 from 1964-2009 as follows (my data and workings are available on request).

Now I took liberties with the data for Germany which were not available before 1984, given the division of Germany into west and east up to 1989.  But my assumptions for the data for the period 1964-84 were realistic, in my view.

What my results show is that the G7 rate of profit fell secularly from 1964 to 2007 – as in all other studies; the fall mainly took place in the 1970s – as in the US; there was a recovery of modest proportions during the neo-liberal period from the early 1980s which peaked in the late 1990s – again as in the US.  The subsequent recovery after the recession of 2001 gave way eventually to a steep fall in the Great Recession of 2008-9.  These results confirm my original results of 2012 and 2015.

In order to get closer to a ‘world rate of profit’, the emerging economies must be added to the G7 result.  I shall show that in a future post.  And don’t forget the work of Esteban Maito (http://gesd.free.fr/maito14.pdf).

Clearly further research is necessary to get closer to a ‘Marxian’ rate of profit, as Trofimov points out, “These issues call for the need to construct “Marxian national accounts” prior to the analysis of profit rates in the Marxian formulation.  First of all, given that a large part of economic activity in developed economies is unproductive according to the Marxist formulation, the overall level of profit rate is likely to be overestimated. Secondly, unproductive activities, typically embodied in the services, tended to rise over the past decades, meaning that estimated falls in profit rates might become more drastic, and certain estimated increases might become less substantial.”

Yes, the next task is to develop a world rate of profit measure based on productive capital – over to Hercules.

Productivity, profit and market power

Going the rounds among mainstream economists in the US are new explanations for the slowdown in productivity growth and innovation especially since the beginning of the 21^st century and also why labour’s share in national income has been in long-term decline since the early 1980s.

In a new paper,   The Rise of Market Power and the Macroeconomic Implications, Jan De Loecker and Jan Eeckhout (DE) argue that the markup of price over marginal cost charged by public US firms has been rising steadily since 1960, and in particular after 1980.  The paper suggests that that the decline of both the labor and capital shares, as well as the decline in low-skilled wages and other economic trends, have been aided by a significant increase in markups and market power – in other words the rise of monopoly capital in the form of ‘super-star’ companies like Apple, Amazon, Google etc that now dominate sales, profits and production and where the utilisation of labour is low compared to other companies and industries.  These monopolies won’t invest because they don’t need to compete, and so productivity growth slows.

This is a counter-explanation to the current dominant explanations for the perceived decline in labour’s share, namely, globalization (American workers are losing out to their counterparts in places like China and India) and automation (American workers are losing out to robots) and inverse rise in the share going to profits.  Now various mainstream economists are arguing that this rise is not due to globalisation or automation but due to higher markups in prices from companies that control their markets monopolistically.  In other words, they are making extra profit over and above ‘normal competitive costs’.  De Loecker and Eeckhout find that between 1950 and 1980, markups were more or less stable at around 20 percent above ‘marginal cost’, and even slightly decreased from 1960 onward. Since 1980, however, markups have increased significantly: on average, firms charged 67 percent over marginal cost in 2014, compared with 18 percent in 1980.

Evolution of average markups (1960 – 2014). Average markup is weighted by market share of sales in the sample. Source: De Loecker and Eeckhout (2017)

So the enormous increase in profits over the past 35 years, they argue, is consistent with an increase in market power. “In perfect competition, your costs and total sales are identical, because there’s no difference between price and marginal costs. The extent to which these two numbers—the sales-to-wage bill and total-costs-to-wage bill—start differing is going to be immediately indicative of the market power,” says De Loecker.  “Most of the action happens within industries, where we see the big guys getting bigger and their markups increase,” De Loecker explains.

In another paper, a group of mainstream economists considered a ‘superstar firm’ explanation for the fall in labour share of GDP.  The hypothesis is that technology or market conditions—or their interaction—have evolved to increasingly concentrate sales among firms with superior products or higher productivity, thereby enabling the most successful firms to control a larger market share. Because these superstar firms are more profitable, they will have a smaller share of labour income in total sales or value-added. Consequently, the aggregate share of labour falls as the weight of superstar firms in the economy grows. They found that the concentration of sales (and of employment) has indeed risen from 1982 to 2012 in each of the six major sectors covered by the US economic census. And those industries where concentration rises the most have seen the sharpest falls in the labour share, so that the fall in the labour share is mainly due to a reallocation of labour toward firms with lower (and declining) labour shares, rather than due to declining labour shares within most firms.

It’s certainly true that accumulation of capital will take the form of increased concentration and centralisation of capital over time.  Monopolistic tendencies are inherent, as Marx argued in Volume One of Capital 150 years ago. And Marx’s prediction of increased concentration and centralisation of capital as a long-term law of capitalist development finds further confirmation in a new study of US publicly quoted companies.  Kathleen Kahle and Rene Stulz find that slightly more than 100 firms earned about half of the total profit made by US public firms in 1975. By 2015, just 30 did.  Now the top 100 firms have 84% of all earnings of these companies, 78% of all cash reserves and 66% of all assets.  The top 200 companies by earnings raked in more than all listed firms, combined!  Indeed, the aggregate earnings of the 3,500 or so other listed companies is negative – so much for most US companies being awash with profits and cash.

Why is this happening? According to this study, it is the drive for new technology to lower costs, as Marx argued before. Research and development has become increasingly critical to competitiveness. The bigger and richer the market Goliaths get, the harder it is for the Davids of the US economy—and the need for R&D to compete. Companies drowning in cash can easily afford patents and the investments to develop those. Or, as seems to be happening, to buy the company with the patent.

However, there are two things against the ‘market power’ argument, at least as the sole or main explanation of the rise in profits share and profit per unit of production.  First, as De Loecker and Eeckhout find, economy-wide, it is mainly smaller firms that have the higher markups – hardly an indicator of monopoly power.  And second, labour share did not really fall very much until after 2000 to reach a low in 2014.  Indeed, in 2001 it was at 64%, the same share as in 1951 – although it is true that it had fallen to the low 60%s in the 1980s and 1990s.  But by 2014, labour share in GDP was as low as 60%.

And it’s the same with profits per unit of US national output or corporate value-added.  Profits per unit of gross value added (a measure of new output) in US non-financial companies rose from just 2% in the 1970s to 4-6% in the 1990s.  Bu the real take-off was again from 2000, with profit per unit rising to a peak of near 14% by 2014.

Was the basis of this recent leap in profit share and sharp fall in labour share a product of globalisation, or automation or monopoly power, or is there another explanation?  Well, one mainstream economist, Mordecai Kurz of Stanford University in another paper, On the Formation of Capital and Wealth, has measured what he calls ‘surplus wealth’ being accumulated by large firms.  This he defines as the difference between wealth created (equity and debt) in the form of financial assets and a firms’ actual real fixed assets. This is equivalent to Tobin’s Q measure of the stock market price relative to the real value of corporate capital.  In a Marxist sense, it is really a measure of company’s fictitious capital or profit.

Kurz finds that aggregate ‘surplus wealth’ rose from -$0.59 Trillion in 1974 to $24 Trillion which is 79% of total market value in 2015. The added wealth was created mostly in sectors transformed by IT. Declining or slow-growing firms with broadly distributed ownership have been replaced by IT based firms with highly concentrated ownership. Rising fraction of capital has been financed by debt, reaching 78% in 2015.  Kurz reckons this has been made possible by IT innovations that enable and accelerate the erection of barriers to entry and once erected, IT facilitates maintenance of restraints on competition. These innovations also explain rising size of firms.  Measuring monopoly power from this ‘surplus wealth’, Kurz reckons it rose from zero in the early 1980s to 23% in 2015.

Now Kurz and the other mainstream papers may well be right that, in the neo-liberal era, monopoly power of the new technology megalith companies drove up profit margins or markups.  The neo-liberal era saw a driving down of labour’s share through the ending of trade union power, deregulation and privatisation.  Also, labour’s share was held down by increased automation (and manufacturing employment plummeted) and by globalisation as industry and jobs shifted to so-called emerging economies with cheap labour.  And the rise of new technology companies that could dominate their markets and drive out competitors, increasing concentration of capital, is undoubtedly another factor.

But another compelling explanation is that the rise in corporate profits was increasingly fictitious, based on rising stock and bond market prices and low interest rates.  The rise of fictitious capital and profits seems to be the key factor after the end of dot.com boom and bust in 2000.  Thereafter, profits came increasingly from finance and property, not technology. If that is right, then it helps to explain why the biggest slowdown in productivity growth in the US began after 2000, as investment in productive sectors and activity dropped off.

And if that is right, then the recent fall back in profit share and modest rise in labour share since 2014, suggests that it is a fall in the overall profitability of US capital that is driving things rather than any change in monopoly ‘market power’.

But that is something mainstream economics never wants to consider.  If profits are high, then it’s ‘monopoly power’ that does it, not the increased exploitation of labour in the capitalist mode of production.  And it’s monopoly power that is keeping investment growth low, not low overall profitability.

From Jackson Hole to the Teton Heights?

At the end of every August, the central bankers of the world meet in the ski resort of Jackson Hole, Wyoming, USA to discuss the state of the world economy and the role of monetary policy in improving it.  These central bankers hear presentations from top mainstream academic economists and make speeches on how they see things.  This year, the symposium starts today with both Janet Yellen, head of the US Federal Reserve (to be replaced by Trump next year) and Mario Draghi of the European Central Bank delivering an address.

In previous years, the main theme has been on how to ease monetary policy (ie lower interest rates and print more money) in order to save the banking system and stimulate the capitalist economy into recovery from the Great Recession.

In 2013, the cry was for ‘quantitative easing’ (QE).  This was the policy idea that central banks, as the ‘last lender of resort’, would pump money into the economy by buying all sorts of financial assets from the commercial banks and other financial institutions (mainly government bonds, but also corporate bonds, mortgage bonds and even stocks and shares).  In this way, they would fill the coffers of the banks with funds to lend on to households and corporations.

This ’unconventional monetary policy’ was adopted by the Fed, the ECB and the Bank of Japan big time. The balance sheets of these central banks rocketed.  The US Fed now has $4trn worth of bonds and other assets on its books, funded by the creation of more dollars.  The ECB is heading for over $3trn too after it launched another QE program in 2015.

And the BoJ’s QE plans have taken its balance sheet up to 75% of the equivalent of Japan’s GDP!

But has it worked?  The answer is no.  Back in 2013, the Jackson Hole attendees were told by Vasco Curdia and Andrea Ferrero at the Federal Reserve Bank of San Francisco (Efficacy of QE) that the Fed’s QE measures from 2010 had helped to boost real GDP growth by just 0.13 percentage points and the bulk of this ‘boost’ was thanks to ‘forward guidance’, namely convincing investors that interest rates were not going to rise.  If that factor had been left out, the US real GDP would have risen only 0.04 per cent as a result of QE.

Two years later, Stephen Williamson,vice-president of the Federal Reserve Bank of St Louis,  issued a study in which he concluded : “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed – inflation and real economic activity. Indeed casual evidence suggests that QE has been ineffective.”

This ought to have been no surprise because back in the 1930s during the Great Depression, John Maynard Keynes also concluded after a few years that quantitative easing was a failure.  Pumping money into the banks did not boost the post-1929 US economy.  Eventually, Keynes opted for fiscal spending and government investment as the only policy to get out of the 1930s depression.

Indeed, all QE has done is to create a huge bubble in the stock markets of the world, while economic growth has remained sluggish at average rates less than half before the Great Recession and real incomes for the average household (who had no stocks) flat or falling.

Nevertheless, under the influence of the monetarist school of mainstream economics founded by ‘free market monetarist’ Milton Friedman and expounded by his follower, former Fed chief Ben Bernanke, the central banks continued with QE.

At the beginning of 2016, the fear was that the major capitalist economies were slipping into a debt deflation slump and something new had to be done. Indeed, some central banks resorted to even more desperate measures of not just reducing the ‘policy’ (base) interest rates to zero (ZIRP) but further into negative interest rates (NIRP).  In other words, central banks were paying commercial banks to take their new money!

But by the end of 2015, the US Fed, with an economy that was doing slightly better than elsewhere, decided to reverse the easy money policy.  The Fed hiked its policy rate in December 2015 for the first time in nine years.  Yellen explained that the US economy “is on a path of sustainable improvement.” and “we are confident in the US economy”.

This year’s discussion at Jackson Hole will not be about ‘unconventional monetary policy’ and the efficacy of QE. That has been forgotten and the debate has moved onto how to ‘normalise’ interest rates (raising them) in order to establish control over potentially rising inflation in an environment of ‘full employment’, without provoking a new recession.  The title of this year’s symposium is Fostering a Dynamic Economy – apparently the world economy is now ‘dynamic’.

Indeed, all the talk is about how for the first time in ten years since the global financial crash, “a broad-based economic upswing is at last under way. In America, Europe, Asia and the emerging markets, for the first time since a brief rebound in 2010, all the burners are firing at once.” All 45 countries tracked by the OECD are on track to grow this year and 33 of them are poised to accelerate from a year ago.

Neverthless, mainstream economics remains divided about whether it is a good idea for the Fed to continue to hike rates and sell off its QE purchased bonds, as it eventually plans.  Keynesians like Larry Summers and Paul Krugman reckon such credit tightening would seriously damage consumer spending and investment and cause another credit crunch.  They would prefer to keep the credit bubble going with cheap money, along with some more government spending on infrastructure etc, to avoid ‘secular stagnation’.  Summers wrote that “a reasonable assessment of current conditions suggest that raising rates in the near future would be a serious error”.

On the other hand, the Austrian school of economics as represented by the Bank for International Settlements (BIS), reckons that to keep fuelling the credit bubble with cheap money and QE is presaging yet another financial crash down the road as debt in all the major economies is still too high.  Credit bubbles lead to ‘malinvestment’ and low productivity.  It is better to keep government spending curbed and to hike rates so that money is not spent on useless projects and the credit and stock market bubble is ‘pricked’.

Yellen cites full employment and potentially rising inflation as reasons for hiking interest rates now.   But there is little sign of any pick-up in inflation.  The so-called Phillips curve, namely the trade-off between low unemployment and higher inflation, beloved by Yellen and the Keynesians alike, is not in operation.  It is flatter than eve (see graph below).  Phillips was proved wrong in the 1970s when economies experienced, low growth, high unemployment and inflation (‘stagflation’).  Now there is high employment (at least on official figure) but low inflation, low growth and low wages – stagnation.

The reality is that cutting or hiking interest rates has little effect on capitalist economies compared to the level of profitability in the capitalist sectors of the world economy. If profitability is improving, then interest rates could rise with little impact on the ‘real economy’, even if the stock market falls back.  It is the profitability of capital that matters and from there to investment and growth.

In a recent post, I pointed out that both US and global corporate profits has staged something of small recovery in the last few quarters.  But US domestic corporate profits have grown at an annualized rate of just 0.97% over the last five years. Prior to this period, five-year annualized profit growth was 7.95%.   And profitability (profit as a percentage of capital invested) in the US is some 6% below its peak in 2006 before the Great Recession and after recovering to that peak by 2014, has been falling for the last two years (according to my calculations from AMECO data).

Moreover, at $8.6 trillion, US corporate debt levels are 30% higher today than at their prior peak in September 2008.  At 45.3%, the ratio of corporate debt to GDP is at historic highs, having recently surpassed levels preceding the last two recessions.  That suggests that increased costs of debt servicing from rising interest rates driven by the Fed’s ‘normalisation’ policy could tip things over, unless profitability recover for the wider corporate sector.

Jackson Hole was so named because it was set in a deep valley between the peaks of the massive Teton mountains. Will the central bankers there be right that the world economy is finally getting out of its hole and heading to the heights of the Tetons? We shall see.

 

Picking up?

The latest economic data are showing that economic growth in the major capitalist countries has been picking up in the first half of 2017.

Japan’s economy expanded at the fastest pace for more than two years in the three months to June, with domestic spending accelerating as the country prepares for the 2020 Tokyo Olympics.

In the Eurozone, real GDP growth rose at annualised rate of 2.5%, with the Visegrad countries of Czech, Poland, Hungary and Slovakia rising at 5.8% in the second quarter of this year.

With the US economy continuing to trundle along at just over a 2% a year growth, the major economies are looking a little brighter in growth terms, it seems – at least compared to the falling growth rates of 2015-6.

What has been the key reason for this slight improvement?  In my view, it is the relative recovery in the Chinese economy, considered by most observers and the evidence as the driver of world economic growth (at the margin) since 2007. As the IMF put it in its latest survey of the Chinese economy, “With many of the advanced economies of the west struggling in the years since the financial crisis of 2007-09, China has acted as the growth engine of the global economy, accounting for more than half the increase in world GDP in recent years.”

Manufacturing output in China increased 6.7% yoy in July, continuing a slight recovery in 2017 after reaching a low in 2016 from a peak of over 11% a year in 2013.  As a result, Eurozone manufacturing output has picked up, particularly in Germany, the Netherlands and Italy as they export more to China.  The US manufacturing sector has also reversed its actual decline in 2016.  Japan’s manufacturing sector leaped up 6.7% compared to 2016, led by construction demand for the Olympics.

This all looks much better.  But remember most of these major economies are still growing at only around 2% a year, still well below pre-2007 rates or even the average in the post-1945 period.  The ‘developed’ capitalist economies are growing at their slowest rate in decades.  Ruchir Sharma, chief global strategist and head of emerging markets at Morgan Stanley Investment Management, noted in a recent essay in the magazine Foreign Affairs that “no region of the world is currently growing as fast as it was before 2008, and none should expect to. In 2007, at the peak of the pre-crisis boom, the economies of 65 countries – including a number of large ones, such as Argentina, China, India, Nigeria, Russia and Vietnam – grew at annual rates of 7% or more. Today, just six economies are growing at that rate, and most of those are in small countries such as Côte d’Ivoire and Laos.”

Nevertheless, all the purchasing managers indexes (PMIs) that provide the best ‘high frequency’ guide to the attitude and confidence of the capitalist sector in each country all show expansion is still taking place – if not at the pace of 2013-14.  Again the key seems to be a recovery in China’s PMI.

 

What does all this tell us about the likelihood of a new global economic recession in the next year or two?  That is something that I have been forecasting or expecting.  The latest data would seem to point away from that.

The mainstream forecasters remain optimistic about growth with the only proviso being that it is China that might collapse.  The IMF survey makes the familiar argument of the mainstream that overall debt is so high that it will eventualy collapse in bankruptcies and defaults, causing a slump and weakening the world economy.  Total debt has quadrupled since the financial crisis to stand at $28tn (£22tn) at the end of last year.

I disagree: for two reasons.  First, when China’s growth slowed sharply at the beginning of 2016, the mainstream observers argued that China could bring the world economy down.  My view was that, important as the Chinese economy was, it was not large enough to take the US and Europe down.  Those advanced economies remained the key to whether there would be a world slump.  And so it has proved.

Second, the size of China’s debt is large but the Chinese economy is different from the advanced capitalist economies.  Most of that debt is owed by the Chinese state banks and state enterprises.  The Chinese government can bail these entities out using its reserves and forced savings of Chinese households.  The state has the economic power to ensure that, unlike governments in the US and Europe during the credit crunch of 2007.  Governments then were beholden to the capitalist banks and companies, not vice versa.  So any credit crisis in China will be dealt with without producing a major collapse in the economy, in my view.

So does this mean that a new world slump is off the agenda?  No, in short.  One of my key indicators of the health of capitalist economies, as the readers of this blog well know, is the movement of profits in the capitalist sector.  Global corporate profits (a weighted average of the major economies) have also made a significant recovery from their collapse at the end of 2015. Indeed corporate profits overall seem to rising at the fastest rate since the immediate bounce-back after the end of the Great Recession.

But this overall figure is driven by the Chinese recovery and the pickup in Japan (due to the Olympics construction?).  Corporate profit growth in the US, Germany and the UK is slowing again after a brief pick-up in late 2016.

For me, the key remains the state of US economy and in particular, profits and investment levels there.  The booming US stock market is now way out of line with corporate earnings levels.  The S&P 500 cyclically adjusted price-to-earnings (CAPE) valuation has only been higher on one occasion, in the late 1990s. It is currently on par with levels preceding the Great Depression.

US corporate profits have recovered in the last few quarters after declining (although now slowing again) and, along with that, business investment has picked up.  Watch this space over the rest of 2017 to see if this is sustained.

Total domestic corporate profits have grown at an annualized rate of just 0.97% over the last five years. Prior to this period five-year annualized profit growth was 7.95%. At $8.6 trillion, corporate debt levels are 30% higher today than at their prior peak in September 2008.  At 45.3%, the ratio of corporate debt to GDP is at historic highs, having recently surpassed levels preceding the last two recessions.  If there is an issue with the level of debt, it is in the US, not in China.

Ten years on

It’s ten years on to the day since the global financial crash began with the news that the French bank, BNP had suspended its sub-prime mortgage funds because of “an evaporation of liquidity”.

Within six months, credit tightened and inter-bank interest rates rocketed (see graph above).  Banks across the globe began to experience huge losses on the derivative funds that they had set up to profit from the housing boom that had taken off in the US, but had started to falter.  And the US and the world entered what was later called The Great Recession, the worst slump in world production and trade since the 1930s.

Ten years later, it is worth reminding ourselves of some of the lessons and implications of that economic earthquake.

First, the official institutions and mainstream economists never saw it coming.  In 2002, the head of the Federal Reserve Bank, Alan Greenspan, then dubbed as the great maestro for apparently engineering a substantial economic boom, announced that ‘financial innovations’ i.e. derivatives of mortgage funds etc, had ‘diversified risk’ so that “shocks to overall economic will be better absorbed and less likely to create cascading failures that could threaten financial stability”.  Ben Bernanke, who eventually presided at the Fed over the global financial crash, remarked in 2004 that “the past two decades had seen a marked reduction in economic volatility” that he dubbed as the Great Moderation. And as late as October 2007, the IMF concluded that “in advanced economies, economic recessions had virtually disappeared in the post-war period”.

Once the depth of the crisis was revealed in 2008, Greenspan told the US Congress, “I am in a state of shocked disbelief”.  He was questioned “in other words, you found that your view of the world , your ideology, was not right, it was not working” (House Oversight Committee Chair, Henry Waxman). “Absolutely, precisely, you know that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well”.

The great mainstream economists were no better.  When asked what caused the Great Recession if it was not a credit bubble that burst, Nobel Prize winner and top Chicago neoclassical economist Eugene Fama responded: “We don’t know what causes recessions. I’m not a macroeconomist, so I don’t feel bad about that. We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity… If I could have predicted the crisis, I would have. I don’t see it.  I’d love to know more what causes business cycles.”

Soon to be IMF chief economist, Olivier Blanchard, commented in hindsight that “The financial crisis raises a potentially existential crisis for macroeconomics.” … some fundamental [neoclassical] assumptions are being challenged, for example the clean separation between cycles and trends” or “econometric tools, based on a vision of the world as being stationary around a trend, are being challenged.”

But then most of the so-called heterodox economists, including Marxists, did not see the crash and the ensuing Great Recession coming either.  There were a few exceptions:  Steve Keen, the Australian economist forecast a credit crash based on his theory that “the essential element giving rise to Depression is the accumulation of private debt” and that had never been higher in 2007 in the major economies.  In 2003, Anwar Shaikh reckoned the downturn in the profitability of capital and the downwave in investment was leading to a new depression. And yours truly in 2005  said: “There has not been such a coincidence of cycles since 1991. And this time (unlike 1991), it will be accompanied by the downwave in profitability within the downwave in Kondratiev prices cycle. It is all at the bottom of the hill in 2009-2010! That suggests we can expect a very severe economic slump of a degree not seen since 1980-2 or more”  (The Great Recession).

As for the causes of the global financial crash and the ensuing Great Recession, they have been analysed ad nauseam since.  Mainstream economics did not see the crash coming and were totally perplexed to explain it afterwards. The crash was clearly financial in form: with collapse of banks and other financial institutions and the weapons of mass financial destruction, to use the now famous phrase of Warren Buffett, the world’s most successful stock market investor.  But many fell back on the theory of chance, an event that was one in a billion; ‘a black swan’ as Nassim Taleb claimed.

Alternatively, capitalism was inherently unstable and occasional slumps were unavoidable.  Greenspan took this view: “I know of no form of economic organisation based on the division of labour (he refers to the Smithian view of a capitalist economy), from unfettered laisser-faire to oppressive central planning that has succeeded in achieving both maximum sustainable economic growth and permanent stability.  Central planning certainly failed and I strongly doubt that stability is achievable in capitalist economies, given the always turbulent competitive markets continuously being drawn toward but never quite achieving equilibrium”.  He went on, “unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible.  Assuaging the aftermath is all we can hope for.”

Most official economic leaders like Blanchard and Bernanke saw only the surface phenomena of the financial crash and concluded that the Great Recession was the result of financial recklessness by unregulated banks or a ‘financial panic’.  This coincided with some heterodox views based on the theories of Hyman Minsky, radical Keynesian economist of the 1980s, that the finance sector was inherently unstable because “the financial system necessary for capitalist vitality and vigour, which translates entrepreneurial animal spirits into effective demand investment, contains the potential for runaway expansion, powered by an investment boom.  Steve Keen, a follower of Minsky put it thus: “capitalism is inherently flawed, being prone to booms, crises and depressions.  This instability, in my view, is due to characteristics that the financial system must possess if it is to be consistent with full-blown capitalism.”   Most Marxists accepted something similar to the Minskyite view, seeing the Great Recession as a result of ‘financialisation’ creating a new form of fragility in capitalism.

Of the mainstream Keynesians, Paul Krugman railed against the neoclassical school’s failings but offered no explanation himself except that it was a ‘technical malfunction’ that needed and could be corrected by restoring ‘effective demand’.  

Very few Marxist economists looked to the original view of Marx on the causes of commercial and financial crashes and ensuing slumps in production.  One such was G Carchedi, who summed that view up in his excellent, but often ignored Behind the Crisis with: ““The basic point is that financial crises are caused by the shrinking productive base of the economy. A point is thus reached at which there has to be a sudden and massive deflation in the financial and speculative sectors. Even though it looks as though the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere.”  Agreeing with that explanation, the best book on the crash remains that by Paul Mattick Jnr, Business as usual. 

And indeed, profitability in the productive sectors of the capitalist major economies was low historically in 2007, as several studies have shown.  In the US, profitability peaked in 1997 and the rise in profitability in the credit boom of 2002-6 was overwhelmingly in the financial and property sectors.  This encouraged a huge rise in fictitious capital (stocks and debt) that could not be justifies by sufficient improvement in profits from productive investment.

The mass of profit began to fall in the US in 2006, more than a year before the credit crunch struck in August 2007.  Falling profits meant over-accumulation of capital and thus a sharp cutback in investment.  A slump in production, employment and incomes followed i.e. The Great Recession.

Since the end of that recession in mid-2009, most capitalist economies have experienced a very weak recovery, much weaker than after previous post-war recessions and in some ways even weaker than in the 1930s.  A recent Roosevelt Institute report by JW Mason found that “there is no precedent for the weakness of investment in the current cycle. Nearly ten years later, real investment spending remains less than 10 percent above its 2007 peak. This is slow even relative to the anemic pace of GDP growth, and extremely low by historical standards.”

So the Great Recession became the Long Depression, as I described it, a term also adopted by many others, including Keynesian economists like Paul Krugman and Simon Wren-Lewis.  Why did the Great Recession not lead to a ‘normal’ economic recovery to previous investment and production rates?  The mainstream economists of the monetarist school argue that governments and central banks were slow in cutting interest rates and adopting ‘unconventional’ monetary tools like quantitative easing.  But when they did, such policies appeared to have failed in reviving the economy and merely fuelled a new stock market and debt boom.

The neoclassical school reckons that debt should be cut back as it weighs on the ability of companies to invest while governments ‘crowd out’ credit because of their high levels of borrowing.  This ignored the reason for high government debt, namely the huge cost of bailing out banks globally and the slump in tax revenues from the recession.  In opposition, the Keynesians say the Long Depression was all due to ‘austerity’ ie governments trying to reduce government spending and balance budgets.  But the evidence for that conclusion is not compelling.

What the neoclassical, Keynesian and heterodox views have in common is a denial for any role for profit and profitability in booms and slumps in capitalism!  As a result, none look for an explanation for low investment in low profitability.  And yet the correlation between profit and investment is high and continually confirmed and profitability in most capitalist economies is still lower than in 2007.  

After ten years and a decidedly long, if very weak, economic recovery phase in the ‘business cycle’, are we due for another slump soon?  History would suggest so.  It won’t be triggered by another property slump, in my view.  Real estate prices in most countries have still not recovered to 2007 levels and even though interest rates are low, housing transaction levels are modest.

The new trigger is likely to be in the corporate sector itself.  Corporate debt has continued to rise globally, especially in the so-called emerging economies.  Despite low interest rates, a significant section of weaker companies are barely able to service their debts.  S&P Capital IQ noted that a record stash of $1.84trn in cash held by US non-financial companies masked a $6.6trn debt burden. The concentration of cash of the top 25 holders, representing 1% of companies, now accounts for over half the overall cash pile. That is up from 38% five years ago.  The big talk about the hegemoths like Apple, Microsoft, Amazon having mega cash reserves hides the real picture for most companies. 

Profit margins overall are slipping and in the US non-financial corporate profits have been falling.

And now central banks, starting with the US Federal Reserve, have started to reverse ‘quantitative easing’ and hike policy interest rates.  The cost of borrowing and existing debt servicing will rise, just at a time when profitability is flagging.

That’s a recipe for a new slump – ten years after the last one in 2008?

The tragedy of Venezuela

As the Maduro regime tries to impose its new Constituent Assembly as a rival or replacement of the existing Venezuelan Congress and arrests the leaders of the pro-capitalist opposition, the dire economic and social situation in the country continues to worsen.

According to the IMF, Venezuela’s GDP in 2017 is 35% below 2013 levels, or 40% in per capita terms. That is a significantly sharper contraction than during the 1929-1933 Great Depression in the US, when US GDP is estimated to have fallen 28%. It is slightly bigger than the decline in Russia (1990-1994), Cuba (1989-1993), and Albania (1989-1993), but smaller than that experienced by other former Soviet States at the time of transition, such as Georgia, Tajikistan, Azerbaijan, Armenia, and Ukraine, or war-torn countries such as Liberia (1993), Libya (2011), Rwanda (1994), Iran (1981), and, most recently, South Sudan.

So, on this measure, according to Ricardo Haussman, former chief economist of Inter-American Development Bank, Venezuela’s economic catastrophe dwarfs any in the history of the US, Western Europe or the rest of Latin America.

Back in 2013, I warned that the achievements of the ‘Bolivarian revolution’ under Chavez were seriously under threat.  Chavez had improved the conditions of the poorest with increased wages, social services and reduced inequality.  But these improvements were only possible within the confines of capitalist economy by using the revenues of oil exports at a time of very high global oil prices.  But oil prices started to mark time and have virtually halved in the last two years.

Oil exports fell by $2,200 per capita from 2012 to 2016, of which $1,500 was due to the decline in oil prices.  The Maduro government started to rack up huge foreign debts to try and sustain living standards.  Venezuela is now the world’s most indebted country. No country has a larger public external debt as a share of GDP or of exports, or faces higher debt service as a share of exports.

The government resorted to the devaluation of the currency to boost dollar revenues, but this only stimulated outrageous inflation and cuts in real wages.  At the same time, the government decided to ‘honour’ all its foreign debt payments and cut imports instead.  As a consequence, imports of goods and services per capita fell by 75% in real (inflation-adjusted) terms between 2012 and 2016, with a further decline in 2017.  Such a collapse is comparable only to that of Mongolia (1988-1992) and Nigeria (1982-1986) and bigger than all other four-year import collapses worldwide since 1960.  This led to a collapse in agriculture and manufacturing even larger than that of overall GDP, slashing almost another $1,000 per capita in locally produced consumer goods.

The minimum wage – which in Venezuela is also the income of the median worker, owing to the large share of minimum-wage earners – declined by 75% (in constant prices) from May 2012 to May 2017.  Measured in the cheapest available calorie, the minimum wage declined from 52,854 calories per day to just 7,005 during the same period, a decline of 86.7% and insufficient to feed a family of five, assuming that all the income is spent to buy the cheapest calorie. With their minimum wage, Venezuelans could buy less than a fifth of the food that traditionally poorer Colombians could buy with theirs.

Income poverty increased from 48% in 2014 to 82% in 2016, according to a survey conducted by Venezuela’s three most prestigious universities. The same study found that 74% of Venezuelans involuntarily lost an average of 8.6 kilos (19 pounds) in weight. The Venezuelan Health Observatory reports a ten-fold increase in in-patient mortality and a 100-fold increase in the death of newborns in hospitals in 2016.

According to a study carried out between October and December 2016 by Caritas Venezuela, in collaboration with Caritas France, the European Commission and the Swiss Confederation, there are clear indications of chronic malnutrition among children in Venezuela. In some areas, it reaches levels close to what, according to international standards, is a crisis. The report says: “Insecure and irreversible survival strategies are being recorded from an economic, social and biological point of view, and the consumption of street foods is especially worrying.”  “According to a survey conducted in June 2016 in the state of Miranda, 86% of children feared to run out of food. Fifty percent said they went to bed hungry for lack of food in their homes. “

Erika Guevara, director of Amnesty International’s Regional Office for the Americas in June 2016, wrote:  “J.M. Children’s Hospital. Of the Rivers in Caracas, once a source of pride as a model of pediatric care in Venezuela, today is a tragic symbol of the crisis that is sweeping this South American country.  Half the gigantic building is collapsing, the walls stagger, the floors are flooded and the rooms are so deteriorated that they are no longer used. Halfway through, hundreds of children are being treated. But both medicines and basic medical supplies are in short supply, and the children’s mothers have already given up ordering them. (…)”. The Voices of Hunger, a report made by Telemundo and led by the Venezuelan journalist Fernando Girón, shows how Venezuelan children fight with birds of prey for bones discarded by butchers (El Nacional, 02/28/17).

Before Chavez, most Venezuelans were desperately poor after a series of right-wing capitalist governments.  But now once again, under Maduro, this is the situation for the poor and the majority of the Venezuelan working class.  No wonder support for the Maduro government has subsided while the forces of reaction grow stronger.  While the majority struggle, many at the top of the Maduro government are as comfortable as the Venezuelan capitalists and their supporters who are trying to bring the government down.

The Maduro government is now relying increasingly not on the support of the working class but on the armed forces.  And the government looks after them well.  The military can buy in exclusive markets (for example, on military bases), have privileged access to loans and purchases of cars and departments, and have received substantial salary increases. They have also won lucrative contracts, exploiting exchange controls and subsidies, for example, selling cheap gasoline purchased in neighboring countries with huge profits.

As Rolando Asturita has pointed out in a series of posts.  the army has strong direct economic power, since the FANB directs and controls a whole series of companies: the bank BANFANB; AGROFANB, for agriculture; EMILTRA, transport; EMCOFANB, company communications systems of the FANB; TVFANB, an open digital TV channel; TECNOMAR, a mixed military technology projects company; FIMNP, an investment fund; CONSTRUFANB, constructor; CANCORFANB, Bolivarian Mixed Company; Water Tiuna, water bottling plant; And then there is CAMINPEG, the anonymous military, mining and oil and gas company.

Many of the Maduro government elite have used the economic crisis to their own personal benefit.  They have bought up government debt for rich returns, while at the same time ensuring that there is no default, all at the expense of falling living standards for the people who must pay this debt through taxes and foregone oil revenues.  Foreign exchange earmarked for the payment of foreign debt has been offset by the reduction of imports of food, medicines or essential industrial inputs.

So, as anti-government protestors fight the police and army on the streets and the Maduro government moves ever closer to outright authoritarian rule, the working class is left in the cold.  The economic and social program of the opposition is the traditional one of the national capitalists backed by imperialism: namely, reform of the labor laws (ie more exploitation and sackings), privatization or re-privatization of state enterprises, deregulation of controls over investment (ie ensuring a high rate of labor exploitation) and, of course, the lifting of price controls and exchange reunification. The implementation of this program would impose even more losses on the majority.  As would the planned sanctions by US imperialism and its acolytes in the region.

What went wrong with the laudable aims of Chavismo? Could this tragedy been avoided? Well, yes, if the Chavista revolution had not stopped at less than halfway, leaving the economy still predominantly in the control of capital.  Instead, the Chavista and Maduro governments relied on high oil prices and huge oil reserves to reduce poverty, while failing to transform the economy through productive investment, state ownership and planning.  Between 1999 and 2012 the state had an income of $383bn from oil, due not only to the improvement in prices, but also to the increase in the royalties paid by the transnationals. However, this income was not used transform the productive sectors of the economy.  Yes, some was used to improve the living standards of the most impoverished masses. But there was no plan for investment and growth.  Venezuelan capital was allowed to get on with it – or not as the case may be.  Indeed, the share of industry in GDP fell from 18% of GDP in 1998 to 14% in 2012.

Now the right-wing ‘free marketeers’ tell us that this shows ‘socialism’ does not work and there is no escape from the rigors of the market.  But the history of the last ten years is not the failure of ‘socialism’ or planning, it is the failure to end the control of capital in a weak (an increasingly isolated) capitalist country with apparently only one asset, oil.  There was no investment in the people, their skills, no development of new industries and the raising of technology – that was left to the capitalist sector.  Contrast that with ‘socialism with Chinese characteristics’, albeit in the largest country and now economy in the world.

Just over a year ago, I argued in a post that, to save the aims of Chavismo, “it is probably too late, as the forces of reaction gain ground every day in the country.  It seems that we await only the decision of the army to change sides and oust the Chavistas.” 

Profitability and investment again – the AMECO data

Recently, Larry Elliott, the economics correspondent of the British liberal newspaper, The Guardian raised again the puzzle of the gap between rising corporate profits and stagnant corporate investment in the major capitalist economies. Elliott put it “The multinational companies that bankroll the WEF’s annual meeting in Davos are awash with cash. Profits are strong. The return on capital is the best it has been for the best part of two decades. Yet investment is weak. Companies would rather save their cash or hand it back to shareholders than put it to work.”

Why was this?  Elliott posed some possibilities: “corporate caution is that businesses think bad times are just around the corner”, but as Elliott pointed out the hoarding of corporate cash was “going on well before Brexit became an issue and it affects all western capitalist countries, not just Britain.”

So he considered other reasons that have been raised before: “cutting-edge companies need less physical capital than they did in the past and more money in the bank unless somebody comes along with a takeover bid” or that “the people running companies are dominated by short-term performance targets and the need to keep shareholders sweet”.

So company managers use the cash to buy back their shares or pay out large dividends rather than invest in new technology. “Shareholder value maximisation has certainly delivered for the top 1%. They own 40% of the US stock market and benefit from the dividend payouts, and the share buybacks that drive prices higher on Wall Street. Those running companies, also members of the 1%, have remuneration packages loaded up with stock options, so they too get richer as the company share price goes up.”

There is some element of truth in all these possible explanations for ‘the gap’ between corporate earnings and investment that opened up in the early 2000s.  But I don’t think that corporate investment is abnormally low relative to cash flow or profits.  The reason for low business investment is simpler: lower profitability relative to the existing capital invested and the perceived likely returns for the majority of corporations.

I have dealt with this issue before in previous posts and in debate with other Marxist economists who deny the role of profitability in directing the level of corporate investment and, ultimately growth in production in the major capitalist economies.

The point is that the mass of profits is not the same as profitability and in most major economies, profitability (as measured against the stock of capital invested) has not returned to the levels seen before the Great Recession or at the end of neoliberal period with the dot.com crash in 2000.

And the high leveraging of debt by corporations before the crisis started is acting as a disincentive to invest and/or borrow more to invest, even for companies with sizeable amounts of cash. Corporations have used their cash to pay down debt, buy back their shares and boost share prices, or increase dividends and continue to pay large bonuses (in the financial sector) rather than invest in productive equipment, structures or innovations.

For example, look at the UK’s corporate sector.  Sure the mass of profits in non-financial corporations has jumped from $40bn a quarter in 2000 to £85bn now.  And it may be true that “the return on capital is the best it has been for the best part of two decades”, as Elliott claims.  But it is all relative.  The rate of return on UK capital invested has dropped from a peak of 14% in 1997 to 11.5% now.  Profitability recovered after the Great Recession trough of 9.5% in 2009 but it is still below the peak prior to the crash of 12.3% in 2006.  And UK profitability has stagnated since 2014, prior to Brexit.

Thus it should be no surprise that UK businesses have stopped investing in productive capital.

It’s the same story in the US, where not only is the average profitability of US corporations falling, but so are total profits in the non-financial sector.  Profit margins (profits as a share of non-financial corporate sales) measure the profit gained for each increase in output and these have been falling for some quarters.

And more recently, total profits in non-financial corporations have been contracting.

So again, it is no surprise that business investment is also contracting among US corporations.

I have dealt before with the argument that Elliott offers again that companies are “awash with cash”.

First, it is only a small minority of very large companies like Apple, Amazon, Microsoft etc that have large cash hoards.  The majority of companies do not have such hoards and indeed have increased levels of corporate debt.  And there is a sizeable and growing minority that have profits only sufficient to service their debt interest with none left for expansion and productive investment.  According to the Bank for International Settlements, the share of these ‘zombie’ companies has climbed to over 10%: “the share of zombie firms – whose interest expenses exceed earnings before interest and taxes – has increased significantly despite unusually low levels of interest rates”.

But perhaps the most compelling support for my argument that weak business investment in the major capitalist economies is the result of low profitability is some new evidence that I have gleaned from the EU’s AMECO statistical database. http://ec.europa.eu/economy_ finance/ameco/user/serie/ SelectSerie.cfm

Based on the simple Marxist formula for the rate of profit of capital s/c+v, where s= surplus value and c= constant capital and v= variable capital, I used the following AMECO categories.  s = Net national income (UVNN) less employee compensation (UWCD); c = Net capital stock (OKND) inflated to current prices by (PVGD); v = employee compensation (UWCD).  From these data series, I calculated the rate of profit for each of the major capitalist economies.

Of course, the AMECO categories do not match proper Marxist categories for many reasons.  But they do give cross-comparisons, unlike national statistics.  And my results seem reasonably robust when compared with national data calculations.  For example, when I compared the net rate of return on capital for the US using the AMECO data and Anwar Shaikh’s more ‘Marxist’ measure for the rate of profit in US corporations for 1997-2011, I found similar peaks and troughs and turning points.

The results for profitability in the major capitalist economies, using the AMECO data, confirm that the rate of profit is lower than in 1999 in all economies, except Germany and Japan.  Japan, by the way, still has the lowest rate of profit of all the major economies.  Indeed, the level of the rate of profit is highest in the UK, Italy and an enlarged EU (which includes Sweden and Eastern Europe), while the lowest rate of profit is in the US and Japan.

All countries suffered a severe slump in profitability during the Great Recession, as you might expect.  Then profitability recovered somewhat after 2009. But, with the exception of Japan, all economies have lower rates of profit in 2016 than in 2007, and by some considerable margins.  And in the last two years, profitability has fallen in nearly all economies, including Japan.

The table below shows the percentage change in the level of the rate of profit for different periods.

So the AMECO data show that profitability is still historically low and is now falling. No wonder business investment in productive capital has remained weak since the end of the neo-liberal period (graph below for the US) and now is even falling in some economies.