US economy in shutdown?

So the US Congress has forced a shutdown in a portion of federal government services.  From yesterday, 800,000 federal employees will be laid off without pay. This affects about one-third of federal government spending, the rest is actually exempt and, of course, Congress has agreed to ensure that American soldiers on ‘active service’ will continue to be paid, but not civilians.  So far, after two days of shutdown, according some estimates, US real GDP growth will be reduced by about by 0.1 percentage points at an annualised rate in this quarter, while a week-long shutdown would cost 0.3 percentage points.  And remember that, in the third quarter, the US economy was growing at just 1.7% (see my post, https://thenextrecession.wordpress.com/2013/07/31/the-us-economy-bigger-but-not-healthier/).  So a continued shutdown would begin to have a significant effect on real GDP growth.

The argument of some mainstream economists, no doubt easily seized upon by the tea party activists in the Republican party who are behind forcing this shutdown, is that smaller government and lower government spending is good news.  After all, the loss in GDP will be really in unproductive government spending.  Capitalist sector growth is unaffected.  This is nonsense.  Sure, overall government spending, whether financed by borrowing or taxes, is a negative to overall capitalist sector profits, but significant sections of the capitalist sector depend on government procurement of goods and services.  This will now be suspended – they may be recovered later, but some losses for capitalist producers of government demand will endure.  This leaves out, of course, the impact of the loss of government services on the poor and needy, namely the closure of federal health services and food stamps provision etc.  But then that is just a ‘use value’ for people and not a reduction in ‘exchange value’ for capitalist production, which is all that matters.

But that is not the end of the risk of a new downturn in US economic growth.  There is the looming issue of the federal government debt ceiling.  This is the annual limit placed by Congress on the amount that the US government can borrow. Ironically, the debt ceiling was introduced during the First World War to help the federal government pay for the war.  Up to then, every new piece of borrowing had to approved by Congress laboriously.  To speed things up, Congress dispensed with considering every government bond issuance and just set a limit on how much outstanding debt there could be each year.  But now, with total US government debt over $22trn in gross amounts (including state-guaranteed mortgage or so-called agency debt) and federal debt at over $16trn, the ceiling limit has become just that – a limit not a help.

As the government does not yet balance its books (although the deficit between revenues and spending is narrowing fast as spending has been held down and tax collection is rising, it is still about 4% of GDP), it must borrow the difference by issuing treasury securities (debt).  Also the government must issue new debt to cover debt that is maturing and which must be repaid to those who bought its bonds.  Well, the debt ceiling will be breached by 17 October at the latest and available cash for the federal government after that is estimated at $30bn, which would run out before the end of this month.  And at the end of October, the government must repay about $70bn in maturing bonds or default on its debt.

A debt default would be a disaster for the government’s standing in global bond markets and lead to a sharp downgrading of its credit rating and so force up interest rates.  it would also spill over into the rest of world as  holders of US government debt, which includes most of the world’s central banks, governments and banks, would find themselves short of cash receipts that they were expecting and some may be unable to meet their own obligations.  In addition, the US government would be forced to balance its budget for 2014, which started in October, and thus would have to impose a 20% cut in spending immediately.  That would push the US economy back into recession very quickly.

Of course, this is not going to happen – I think.  The Republican-controlled House of Representatives will have to agree with the Democrat-controlled Senate to raise the debt ceiling before Armageddon arrives.  But the Republicans, controlled as they are by the tea-party crazies, may drag this right out to the edge of the cliff.  What is behind this Republican intransigence to the point of closing down government services is partly a claim that the government is borrowing ‘too much’, partly a hatred of President Obama, but mostly a belief that Obama’s new healthcare reform is a move towards European-style ‘socialism’ and a welfare state.  The tea party loonies thrive on the view of the petty bourgeois, small town suburban myth that the American dream is really about families working and doing things on their own without the ‘interference’ of big government.  Even state-funded police forces and intelligence services against ‘terrorism’ are viewed with suspicion by some of the more extreme elements.  A man and his gun (often illegal) is all that is needed.

I am reminded of the new film, Prisoners, now out in the US, where our hero is a small self-employed craftsman who believes in protecting his family himself, trains his son at an early age to use guns and ‘be strong’.  His daughter is kidnapped by some crazies.  He has no faith in the ability of the police to solve the case and get his daughter back.  He decides to take the law into his own hands.  This is a typical plot in many US movies, where the hero solves the issue without the support and often the hindrance of the authorities.  But in Prisoners, the opposite is the outcome.  His ‘going it alone’ leads to disaster.

The American dream of the individual overcoming all odds is, of course, an illusion.  It is not ‘big government’ that is the problem of US capitalism, but ‘big business’.  The banking crash, the Great Recession and the lack of jobs and investment is not the result of government but of the failure of the capitalist sector.  Indeed, it is government and the ‘small’ people who have taken the burden of the crisis caused by banks and capital.

And yet when the Democrats take a very small step in trying to alleviate one of those burdens on people, the lack of affordable ‘on demand’ healthcare, it is the Republicans, backed by big business, medical insurance and the big pharma companies, and driven on by the tea party crazies, who decide to block an agreement on the 2014 budget unless Obama backs down on implementing his healthcare reform.

But Americans badly need a proper healthcare service.  The US spends 18 per cent of its gross domestic product on health against 12 per cent by the next highest spender, France. The US public sector spends a higher share of GDP than those of Italy, the UK, Japan and Canada.  US spending per head is almost 100 per cent more than in Canada and 150 per cent more than in the UK.  But America’s mainly privately owned and funded healthcare sector is a miserable failure in terms of meeting people’s needs (although very profitable).  US life expectancy at birth is the lowest of these countries, while infant mortality is the highest. Potential years of life lost by people under the age of 70 are also far higher.

Under tremendous pressure from below, the Democrats finally got the nerve to push through Congress some limited reform of US healthcare.  The Patient Protection and Affordable Care Act (dubbed ‘Obamacare’ by the Republicans) was signed into law back in March 2010, but is only now being implemented.  It is not a universal healthcare service free at the point of demand and paid for out of taxation, as in the UK or in Europe.  Instead, it is relies on providing government subsidies to existing private medical insurance schemes of employers alongside the government-provided Medicaid scheme for very poor.

Obamacare will help about 20 percent of Americans who are either uninsured or get insurance on the individual (or “non-group”) market. The idea is that anybody who makes more than the federal poverty line, but less than four times the poverty line ($94,200 for a family of four), can buy subsidised insurance. Those making less than 133 percent of the poverty line and living in a state that has accepted the Medicaid expansion can get Medicaid.  The Congressional Budget Office expects that the Affordable Care Act will cover about 14 million of the uninsured in 2014 and 25 million by the end of the decade.

health-coverage-sources

One of the really big changes that the health law makes is to eliminate the relevance of preexisting conditions altogether. This means that insurers won’t be allowed to ask about the existing health problems of applicants or charge more because of it.

The problem with Obamacare is manifold, however.  The first is that it won’t even be applied in all states.  The Medicaid expansion was made optional by the Supreme Court and only 26 states are likely to participate.  And there are no subsidies for private insurance for people making less than the poverty line.  Moreover, Obamacare still leaves about 30 million people uninsured, according to a new analysis in the journal Health Affairs.  So still the most vulnerable will not have universal healthcare.  Also Obamacare is to be paid for by cutting other health services.  The first are cuts to Medicare reimbursements. These are cuts largely to the rates that we pay doctors who see Medicare patients, and also what we pay private insurers that cover these subscribers.  The other big funding source are taxes on different health care industries like hospitals, insurance companies and, more relevant in recent days, medical device makers. And every American who does not take out Obamacare insurance will still have to pay a $95 tax penalty.

Obamacare is a botched measure that only helps a proportion of uninsured Americans.  It is only a subsidy to buy private health insurance which means the money goes to the greedy hands of ‘big insurance’ and private hospitals and doctors.  Millions will not be able to afford even the subsidised health premiums and will not qualify for the laborious medicaid schemes either.  And the whole thing is to be paid for by reductions in other government spending and more taxes on lower income sectors.  It is yet another example of the failure of capitalist schemes to provide basic needs.

The Affordable Care Act will raise taxes on investment income for people who earn more than $200,000.  And here we get yet again the screams of the rich against taxation.  This is the height of hypocrisy when the latest data reveal that US income inequality has reached new heights.  University of California Professor Emmanuel Saez (http://elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf) analyzed recent IRS data and discovered that the incomes of the top 1% of Americans rose by 19.6% in 2012 while the income of the bottom 99% grew by only 1%.  The result is that the top 1% accounted for 19.3% of total household income in 2012, their highest share since 1928.  If capital gains are included, the top one percent’s income share has risen f rom 18.1% in 2009 to 22.5% in 2012.  Indeed, the top 1% captured slightly more than half of the overall economic growth of real incomes per family over the period 1993-2010. And in the first year of economic recovery after 2009, the rich took 93% of the rise in household income!

US inequality

This increase in inequality of income has taken place in all the major capitalist economies (see my post, https://thenextrecession.wordpress.com/2013/07/14/the-story-of-inequality/). And it is not just income inequality that has grown in the US and in other capitalist economies.  In a recent paper (http://www.voxeu.org/article/capital-back), Picketty and Zucman found that the wealth-to-income ratios of rich countries have been increasing since the 1970s . In the top eight developed economies, according to official national balance sheets, aggregate private wealth has risen from about two to three times national income in 1970 to a range of four to seven times today.   And the authors show that, looking at the very long run, the postwar decades – marked by relatively low wealth – appear to be a historical anomaly. High wealth-to-income ratios were the norm in Europe throughout the 18th and 19th centuries (see graph below). Then the world wars, low saving rates, and a number of anti-capital policies provoked a large drop in private wealth, from six to seven times national income to about two times in the aftermath of World War II. The wealth-to-income ratios have been rising ever since, to the extent that they appear to be returning to their 19th-century levels.  Capitalism has not changed to reduce inequality anywhere – confirming Marx’s view that (relative) amiseration of the people would increase under capitalism (see my post, https://thenextrecession.wordpress.com/2010/01/10/20/).

piketty fig2 26 sep(1)

The recent increase in inequality since the Great Recession as recorded by Saez is a product of the massive increase in the share of profit in capitalist production since the trough of the recession in 2009, mainly by holding down wages and employment, as the now familiar graph of the ratio of US corporate profits to GDP shows.

US corporate profits to GDP

But it is not just the squeeze on labour that has driven up profits and increased inequality.  It is also the policies of pro-capitalist governments and central banks.  Governments have generally followed policies of forcing down government spending, raising taxes on employees and cutting services in pursing fiscal ‘austerity’ to reduce costs for the capitalist sector and keep interest rates low.  So central banks have taken up the task of trying to stimulate the capitalist economy with a flood of cheap money and liquidity.  But most of this liquidity has not led to an expansion of productive investment or in the productive sectors of the capitalist economies.  Investment levels remain well below pre-crisis peaks and real GDP growth remains well below trend growth before the Great Recession.

Take the UK.  The proportion of total expenditure accounted for by spending on investment has fallen from an average of 13.5 per cent in 2007 to an average of 10.9 per cent during 2012 and to 10.4 per cent in the second half of 2013.

UK investment

he proportion of total expenditure accounted for by spending on investment has fallen from an average of 13.5 per cent in 2007, to an average of 10.9 per cent during 2012 and to 10.4 per cent in the second half of 2013. Investment accounts for an average of 14.6 per cent of Gross Financial Expenditure in the G7, with the UK’s 10.4 per cent compares with 14.1 per cent in France, 16.7 per cent in the United States and 17.9 per cent in Canada. – See more at: http://www.cityam.com/blog/1380705247/uk-investment-expenditure-hits-1950s-low#sthash.3UIpDkGy.dpuf

This liquidity, as we have explained in numerous posts, has been ‘invested’ by the banks and other credit intermediaries into unproductive sectors like real estate and into ‘fictitious capital’ like stocks and bonds.  As a result, the stock market has rocketed and house prices are rising at near double-digit rates in the US and other countries.  The main reason that the Fed did not go ahead with its plan to’ taper’ its purchases of government bonds and ‘agency’ debt last month as it had promised was the rise in mortgage rates that had taken place since it announced the tapering plan last April (see my post, https://thenextrecession.wordpress.com/2013/09/19/tapering-maybe-not/).  The Fed’s policy has meant that the banking sector is not lending on this cheap credit to the real or productive sectors of the economy.  As I have argued before, the big corporations already have cash but won’t invest and the small corporation are loaded with debt and cannot borrow.  So bank lending in the US is slowing up.

US bank lending

And in Europe, it is contracting at a faster pace!

European bank lending

In this fictitious world, the rich are gaining most as it they that own the stock and are buying up the property – street by street in Detroit or New Orleans).  As Saez’s data show, if you include capital gains in income (see figure above), the inequality of income is even greater.

We get the same approach to recovery in the UK where the Conservative coalition has launched a plan to help home buyers by providing government money and guarantees for mortgages with as little as 5% deposit down for residential property worth up to £600k.  Speculative investors are piling in to take advantage of this government scheme.  In London, house prices are rising at near 10% a year and buy-to-let purchases are booming.

There is confusion about why capitalists are not investing much compared to the huge profits they seem to be stacking up  Profits are at a record high in the US and companies are piling up cash mountains.  But as I have explained in previous posts, profits are not the same as profitability and cash mountains are not profits but accumulated reserves that must be set against accumulated debt held by companies (see my post, thenextrecession.wordpress.com/2013/09/17/nobodys-investing/).

There is no real drop in overall debt in most capitalist economies.  The latest flow of funds data from the US Fed show a fall in the debt of households and, given the sharp rise in property and stock values, a significant rise in the net wealth of households, although as we have seen these gains are sharply concentrated in rich households.  But there has been no fall in non-financial corporate debt and of course in government debt.  They are both rising, if at a slower pace.  Debt deleveraging has not been sufficient to allow companies to start significant investment in new capacity.

Now it is true that sentiment in the capitalist sector about future growth seems to be picking up all round.  The purchasing managers indexes (PMIs) that I follow as high frequency indicators of activity in capitalist economies would suggest better times might be ahead.

PMIs

But real data on economic growth, manufacturing output and investment don’t confirm that.  And above all, profitability remains below the peak level before the crisis began in 2007.  I have measured the fall in UK profitability in previous posts (https://thenextrecession.wordpress.com/2012/05/01/the-uks-weak-recovery-and-profitability/).  I made a stab at updating the position for US profitability from the latest Federal Reserve data.  This is what I found.

US ROP 2012

The graphs shows that the rate of profit for non-financial corporations (a crude proxy of the productive sector of US capitalism) up to the end of 2012, with profits measured against the cost of tangible fixed assets and employee costs and then measured against the additional inclusion of net corporate debt (net worth).  It shows that the rate of profit has nearly recovered to its pre-crisis peak in 2006 against tangible assets but when net debt is included, the rate of profit is starting to fall away.  US corporations are not going to get back to pre-crisis levels of profitability.  There is more work to be done on analysing the data and I shall return to this in future posts, but initial evidence does not suggest that US corporate profitability is on the march upwards.

So the prospects for faster economic growth and a sustained recovery in the major advanced capitalist states remains questionable, at best.  And it is a world phenomenon.  Take world trade.  As former Goldman Sachs chief economist and now FT blogger, Gavyn Davies recently pointed out (http://blogs.ft.com/gavyndavies/2013/09/29/why-world-trade-growth-has-lost-its-mojo/), world trade is in serious doldrums.  Normally, world trade growth is about twice the rate of global real GDP.  Between 1990-2008, global real GDP rose 3.2% a year, while world trade volume rose at 6% a year.  However since 2008, world trade has grown more slowly that real GDP and the share of exports in world GDP has fallen for the first time in 25 years – since the deep recession of the early 1980s.  Protectionism – the imposition of tariffs and other restrictions on imports is rising (stalling further globalisation) – and the decline in world trade relative to GDP since 2008 has probably knocked down GDP growth by 1% point.  It’s another indicator of the Long Depression that the major economies have entered.

World trade growth

So the risk (however small) that the US Congress could push the US government into a default in its debt only adds to the probability of another global slump down the road.

46 Responses to “US economy in shutdown?”

  1. Daniel Rocha Says:

    I don’t get something: were 800,000 thousand fired permanently, or just fired “momentarily” , while there is a political impasse?

    • michael roberts Says:

      Just told to go home and stay there without pay.

      • Daniel Rocha Says:

        Alright. But I am really confused because I am not used to this kind of situation in my country, Brazil, specially among federal employees.

        I need a better explanation, if you don’t mind. Does it mean their working contract was rendered null and void? Was it a forced, non paid “vacation”, and they can be called back at that moment? What is that?

  2. S. Artesian Says:

    It’s called a furlough. They are still employed; and medical insurance remains intact… until of course the shutdown makes it impossible for the government to pay the premiums. Where unionized employees are affected, the collective bargaining agreement is still valid (don’t tell the Congress this, as they’ll try to find some way to void the contracts).

    During the period of the furlough, the employees are not paid. However, when a continuing resolution is agreed upon, employees are eligible for back pay or for compensation during the furlough period, depending on the terms of the continuing resolution.

    And yes, employees so furloughed can and will be called back to work when a continuing resolution is agreed upon.

  3. S. Artesian Says:

    Interesting article from the Wall Street Journal:

    http://online.wsj.com/article/SB10001424052702304373104579107480729687014.html

  4. colono Says:

    It is not ‘big government’ that is the problem of US capitalism, but ‘big business’. — interesting distinction, but how do you draw the line?

    • michael roberts Says:

      It’s just a phrase. I was making the point that the crisis is the result of the failure of big business, starting with big finance, and not with government deficits or debt. The government sector is not where to look for the cause of capitalist crisis, as pro-capitalist politicians and economists would have it. On this occasion, I was not making the (correct) point that the state is controlled by or integrated with capitalism and the ruling class.

  5. S. Artesian Says:

    We don’t, draw the line that it… business, government– integral to capitalism.

    • colono Says:

      I would agree that it is integral, but the post makes the distinction. So, I wonder about ichael Robert’s views on it..

  6. bill j Says:

    “But as I have explained in previous posts, profits are not the same as profitability and cash mountains are not profits but accumulated reserves that must be set against accumulated debt held by companies”

    Profits are not the same as profitability – but they’re obviously related. Profit rates are also very high. Assets don’t have to be set against debts. Assets are capital, debts are fictional capital, one is paid the rate of profit, the other the rate of interest. Not the same thing at all.

    • michael roberts Says:

      Cash reserves are a stock, profits are a flow. When the media says companies have large cash mountains, it just means they have assets in cash which have been accumulated from profits. But these reserves must be set against the stock of debt on the balance sheet. Of course, companies have other assets (tangible and financial) to match up liabilities like debt. But cash reserves may have to be used to pay down debt and thus cannot be used to invest. Profits are earned on assets and interest is paid on debt, but those are flows not stocks.

      • bill j Says:

        Yes cash reserves are a stock, profits are a flow, but that’s not the point. Cash reserves are reserves of capital – a stock of capital – debts are a stock of fictional capital. Capital reserves earn the rate of profit – fictional capital debts – earn the rate of interest.
        So cash reserves are not offset against debts, as the nominal total of debt is not a real amount, in contrast to holdings of cash – only the interest on that debt is.
        This is significant – inasmuch as anything is significant – don’t want to over egg the pudding – as I noticed the catastrophist opposition in the SP – (bizarrely opposing the catastrophist majority in the SP) – seek to downplay the significance of large cash holdings by claiming the massive size of these holdings is dwarfed by debts. As if these were the same thing. They’re not. One is capital, one is fictional capital.
        The increase in the mass of profit reflects a rising rate of profit for the simple reason that the stock of fixed capital doesn’t change much from one year to the next, so changes in the mass of profit are decisive in determining the level and direction of profit rates.
        That’s anothing thing the catastrophist opposition hate, hence their penchant for using out of date stats.

      • michael roberts Says:

        Bill

        I’m no ‘catastrophist’ about the capitalist economy, but I would have thought debt for borrowers is ‘real’ unless you dont pay it. In which case, it becomes ‘fiction’ as an asset for the lenders. And bankrupt borrowers and lenders can have a real effect on the economy.

        I thought this item was interesting – cash reserves are held by just a few and mostly held abroad.

        http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/03/its-not-just-people-corporations-are-getting-more-unequal-too/

      • bill j Says:

        As with all these things it depends what you mean by “real”. when Marx referred contrasted real and fictional capital, he drew the distinction between capital that had a material existence now whatever form it took, assets, means of production, semi-finished goods, gold etc. these assets earned the rate of profit, and claims on future profits without a material existence in the form of debt, bonds, government financial instruments etc. hence “fictional”. The claim on future profits was real, but as it had no material existence in the capitalist accumulation process.
        “The greater portion of the banking capital is, therefore, purely fictitious and consists of certificates of indebtedness (bills of exchange), government securities (which represent spent capital), and stocks (claims on future yields of production).”
        This is important as these claims were paid the rate of interest which is generally lower than the rate of profit.
        So in comparing cash reserves – a form of capital – with debts – a form of fictional capital – we are confusing different things.
        In one sense debts may be repaid, but actually there is no need to repay debts, only the interest on them. As we know, the nominal amount of debt does not increase with inflation, so unlike capital, which has a material existence and value which changes to reflect changes in productive conditions, debt is devalued by inflation.
        Hang onto them for long enough and they will become worthless through age.
        So cash reserves are not at all the same as debt and do not have to be “balanced” against them, only their respective earnings do.
        As for the catastrophists in the SP, the weird thing is that both sides agree on the mistake – they assert the world economy is indeed in a global slump – all they disagree about is the reasons for their mistaken analysis.
        That surely takes the biscuit as a reason to fall out?

      • GrahamB Says:

        Anwar Shaikh in his article “The First Great Depression of the 21st Century” calculated a profit-of-enterprise = profit rate – interest rate.

      • S. Artesian Says:

        “I thought this item was interesting – cash reserves are held by just a few and mostly held abroad.

        http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/03/its-not-just-people-corporations-are-getting-more-unequal-too/
        ______________________
        What the article says is that the largest corporations are accumulating greater portions of the total cash assets. To validate your claim however, Michael, we’d have to see these corporations accumulating these cash reserves as an offset to increased debt, and increasing debt service.

        Apple’s debt to equity ratio is about .14 or 14%, all of which has been accumulated in the current year, while Apple itself has been accumulating cash reserves since 2001, so this does not validate your contention.

        Microsoft’s debt to equity ratio is about .20, most of which has been accumulated since 2009, with a recent spike given Microsoft’s latest round of takeovers. But Microsoft has been accumulating cash reserves ever since day 1, and is hardly laying in cash to offset debt service.

        Intel’s ratio is at .24, Cisco’s about .28, these are low, low ratios that simply do not require an offset from cash reserves.

        Total debt of the S&P 500 companies peaked in 2007 and then declined some 25% by 2011 to about $7 trillion; during that same period cash reserves grew about 50% to $1.5 trillion. If cash reserves were being used to offset, service, or retire debt, we should expect to see the reserves experience absolute declines over time. We do not.

        In the latest quarter, due to repayments, S&P 500 debt to equity ratio, as reported by Merrill Lynch, declined to .55, below the running average of .98.

        Indeed, given that profits earned outside the US by US corporations are not subject to tax until repatriation, much of the cash is “ex-patriated”– and nobody knows how much of this type there is. Except……..it’s not really kept outside the US. Much of it is kept in banking zones like the Cayman Islands where it can loaned to the parent company. Some of it is even kept in the US in the US bank accounts of the foreign branch or subsidiary of the US company.

        We can and should say a lot about the current economic condition of capital– in 2009 the first real decline in world trade volume in many a year; the slow and weak recovery where such “recovery” is even manifested; the destruction of living standards, the growth of unemployment, the “forced” emigration from Ireland as a result of the government bailing out the banks; the evisceration of Greece and Cyprus; the “propping up” of profits by driving down the wage bill in the US, and IMO the end of the “China miracle”– or at least its running up against the limits of its fractured and unproductive agricultural sector.

        But I don’t think we can claim that debt, or a “debt overhang” is behind reduced rates of investment. And I don’t think we should say that increasing investment by the capitalists will either indicate or produce a remedy to those conditions listed above.

      • michael roberts Says:

        I have not said that an ‘overhang of debt’ is the only or main reason for reduced rates of investment. The failure of profitability to return to pre-crisis levels, let alone the rate in the late 1990s, and the prospects for future profitability, is the main reason. Debt is a contributory factor for weaker companies, particularly smaller ones.

        So debt has been reduced by large (S&P 500) companies, particularly very large ones. But the overall US corporate debt ratio (to GDP) is much higher than it was in the 1980s and 1990s – up 45% in the US, doubled in the UK. According to the IMF’s latest Global Financial Stability Report,

          non-financial corporate debt to GDP

        , since 2000 is up 36% in France, 30% in Italy, 65% in Spain, 23% in the UK and 20% in the US (although the latter’s level is way lower than elsewhere). Since mid-2007, at the start of the credit crunch, US non-financial corporate debt to GDP has risen 15%, more than elsewhere. You could take an optimistic view on this and say that rising non-financial corporate debt to GDP suggests American corporations are confident about taking on more debt, given better prospects and existing comparatively low levels of debt. Or you could say it is a burden even at these levels that has not been dealt with by weaker firms and so holds them back. It seems that those with cash reserves have little debt and those without have a lot more – perhaps that’s the conclusion we should draw from the data.

        We can agree about the current state of capital. In my view, capital will only make a turn for the better when profitability recovers sufficiently to drive up investment rates and restore some employment. The driver of capitalist activity and eventually ‘effective demand’ is not household consumption which has hardly moved as a share of GDP during the crisis but investment which has been the decisive swing factor, as in all capitalist slumps.

      • bill j Says:

        Well its obviously a matter of debate if rates of profitability are so low. I don’t think they are, as I think is quite clear from your graphs on the rise of profits as a proportion of national income. Either way, there is no argument that profits and profit rates have recovered very fast after the 2008 crash. Its not surprising that they haven’t peaked yet, given its the start of the boom phase of the cycle.
        I can’t see anything in the next year or two that’s going to stop them rising further.
        As for the proportion of debt increasing, as we’ve esablished, these nominal totals mean nothing. Its the amount of interest that is serviced from them that counts. And that is at record lows. What’s more of course, the rise in state debt is offset very substantially in the USA and UK by QE accuring massive financial assets to the state.
        Debt has no effect on the rate of profit at all, but simply redistributes it among the capitalist class. This is important, as in a crisis, as we saw in 2008, it adds the anarchy of production and so can cause the a credit crunch or similar, exacerbating the scale of the declines. It also means at present, that foreign owners of US and UK bonds are effectively paying for the reflation of their respective economies. QE raises the nominal price of bonds, while reducing their yield, so devaluing historic bonds mainly owned by foreigners, but I really don’t want to re-open that can of worms.

    • S. Artesian Says:

      This: “Debt has no effect on the rate of profit at all, but simply redistributes it among the capitalist class”

      Spot on, as my British cousin would put it.

  7. S. Artesian Says:

    That’s correct, accumulated reserves, (and cash flows, and earnings, etc.) don’t even have to be set against debt. They only have to satisfy the debt service.

    • michael roberts Says:

      ‘Debt service’ includes repayment of debt as well as interest on that debt. Cash reserves are not a flow but an accumulation of cash flow. So higher profits may be accumulated to meet debt repayments rather than invested.

      • S. Artesian Says:

        Yes, it includes repayment of the principal and interest; but that doesn’t change the principle (!) behind the exchange, and exchange is what we are talking about here.

        Cash assets and cash type assets do not have to set off against the full face value of the debt precisely because the full face value of the debt is not recovered or re-covered in a single year. To argue that it does or should be is akin to the US Congress requiring that the US Postal Service budget each year for 100% of future pension liabilities.

        Because the face or notional value of the debt is not covered in any single year, corporations are more than willing to absorb levels of debt that far exceed the annual earnings of the corporation and they do so without adverse results.

        The point here is that debt is not the driver. Earnings are, interest rates are, “cost-benefit,” “spreads,” are. If higher profits are not reinvested but amassed it may mean there is a need to meet debt service payments– but most probably not. Precisely because large cash assets are accumulated over time, but debt service is paid annually, companies usually do not set aside reserves to meet debt coming due in 5 years or 10 years. There would be no point to assuming the debt in the first place if that was the process.

        Right now, US corporations have enough cash and cash type assets on hand to make all debt service payments due over the next 5 years. Does anyone think that’s why the corporations are holding on to those reserves?

        Usually, and more often than just usually, investment drops because a) profits decline b) opportunities to continue to generate high profits decline c) the inherent unevenness of capitalist production (and indeed– all production with the unevenness showing up in the bottom line of capitalist companies) as turnover periods, circulation times differ for different enterprises d) earnings growth has slowed.

        Let’s not forget where the origin of credit is: It is in the different turnovers, the different circulation times of capitals.

        I actually don’t know of any corporation that has amassed large stocks of cash assets simply as a reserve against debt. That’s certainly not the case with the cash-rich US corporations, who have increased their cash reserves, taking advantage of reduced interest rates and higher earnings to issue record amounts of corporate bonds.

        Also, corporations utilize debt to expand their capital investments. Debt is not the inhibitor of investment– declining earnings, or inability to develop new sources of earnings, new markets are.

      • michael roberts Says:

        No, cash reserves do not have to be used to pay off the full value of any debt. And yes, large US companies have plenty of cash to pay down debt and they don’t need to, although the opposite is the case for some small businesses which are making only enough profit to pay only the interest on their debt (zombies as we call them) – in these cases, debt is an inhibitor. Corporate earnings are up (in the US), but investment returns are not looking so promising going forward compared to before the Great Recession. Companies (who can) prefer to buy back their own shares, pay out larger dividends and reduce debt levels with their cash flows (and reserves) rather than invest in profit-earning investment. So investment is up (in the US) but not nearly enough to restore employment to pre-crisis levels, let along full employment.

  8. bill j Says:

    Blimey we agree!
    So lets say assets are $1trillion and liabilities are $10 trillion – oh my gosh – it looks like we’re down $9 trillion. But in fact the assets earn 10% – $1 trillion p/a and the liablities earn 0.5% – $500bn p/a. The assets can easily pay for the liabilities and then some.

  9. S. Artesian Says:

    That’s the principle– the math though– the assets earn $100 billion per year; the service on the loan costs $50 billion. I’m making money hand over fist.

    I borrow now to purchase, to cover the “full value” of the assets. I use the assets to make enough money to pay back the loan over time. I pay for the extra time. Time isn’t money; but it can be converted into it. That’s called capitalism.

    “All economy is the economy to time”– K. Marx

  10. vallebaeza Says:

    Reblogged this on Econo Marx 21.

  11. S. Artesian Says:

    ” Companies (who can) prefer to buy back their own shares, pay out larger dividends and reduce debt levels with their cash flows (and reserves) rather than invest in profit-earning investment. So investment is up (in the US) but not nearly enough to restore employment to pre-crisis levels, let along full employment.”

    Agree with all that, but debt is not the cause. Debt is not restricting investment; and investment itself is no sure-fire index to capitalist recovery in the shorter-term.

  12. Daniel Rocha Says:

    Debt does restrict investment, since it subtract from the surplus of the industrial capitalists to the rent capitalists, who may not be willing to circulate money, but stick to primitive accumulation.

    And although investment is no sure-fire index for recovery, it is the only way to recovery, since there is no other way to make money if not by extraction of surplus labor.

    • Daniel Rocha Says:

      By the way, although I am dividing here industry and finance, they are usually done by the same people or organizations. But even so, they have distinct circulation paths, so the reasoning applies.

    • S. Artesian Says:

      1. credit and finance are not rent.

      2, Debt subtracts from surplus? Well, so does investment, as it a cost that must be subtracted from surplus. It makes no sense to make an eternal, linear connection between debt and “restricted investment.”

      3. The question is under what conditions does debt appear to be an inhibiting force and is that appearance real, substance, or just an expression of something else?

      4. Debt, if anything proves anything over the last 100 years can also be a spur to investment. You might look at how companies finance takeovers and expansions.

      The concrete issue at stake here and now is: Is the debt in…….(China, Japan, US, EU, Turkey, Egypt — pick one or more) inhibiting investment? The answer is clearly not. Where investment is reduced, it is for reason other than debt. Where investment continues, it continues in the face of and with the assistance of debt accumulation.

      Debt did not inhibit GM from investing in production facilities up to 2007. On the contrary debt was integral to the expansion of production facilities.

      Debt did not cause the collapse of GM.

      • Daniel Rocha Says:

        Credit and finance are capitalists the cycle M-M’, and they do profit from collecting interest from debts. Interest is a rent over the use of money, which, when invested in production, is a form of capital. This is akin to renting a facility for another capitalist for production or sales.

        Investment may be kind of advanced capital into production, the exception is technological research. It does not necessarily subtract from surplus, what subtracts is the interest over the advanced capital, when advanced money is done with money from other capitalists.

        Given that borrowed money is the average way to advance capital, and if the debt is too high and there is too much unsold inventory, even a small interest rate will impact investment. Money capitalists will seek safe heavens, like treasure bonds of advanced countries. This will lead to the raise of interest in less advanced countries, which is where most of the surplus is made.

        Capitalists, if taken as in its global totality, seeks profits. So, there is no reason, in this moment, to invest. For them, China and other countries already have their advantage of cheap labor curtailed by the small wage gains by the working class. If they are losing the small gains to improve profits of the capitalists, that will lead to political turmoils, which are indeed on the rise.

        So, the tendency is a global stagnation, so as to avoid a labor revolt on international scale.

  13. S. Artesian Says:

    Nice theory, you got there, but it’s not Marx’s, and more importantly, it does not correspond to how capital actually reproduces itself.. and how capital creates the barrier to its own reproduction.

    The origin of credit is in the different turnovers, the different circulation times of capitals. Credit allows capitals to continue production, continue M-C while awaiting the C’-M’ return, or realization.

    What you need to show is how the expansion of credit, or debt, obstructs the exchange of capital with labor-power– how it obstructs profit in the reproduction of capital. Simply because it represents a division, a distribution, an allocation of a portion of the total profit to something other than reinvestment does not, per se, make it a limit, the limit, an obstruction, or the obstruction to further investment.

    As we can see simply by examining that thing, excuse me, that relation called history– there are periods where high levels of debt correspond to increased profits, increasing profits, and even improving rates of profitability. There are periods when declining levels of debt correspond to reduced profits, shrinking profits. There are periods when increasing levels of debt correspond with improving proving profits.

    This emphasis on finance capital BEING, EXISTING as an antagonism to capital, rather than APPEARING as an antagonism at certain moments has been the source of much confusion, not to mention nonsense… oh ever since before Hilferding.

    If for example, as a capitalist, I assume a loan of 500 billion dollars requiring a service of 50 billion each year over 15 years, and with that 500 billion, I expand production, reach new markets so that my profit is now $20 billion greater each year upon year, then after year 1, I’ve incurred a loss of $20 billion; but years 3-15 are nothing but gravy on top of gravy.

    And that, BTW, is how capitalists actually think because that is the way capital actually acts. When debt becomes unsupportable, it’s not because the debt is “too high.” You yourself point to the real source of the problem when you write:

    “Given that borrowed money is the average way to advance capital, and if the debt is too high and there is too much unsold inventory, even a small interest rate will impact investment”–

    Sure thing “too much unsold inventory” means that capital is facing a problem in its realization, in its reproduction as capital, but the debt is not the source of that predicament, of that encumbering of reproduction.

  14. Daniel Rocha Says:

    Taking the whole economy, the financial capital is a mere faux frais of production, since separating administratively the industry and finance is a much more efficient way of distributing money. As you say, while the commodity waits its monetary realization, the capitalist advance capital for the next cycle.

    But, unfortunately, the finance capitalist competes with other capitalists, including those who are finance it, to acquire surplus. This is a result of a non centrally planned economy. So, money capitalists will hoard the money and increase interests, so that debts and the ability to pay the interests spiral out of control.

    The difficulty in acquiring investment, specially in the sector which produces means of production, makes it harder to introduce new technologies which will morally devalue old commodities. That means new commodities, which should help clean inventory, will have a hard time to be introduced.

    Social tensions, related to unemployment with the acquisition of new technology for the production of new means of production versus with the social gains related to the massive use of labor with the old tech, tends to further stop the accumulation of inventory.

    There is another problem, which Marx or Engels could envision with clarity, which is that new tech tends to substitute even the intellectual activity of humans, like, for example, automatic translators, or robots which simultaneously seek new millions of new therapeutic substances without human intervention. The design of new chips are not possible without the auxiliary of computers. And the new chips are capable of so much complex computations, that armies of programmers are required for small improvements that does not imply in new functionality.

    A consequence of the above it is that complex labor devalues itself morally, besides that this leads to devaluation of less complex activities. So, we are in a stage of capitalism where the law of value is leading to its own destruction.

  15. S. Artesian Says:

    But that is not what has occurred– not in 2004, 2005, 2006, 2007, 2008-2013. “Money capitalists” did not hoard money; did not increase interest rates.

    • Daniel Rocha Says:

      On the contrary, what money capitalists does just hoard money and ask for higher profits. Notice that, except for China, all developing countries have a a double/triple peak, before and after the onset of the crisis and during the amelioration of the crisis in developing countries. The developing countries will just show a peak, if any at all, during the amelioration.

      http://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf

      Check p. 18 and 19.

      Also, if you take a simple ratio of the rate of interest (developing/developed), you will see that in any developing country, even in China, will tend to low values.

      That means tax collection in these countries will fly very fast to developed countries, even though their total debt/GDP is low. Which also leads to a sort of zero sum in the total surplus flux. That means, despite the crisis, the financial sector will have huge profits, compensating the loss in trade balance and local diminishing of surplus generation.

      On every crisis, the finance sector will become stronger, so that economies like UK, US and Germany will have a more rentist character than before. If their industrial surplus decreases (less people employed in industry), that means they will be characterized more and more like debt masters of less developed countries. That is clear even within the Eurozone, like Germany vs. Greece, Portugal and Spain.

      • sartesian Says:

        Since 2008, banks have increased the amounts of cash deposited in central banks, and corporations have increased their cash assets on hand– of that there is no doubt. However, the other half of your assertion– “increase interests, so that debts and the ability to pay the interests spiral out of control” has certainly not occurred in the US.

        The Fed funds rate and the discount rate are at historic lows, and long term rates have been pushed down also.

        The issues here are:

        1. does the mass of debt, in and of itself. cause, compel a reduction in investment? Clearly the evidence says “no.”

        2. Do corporations accumulate cash reserves to offset debt service? Again the evidence clearly amounts to a “no.”

        3. Is interest a “deduction” from surplus value? Well, since interest is a portion of surplus value, it represents a deduction for some capitalists–but the deduction is part of a larger process of redistribution of profits. \

        The decline in profits for capital in 2006, 2007, 2008, 2009 does not have its origin in cash hoarding, nor in demands of “the rentiers” nor in rising interest rates.

      • Daniel Rocha Says:

        No, it didn’t happen in US. The relative increase in interest elsewhere is causing a decreasing in surplus within US, so that it is why it is becoming a rentier country. The hoarding is happening elsewhere, in such way that US does not need invest in its industry, save for science research, to have profits.

        The top 1% of 0.1% is becoming richer due the increasing exploitation of the global south.

      • sartesian Says:

        Where has the relative increase n interest rates occurred and where has that been precipitated by “money hoarding”?

        Certainly not in Europe, not in Japan. Interest rate movements in the emerging market countries were driven up by a flight of capital after Bernanke mentioned the possibility of tapering the QE.

        Regarding this: “The top 1% of 0.1% is becoming richer due the increasing exploitation of the global south.”

        Can you provide any evidence of this– showing the increasing exploitation of the “global south” by the “top 1% of 0.1%” since 2008? I’m asking for real numbers here in terms of profits.

      • Daniel Rocha Says:

        The relative increase in interest rates is always in the developing world. It is just a matter of division operation.

        If you accept marxist law of value, the only source of surplus is the developing world, specially china and south east china, where most of man hours is spent in industrial world. The developed world has a decreasing quantity, so surplus and thus profits, in the form of interests, can only come from the former.

        For example, half of the Brazilian tax income is destined to pay interest rates of the government. That amounts to ~300 billion every year.

      • sartesian Says:

        This:

        “The relative increase in interest rates is always in the developing world. It is just a matter of division operation.

        If you accept marxist law of value, the only source of surplus is the developing world, specially china and south east china, where most of man hours is spent in industrial world. The developed world has a decreasing quantity, so surplus and thus profits, in the form of interests, can only come from the former.”

        is nonsense.

        And this: “For example, half of the Brazilian tax income is destined to pay interest rates of the government. That amounts to ~300 billion every year.”–

        is not a measure of debt service, or surplus, transferred to the “global north”–

        Using the “old” definition of gross general govt. debt (GG- includes federal, state and municipalities), a definition that includes the debt held by central banks, the ratio of debt to GDP declined from about 80% to about 63% between 2002 and 2012.

        Net public sector debt (includes the federal government, the central bank and the non-financial public sector companies, but excludes Petrobras) has declined from app. 60% of GDP to 40% of GDP over the same 2002-2012 period.

        Deutsche Bank reported in 2011:

        (Brazil’s) dependence on private foreign financing, whether international bond markets or foreign buying of domestically issued debt, is small to negligible. FCY [foreign currency] –
        denominated linked debt amounts to less than 3% of GDP.
        Non-resident holdings of domestic LCY [local currency]debt amounts to a relatively modest 5% of GDP.

        (http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000280417.PDF)

        And we might keep in mind that Brazil paid off early all its obligations to the IMF.

    • sartesian Says:

      Forgot to add, according to the WB total debt service, calculated as % of exports in goods and services and primary income– declined from 23.5% in 2008 to 19.4% in 2011. In 2003, that ratio was 67.2%.

      • Daniel Rocha Says:

        Those are very skewed data. What happened it is that national banks, which are having enormous profits, lent so that debt were payed. But these banks have a great share of foreign “investors”, so money is still transferred. We (public servants from Brazil, from municipal to federal level) are not getting a raise, despite massive strikes and protests, because our government want to serve massive debt rates.

        Cops are shooting and killing teachers who want better wages and working conditions.

        This is the data for 2010:

        http://www.rededemocratica.org/index.php?option=com_k2&view=item&id=901:or%C3%A7amento-geral-da-uni%C3%A3o-2010-total-r$-1414-trilh%C3%A3o

        This is for 2014:

        It did not decrease, debt servicing is a quantity that varies wildly, so our government keeps a (huge) reserve just in case interests raises.

        See the evolution:

        In the last one, the tallest means servicing of the debt, the 2nd social service, 3rd wages, 4th health, 5th education and culture.

      • sartesian Says:

        ” But these banks have a great share of foreign “investors”, so money is still transferred. ”

        The devil’s in the details. How great a share of foreign investors and how much is transferred? How is it transferred? By dividend payments? That hardly amounts to exploitation of the “global South” by the “global North.”

        You’re not getting a raise in Brazil NOT to service the debt, which is shrinking, but to keep costs down for your bourgeoisie. Your main enemy is at home– and he’s/she’s named Lula/Dilma.

        None of the links you offer provide any information about debt service payments going to the advanced countries, which was your claim. Not happening. Either Brazil pays more debt service to international holders of the debt or its paying less. Data from the combined debt tables of the World Bank, IMF, and the Bank of Intl Settlements indicate that Brazil is paying less to international holders, that , as DB reports, the amount of debt service going to the “global North” is miniscule.

        Bank interest rates have declined since 2002 from about 26% to today’s app. 9.5%.

        Those aren’t skewed numbers. They are real changes.

      • Daniel Rocha Says:

        Alright, you believe in whatever you want. If you do not want to accept the Theory of Value, but support the worker’s struggle, that’s fine to me.

        I recommend you though, “Divided World Divided Class”, by Zak Cope:

        http://www.akpress.org/divided-world-divided-class.html

      • sartesian Says:

        It’s not a question of “what I believe.” It’s a question of what we can demonstrate.

        I happen to argue that what occurs can be demonstrated to be the manifestations of the law of value. The law of value however does not support the nonsense notions of “global South” or “parasitic transfers” to “rentier countries.” If you think that’s the law of value, well, you’ve got a lot of learning to do.

        Yes indeed, I support the workers’ struggle for the emancipation of labor which dispels all this guff about “global South” etc. etc.

        The “law of value” is not some metaphysical organizing principle. It is quite simply the relations of classes. It has no existence separate and apart from labor organized as wage-labor and the means of production organized as capital. If you think it includes some sort of “division” into north/south, exploiting/exploited NATIONS, then is essence, you’ve missed the point of Marx’s critique.

        Moreover, you have not been able to produce a shred of data that supports your contentions. Funny law it is that can’t be detected in a material expression.

  16. Simon Heath Says:

    “The Fed’s policy has meant that the banking sector is not lending on this cheap credit to the real or productive sectors of the economy. As I have argued before, the big corporations already have cash but won’t invest and the small corporation are loaded with debt and cannot borrow. So bank lending in the US is slowing up.”

    Aren’t big corporations and small businesses taking advantage of the low interest rates and borrowing money to invest in property and the stock market? Or is it just the rich using this easy money?

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