Archive for 2014

Predictions for 2015

December 30, 2014

Making predictions or forecasts about a national or the world economy is fraught with failure. There are so many variables to consider and the data available are often inadequate and biased. But the main reason why economists are usually wrong with their forecasts and predictions is that mainstream economics has no real theory or laws of economics to build predictions on. Nevertheless, they carry on making them, either as an act of hubris (we are so clever!) or because their bosses and clients in investment banks demand it.

No wonder professional economists have predicted none of the last seven recessions. Mainstream economists, being an apologia for the success of market economies and capitalism, never predict a recession, even when one is staring them in the face, as it did at the beginning of 2008. Indeed, since 2001, only an average 12.7% of economists surveyed by James Montier from GMO were right about the following year’s economic growth.

Anyway, I shall try and make some predictions and forecasts for 2015. And at least my forecasts are based, I think, on relying on some important underlying laws of motion of capitalism. That should make my forecast a touch more accurate – I think. Economists, if they are serious about making a science of political economy (perhaps a contradiction in terms!), must make predictions as part of any test of laws, as in natural sciences. It is not good enough for Marxist economists just to say, well, ‘under capitalism there will be recurrent crises (slumps)’. We have to do better than that: namely, at what stage is capitalism going through; is it on an upswing or downswing; is a slump close to hand or some way away?

Back in 2005, when I wrote much of my book, The Great Recession (published in November 2009), I forecast that a major slump was likely to take place in 2009-10. This is what I 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”.

As the quote suggests, I based this forecast or prediction on some laws of motion in capitalism that I had identified. The first was the long cycle in global production prices, namely a period of 27-36 years of general upswing in commodity and production trade prices, followed by a similar downswing. This is called the Kondratiev wave. I reckoned that since 1982, the Kondratiev cycle was in a downswing that could last until 2018. This would keep inflation low and indeed deflation of prices would appear, placing downward pressure on global investment.

The second was that the domestic construction or property cycle (of about 18 years) in major economies like the US and the UK was reaching its peak and we could expect a housing bust around 2009.

Third, and most important, I had discerned that there was profit cycle that could be identified for the major capitalist economies over about 32-36 years from trough to trough. From the late 1990s, most capitalist economies were experiencing a downwave in the profitability of capital that was only being propped up by a credit boom and fictitious capital profits. The downwave would come to a new trough about 2015-16. And in such a downwave, more frequent and deep recessions were likely, as they had been in the previous downwave of 1965-82: with a weak one in 1969-70; a major international one in 1974-5 and finally the double-dip slump of 1980-2. This created the conditions for a revival in profitability (the so-called neoliberal period) that lasted until the end of the century. Back in 2005-6, I reckoned the profit downwave signalled at least another huge slump.

world rate of profit

Finally, there was the Juglar cycle of growth, investment and employment which seemed to last about 8-9 years from recession to recession in modern economies. These recessions took place in profitability upswings, but then they were weak and scarce (1958 or 1990). In downswings, they were more frequent and severe (1929-32, 1937-8 or 1974-5, 1980-2).

On that basis, I reckoned that all these cycles would come together in a major slump around 2009-10, as we had not had all four cycles in a downswing together before since the 1930. Well, I was slightly wrong: the credit bubble burst in 2007 and the Great Recession came one year earlier than I predicted, in 2008-9.

As we enter 2015, both the Kondratiev and profitability cycles are still in a downwave, in my opinion, but the construction cycle has turned up (in some cases leading the current weak ‘recovery’). But another slump must still be on the agenda to enable sufficient destruction of capital values to deliver a new upwave in profitability and also see the end of Kondratiev downwave. If you like, the major economies are halfway through a Long Depression, as in the 1880-1890s or the 1930s. The 1974 slump was eventually followed with the 1980-2 slump; the 1929-32 slump was followed by a recovery and then another slump in 1937-8. So on that basis, after the recovery of 2009-14, we can expect another slump by around 2016-17. There – I have said it now.

But what of 2015? Well let’s start by reminding myself of what I said this time last year about 2014 (https://thenextrecession.wordpress.com/2013/12/30/faster-growth-in-2014/). My general forecast for 2014 was that, contrary to the optimism of the professional mainstream economists working for big money at the likes of Goldman Sachs, the ‘global crawl’ would continue i.e. global economic growth would continue to be weak and below average as it had been ever since the end of the Great Recession in 2009. And so it has proved.

low gear

Back at the beginning of 2014, the IMF forecast a 3.6% expansion in real GDP in the world economy. It will come in at just over 3%, well below the average. The rich investment bankers at Deutsche Bank and Goldman Sachs reckoned that the US economy would grow “above-trend” in 2014. Well, it’s true that the US had a good third quarter of growth, being the best performing capitalist economy since the end of the Great Recession (see my post, https://thenextrecession.wordpress.com/2014/12/24/us-economy-ends-on-a-high-the-uk-le), but it will still achieve only about 2.5% growth, at best, in 2014, well below average trend growth of 3.3% since the 1980s.

As for the UK, I reported last year that the Conservative-led government’s finance minister, George Osborne, was being lauded as a hero because the UK economy would jump ahead in 2014. And indeed, up until the latest data on growth, it seemed that the UK would achieve the fastest expansion of the top G7 capitalist economies in 2014, at 3%. However, such hopes have now been dashed and the UK economy will only manage about 2.5-2.7% this year.

Even this growth has been based on government stimulus for house-building and cheap credit. Investment in productive sectors has been weak. Real GDP per person is still below the peak achieved in 2008 before the Great Recession. Investment in real terms is still 4% below, manufacturing output 5% below and productivity per hour still over 1% below its peak before the Great Recession. Britain is running a payments deficit with the rest of the world equivalent to 6% of GDP, bigger than the government deficit. Above all, net national disposable income per head (after inflation) is some 6% below the peak and real weekly earnings have fallen since the Tories took office in May 2010 in every quarter but two – the longest fall in real wages since the Great Depression.

And it does not look any better in 2015. The housing boom in the UK is beginning to fade and will expose the underlying weakness in the productive sectors in 2015. Average house prices are rising at their slowest rate for more than a year. And according to the Chartered Institute of Personnel and Development (CIPD), UK wage growth is likely to remain weak for at least another year because employers are finding it easy to recruit and retain staff at current pay levels. Employers surveyed in the autumn had an average of 50 applicants for every low-skilled vacancy and 20 for every high-skilled vacancy, 40 per cent of whom were suitable for the role. They also reported that job turnover remained low. “If few employees are leaving, and most employers can find suitable applicants for vacancies, the conditions required for higher across-the-board pay rises are not being met,” said Mark Beatson, CIPD’s chief economist.

Indeed, that is the story for most capitalist economies in 2014 (Europe, Japan, the US and the UK): weak economic growth, poor business investment and falling real incomes for the average household.

Last year I forecast a very weak Japanese economy and it has proved to be even worse that I forecast, despite dollops of virtually interest-free credit, fiscal stimulus packages and another election to install Abenomics – the supposed answer to Japan’s woes (see my post, https://thenextrecession.wordpress.com/2014/10/13/japan-the-failure-of-abenomics/).

And lo and behold, as I write this, the Bank of Japan’s own economic activity survey, the Tankan, suggests that “Japan is going into a double dip”, recession with only a small quarterly increase in GDP for the final quarter of 2014 followed by a renewed contraction next year. In the survey, large Japanese companies gave a score of 14 for current business conditions and forecast a decline to 12 in three months’ time. For small companies, the respective figures were 0 and -4.

The Abe government has launched yet another round of fiscal stimulus measures. It’s going to cut corporate tax rates to try and encourage Japanese companies to invest more and raise wages for their workers and so boost demand. Some hope! Large companies have instead been building up their cash reserves and keeping wages down.

And all this extra spending threatens the other major policy of Abenomics – to get Japan’s huge public sector debt and deficits down. The debt has not been a problem up to now because the interest rate on that debt is near zero and Japan’s banks are pressured to buy government bonds. But this means that little productive investment takes place and if interest rates were to rise, Japan could face a serious debt crisis. The government wanted to reduce its annual deficit by half in 2015 and ‘balance the books’ by the end of the decade. But the economy has been so weak that it has been forced to hold back an increase in sales tax, spend $28bn on projects and give new handouts to corporations. The fiscal target is a joke. What is down the road will be a severe cut in welfare and social benefits to pay for this.

As for Europe, there is no relief. Greece may have finally bottomed the deepest slump in its modern history in 2014, but only after a 40% fall in average living standards and the destruction of jobs, welfare, health and public services. Now it is about to enter a major battle with the EU leaders over how to recover (see below). Spain is still recording record high unemployment levels and with little sign that the productive sectors of the economy are turning up; Italy remains in a depressed state. Only the German economy looks relatively better.

The global economy remains in a crawl and will do so in 2015 for one good reason: the failure of business investment to leap forward. Goldman Sachs reckoned this time last year that there would be a global investment boom in 2014. That has proved to be a mirage in Europe, Japan, the UK and in the major so-called emerging economies of China, India, Brazil and Russia, where investment growth has slowed markedly or collapsed, as in the case of Russia (see my post, https://thenextrecession.wordpress.com/2014/12/08/oil-the-rouble-and-the-spectre-of-deflation/). The emerging markets of Brazil, Russia, India and China collectively known as the BRICs — will likely grow in 2015 at their slowest pace in six years, according to Oxford Economics. Only the US has shown some pick-up in investment.

As I said last year, the reason that business investment has not boomed is that in most economies average profitability remains below levels before the Great Recession and below levels reached in the late 1990s. Most economies are still experiencing the downwave in the profitability cycle, as explained above. Coupled with the downwave in the Kondratiev cycle, that is why the global capitalist economy is in what I call a Long Depression, with some years to run.

Let’s finish with a few predictions.

First, the failure of the Samaras government to get its candidate for President elected by the Greek parliament has forced an election at the end of January that the leftist Syriza party is likely to win, assuming the public opinion polls remain as they are. Syriza will likely have to form a coalition with smaller left and centrist parties. It is pledged to renegotiate the debt burden that the previous government has built up with the EU, some €322bn. This can never be paid off and remains a millstone around the neck of the Greek economy and its people for decades.

greek debt

Syriza wants much of it written off. The EU leaders will play hardball, if only because it is making Ireland and Portugal pay their loans back in spades and it won’t want to set a precedent for other Euro debtors. The existing Troika programme funds are supposed to fund the Greek government from February as long as the government agrees to more fiscal austerity. Syriza claims it will do no such thing, so there appears to an impasse with Greece running out of cash by the summer.

I reckon that this process will spin out through the next few months with nothing resolved. There is a way out for the EU leaders if they want to keep Greece in the euro: they could eventually agree to a perpetual rollover of the debt – so the debt stays on Greek books but there’s nothing to pay for the foreseeable future. This could be sold as the ‘Greek exception’. Alternatively, Syriza reaches a compromise agreement to cover the debt. Either way, my prediction is that Greece will still be in the Eurozone this time next year.

What’s going to be interesting in 2015 is the number of elections in key peripheral Eurozone states coming up. Apart from Greece, Ireland and probably Italy will have elections, where weak centrist governments will try to ‘hold the line’ against populist parties. I will consider the economic programmes of leftist parties like Syriza and Podemos in future posts.

And then there is the UK with a general election in May. I have made three predictions about the UK in the past. The first was that Scotland would vote to stay in the United Kingdom in the referendum last September (see my post, https://thenextrecession.wordpress.com/2014/09/19/scotland-one-prediction-right). That happened. The second was that the Conservative-led coalition would be returned to office (probably the Liberals in tow again). And the third was that the British people would vote to stay in the EU if there is referendum on that in 2017. I’ll explain my prediction for the May election in a post nearer the date.

For 2015, I have launched a Facebook site so that you can keep up to date with my posts and other events and papers.  See
https://www.facebook.com/pages/Michael-Roberts-blog/925340197491022

and

Essays on inequality
Createspace https://www.createspace.com/5078983

or Kindle version for US:
http://www.amazon.com/dp/B00RES373S
and UK
http://www.amazon.co.uk/s/?field-keywords=Essays%20on%20inequality%20%28Essays%20on%20modern%20economies%20Book%201%29&node=341677031.

Advertisements

Top posts of 2014 and a new book for 2015

December 28, 2014

Once again, I give you my most read posts of the year.

1. Global wealth inequality: top 1% own 41%; top 10% own 86%; bottom half own just 1%.
https://thenextrecession.wordpress.com/2013/10/10/global-wealth-inequality-10-own-86-1-own-41-half-own-just-1/
First published in October 2013, it quickly became last year’s winner and held its top spot this year, scoring nearly four times as many views as any other post in this list in 2014, even though it was updated with the latest global wealth report in October 2014.

2. David Harvey, Piketty and the central contradiction of capitalism
https://thenextrecession.wordpress.com/2014/05/19/david-harvey-piketty-and-the-central-contradiction-of-capitalism/
This was posted last May and has received a boost in viewing from a later post on my debate with David Harvey on the rate of profit (see below).

3. Marx blogged to death
https://thenextrecession.wordpress.com/2014/03/31/marx-blogged-to-death/
This came out last March in response to a New York Times discussion by various mainstream economists about whether Marx was right after all about capitalism.

4. Is inequality the cause of capitalist crises?
https://thenextrecession.wordpress.com/2014/03/11/is-inequality-the-cause-of-capitalist-crises/
The most popular of my several posts on the most fashionable subject of 2014: rising inequality in modern economies (see below).

5. Ukraine: Hobson’s choice
https://thenextrecession.wordpress.com/2014/02/27/ukraine-hobsons-choice/
The first of three posts on Ukraine – a major political hotspot in 2014.

6. Marxism in London, socialism in Slovenia
https://thenextrecession.wordpress.com/2014/07/13/marxism-in-london-socialism-in-slovenia/
A post on my presentation on the world economy in depression at last summer’s Marxism festival in London.

7. A world rate of profit revisited with Maito and Piketty
https://thenextrecession.wordpress.com/2014/04/23/a-world-rate-of-profit-revisited-with-maito-and-piketty/
A post that combines a critique of Thomas Piketty’s ‘best business book of the year ‘(FT) with my evidence on the movement in the world rate of profit and the exciting new work of Esteban Maito.

8. David Harvey, monomaniacs and the rate of profit
https://thenextrecession.wordpress.com/2014/12/17/david-harvey-monomaniacs-and-the-rate-of-profit/
Only published in mid-December, this post has raced into the charts, as readers consider the arguments presented by David Harvey against Marx’s law of profitability as the cause of crises and my defence of that position.

9. Piketty – in French, it’s worse
https://thenextrecession.wordpress.com/2014/04/30/piketty-in-french-its-worse/
A post reviewing early critiques of Piketty from France and that famous quote where Piketty admits he has not read Marx’s Capital, although he pinched the title for his book.

10. Scotland: yes or no?
https://thenextrecession.wordpress.com/2014/09/04/scotland-yes-or-no/
The post where I present the economic arguments for and against Scotland separating from the United Kingdom – the burning issue for the British labour movement in 2014.

Essays on Inequality by Michael Roberts

Essays on inequality

I have published a short book on all the issues of inequality in modern economies. It’s a series of essays based on my posts over the last few years on the subject. If you have read all my posts, you still might find it useful as a one-stop source on the issues of inequality. And there are also essays not previously published in the book. It’s short but (hopefully) sweet.

The physical book is available on Createspace here at https://www.createspace.com/5078983

and at Amazon US and Amazon UK (as well as other sites) shortly

at the exorbitant price of $12.99 and £8.99 (I could not get the price any lower!).

But there is a Kindle version for just $2.99 (http://www.amazon.com/dp/B00RES373S) for the US

and £1.99 for the UK
(http://www.amazon.co.uk/s/?field-keywords=Essays%20on%20inequality%20%28Essays%20on%20modern%20economies%20Book%201%29&node=341677031).

Also available on other world sites.

If I make any royalties from this (which I doubt!), I plan to use it for something worthwhile for Marxist economics (suggestions welcome).

US economy ends on a high; the UK less so

December 24, 2014

As we go into the Christian holiday break, the major stock markets of the world are reaching all-time highs. The US S&P-500 index has just had its 51st closing high of the year. The S&P 500 has now rebounded 11% since reaching a recent low in the middle of October, following the collapse of oil prices and a feared debt crisis in Russia (see my post, https://thenextrecession.wordpress.com/2014/12/08/oil-the-rouble-and-the-spectre-of-deflation/). After Janet Yellen, the head of the US Fed, announced that the Fed would not be hiking its ‘policy interest rate’ for at least six months, stock investors renewed their confidence in the continuation of cheap money to invest.

Now the final revision on US GDP growth for the third quarter of 2014 ending in September has been released. It came in at a 5% (annualised) rise over the previous quarter, the fastest quarterly growth in more than a decade. Naturally, this has been heralded by most analysts as a sign that the US economy is now set for sustained fast growth in 2015 onwards and at last we can talk about the end of weak ‘recovery’ since 2009.

Well, it can’t be disputed that the headline figure is impressive. But, as is often the case, the devil is in the detail. Yes, real household spending was up from a 2.5% annual rate in Q2 2014 to 3.2%. But business investment grew at a slower pace (albeit at 8.9%) compared to Q2 (9.7%). The joker in the pack was government spending, which rose 9.9% compared to a decrease of 0.9% in Q2. And the main reason for this was a huge increase in defence spending, from 0.9% in Q2 to 16% in Q3! Government spending contributed 0.8% points of the annualised increase of 5% in Q3. The average contribution from government since 2010 has been less than zero. Without this big jump in arms expenditure, real growth would have been slower than in Q2 2014.

And annualised quarterly figures are misleading. They tell the current pace of change but not how much higher real GDP is compared to, say, a year ago. By the end of September 2014, the US economy was larger in real terms compared to a year ago by just 2.7%. That’s not bad compared to other major capitalist economies, but hardly a staggering pace – and still under the long-term average.

Moreover, the forecast growth rate for the final quarter of this year ending on 31 December is expected to be much less than the 5% just announced. Data for the latest quarter on the US economy suggest a slower growth, with new home sales falling in November (as it is, investment in homes has been weak). Spending on business investment also fell in November. However, consumer spending picked up with the fall in gasoline prices from the oil price collapse. If we assume, say 2.5% yoy growth in Q4, then annual growth in 2014 will end up about 2.4%. The graph below shows that this is pretty much where US economic growth has been since the end of the Great Recession.

US YOY growth

And more or less at the same time, the UK announced its revised figures for real GDP growth Q3 2014. This came it at 0.7% up from Q2 (or an annualised 2.8%). Again not bad, but previous GDP figures going back a few years were revised down and as a result, UK real GDP was reduced from the previous estimate of 3.0% yoy to 2.7% yoy – exactly the same as US growth. It is now clear that the UK will not achieve Chancellor Osborne’s boast of 3% growth in 2014 when the Q4 data come in. Indeed, his claim that the UK economy will be the fastest growing of the top G7 in 2014 is now under challenge.

And it remains the case that the ‘recovery’ in the UK since the Great Recession remains the weakest of the last four recessions.

GDP quarter-on-quarter growth from peak for previous and latest economic downturns

UK recovery

Source: Office for National Statistics

Of course, most commentators expect faster growth in 2015 for both the US and the UK. But this forecast primarily depends on household consumption staying firm and business investment growth accelerating. In the UK, in Q3, business investment increased by 5.2% compared with the same quarter a year ago, but fell compared to Q2 by 1.4%, with a significant fall in so-called intellectual property products (-1.3%).

The reality is that UK economic growth remains skewed towards a consumer boom based on cheap credit and government subsidies to the residential housing market. Rising home prices and rock-bottom borrowing rates have encouraged a level of spending by those in work. As a result, real GDP growth has been mainly driven by construction (homes and offices). Construction activity grew at double the rate of services in the third quarter, while manufacturing and production lagged.

UK sector growth

UK house prices have grown at an annual rate of 8% or more for the last 12 months, according to Nationwide. This has pushed up land values and benefited the property developers who hire engineers and architects.

UK home price growth

Manufacturing growth has been weak and export growth has been terrible. In Q3, the UK racked up a huge deficit with the rest of the world (£27bn) as consumer imports outstripped exports and income and investment from abroad dropped off.

Most important, UK business investment, while rising in real terms, is not recovering relative to GDP.

UK bus inv-GDP

As a result, productivity remains below the level achieved before the Great Recession.

UK productivity

The US corporate sector has enjoyed record high profit margins.

US profit margins

But although margins are high, profitability is coming under pressure as businesses raise investment. Indeed, total corporate profits are now hardly rising, at just 1.4% yoy in Q3 2014. If they stop rising, then business investment growth, far from accelerating to sustain real GDP growth, will contract after a lag.

US bus inv and profits

By this time next year, US real GDP may be suffering from a fall in investment and rising interest rates (if the Fed keeps to its plan).

I’ll discuss the US and world economy in 2015 in more detail in my final post for this year, next week.

The cost of imperialist wars

December 21, 2014

2014 was supposed to be the year that American troops left Iraq, having completed their task of establishing a pro-West democratic government there. It was also the year that British troops left Afghanistan, having completed their task of ‘pacifying’ the notoriously wild Helmand province, leaving the Afghan army to control the region on behalf of the pro-West democratic government based in Kabul.

The reality, of course, is a sorry joke. Both armies, far from leaving the war arena, are now engaged in ‘supporting’ air strikes and a Kurdish army in a battle against a new Hydra head in the shape of ISIS in Syria and Iraq, while Taliban continues its horrendous battle against American and Pakistan forces (and their drones) in the hills of Afghanistan and against the people in its towns.

The wars are far from over and these attempts to impose imperialist control over a multitude of forces are failing, just as the Roman armies failed to subdue the Germanic and other tribes along its northern reaches back some 2000 years ago onwards. The cost to the Roman state was ruinous and eventually too much to cope with.

The cost to the US and its allies in the ‘coalition of the willing’ is also huge, if still possible to absorb. According to the latest estimates, the Afghan conflict has cost $1trn so far since 2002. That’s only about 0.6% of US GDP a year – but not something to ignore, given the low growth in the economy since 2008 and the alternative ways that money could have been spent on to preserve public services or boost the productive sectors of the economy.

Afghan war

According to John Sopko, the US government’s special inspector-general for Afghanistan, the amount the US has spent on reconstruction in Afghanistan when adjusted for inflation is more than the cost of the Marshall Plan to rebuild western Europe after 1945 – and for no result. The waste has been immense too. $500m was spent on 16 transport planes for the Afghan Air Force. The fleet was stored in Kabul for year and the planes were turned into $32,000 worth of scrap metal. Another $34m was spent on a base in south-western Afghanistan. It came equipped with a 64,000 sq ft operations centre and briefing theatre, and has never been used. $3m on eight patrol boats for Afghan police, still in Virginia storage after four years; $5.4m incinerators, installed incorrectly, never used; $3.6m on TV broadcast trucks for live sporting events, unused in Kabul storage – and so on.

To this bill must be added the Iraq war, which has cost $1.7tn, according to the Costs of War Project by the Watson Institute for International Studies at Brown University. And there will be an additional $490bn in benefits owed to war veterans, expenses that could grow to more than $6trn over the next four decades, counting interest. According to Ryan Edwards at City University of New York, the US has already paid interest of $260bn on that war debt.

The war in Iraq has killed at least 134,000 Iraqi civilians and may have contributed to the deaths of as many as four times that number. When security forces, insurgents, journalists and humanitarian workers were included, the war’s death toll rose to an estimated 189,000, the Watson study said. Then there are medical costs already incurred for soldiers who have left the military. Linda Bilmes, a Harvard economist who has done extensive research on the war costs, estimates that medical spending on veterans from both Iraq and Afghanistan has so far reached $134bn. Military healthcare premiums paid by serving military members have been kept low, prompting a surge in healthcare spending by the Pentagon, while salaries have risen above inflation. Since 2001, the defence department’s base budget has increased by $1.3trn more than its own pre-9/11 forecasts.

And the spending is not over. The Pentagon has indicated it wants further funding of $120bn for 2016-19 for operations in Afghanistan. US troops numbering 10,000 are to stay in Afghanistan for at least the next two years at an estimated $7bn a year. Prof Bilmes forecasts future medical and disability costs for veterans from both Iraq and Afghanistan will reach $836bn over the coming decades. The two wars have also added to the Pentagon’s fast-growing pension bill: the military pension system has an unfunded liability of $1.27trn, which is expected to rise to $2.72trn by 2034.

This disaster, both in human terms and in money, is repeated on a smaller scale with the British military intervention. British troops are home from a campaign that lasted 13 years, including Iraq in the middle. PM David Cameron announced in December 2013 that the troops could come home because their ‘mission had been accomplished’. A new book by Frank Ledwidge (Investment in Blood: The True Cost of Britain’s Afghan War) tallies the personal and financial cost of Britain’s Helmand campaign, pointing out that Britain’s failure has “obliterated any consideration of dead Afghans and folded the British war dead into a single mass of noble hero-martyrs stretching from 1914 to now” with the display of plastic red poppies at the Tower of London.  See my previous post on Ledwidge’s work at
https://thenextrecession.wordpress.com/2014/06/01/dont-mention-the-war/.

Ledwidge estimates British troops alone were directly responsible for the deaths of at least five hundred Afghan civilians and the injury of thousands more. Tens of thousands fled their homes. ‘Of all the thousands of civilians and combatants,’ Ledwidge writes, ‘not a single al-Qaida operative or “international terrorist’” who could conceivably have threatened the United Kingdom is recorded as having been killed by Nato forces in Helmand.’ Since 2001, 453 British forces personnel have been killed in Afghanistan and more than 2600 wounded; 247 British soldiers have had limbs amputated. Unknown numbers have psychological injuries.

The British operation in Helmand alone cost £40bn, or £2000 for each taxpaying British household! Britain built a base in Helmand, Camp Bastion, bigger than any it had constructed since the end of the Second World War. It has now handed Camp Bastion over to the Afghan military which is now struggling to prevent it being overrun by attackers. Everything the military did depended on the petrol, diesel and kerosene trucked in from Central Asia or Pakistan; one US estimate calculated that the price of fuel increased by 14,000% in its journey from the refinery to the Afghan front line. In firefights, British troops used Javelin missiles costing £70,000 each to destroy houses made of mud. In December 2013, when they were packing up to leave, they had so much unused ammunition to destroy that they came close to running out of explosives to blow it up with.

Ledwidge adds in the cost of buying four huge American transport planes to shore up the air bridge between Afghanistan and the UK (£800m), 14 new helicopters (£1bn), a delay in previously planned cuts in the size of the army (£3bn) and the cost of returning and restoring war-battered units (£2bn). And £2.1bn spent on ‘aid and development’, most of which was stolen or wasted. Grotesque sums were spent on providing security and creature comforts to foreign consultants: an annual cost of around £0.5m per head!

Ledwidge estimates the cost of the British military’s bloodshed and psychological trauma – the amount spent on the ongoing treatment of damaged veterans, compensation under the recently introduced Armed Forces Compensation Scheme (AFCS), and an actuarial estimate of the financial value of human life – at £3.8bn. An Afghan who sought compensation from the British in Helmand after losing his sight as a result of a military operation might expect a payment of £4500. A British soldier suffering the same injury would be entitled to £570,000.

The whole British campaign in Helmand was a failure: ‘The Afghan army in Helmand was non-existent. The local Afghan police were, on the whole, criminal. The Helmand director of education was illiterate. The British were never fighting waves of Taliban coming over the border from Pakistan: they were overwhelmingly fighting local men led by local barons who felt shut out by the British and their friends in ‘government’ and sought an alternative patron. The Taliban provided money, via their sponsors in the Gulf, and a ready-made, Pashtun-friendly ideological framework the barons could franchise. Since the British were hated even before they arrived, recruitment of foot soldiers was easy.”  (An Intimate War: An Oral History of the Helmand Conflict 1978-2012 by Mike Martin).

So after 13 years of war in far-flung places, American and British imperialism have nothing to show for it, while hundreds of thousands of Iraqis, Afghans and Pakistanis have been killed, injured, tortured and made homeless. And American and British taxpayers have seen their public services cut and their taxes go to fund extravagant, wasteful and hopelessly failed wars to preserve corrupt, unpopular elites in Iraq, Saudi Arabia, and the Gulf states and to sustain the interests of the multinational energy companies.

David Harvey, monomaniacs and the rate of profit

December 17, 2014

David Harvey is a Distinguished Professor at the City University of New York (CUNY), Director of The Center for Place, Culture and Politics (http://pcp.gc.cuny.edu/) and author of numerous books. For over 40 years, he has been one of the world’s most trenchant and critical analysts of capitalist development. And he has developed a global audience for his on-line video lectures on reading Capital, (see http://davidharvey.org/). Harvey won the 2010 Isaac Deutscher prize for the best Marxist book of the year with The Enigma of Capital (http://www.amazon.com/Enigma-Capital-Crises-Capitalism/dp/0199836841).

I have commented on Harvey’s contributions to Marxist economics on various occasions on my blog.
https://thenextrecession.wordpress.com/2010/09/03/views-on-the-great-recession-david-harvey-and-anwar-shaikh/
https://thenextrecession.wordpress.com/2011/11/13/david-harvey-marxs-method-and-the-enigma-of-surplus/
https://thenextrecession.wordpress.com/2014/05/19/david-harvey-piketty-and-the-central-contradiction-of-capitalism/

Professor Harvey has always been critical of the view that Marx’s law of the tendency of the rate of profit to fall plays any significant role as a cause of crises under capitalism. In his award winning book, The enigma of capital, he states that “There is, therefore, no single causal theory of crisis formation as many Marxist economists like to assert. There is, for example, no point in trying to cram all of this fluidity and complexity into some unitary theory of, say, a falling rate of profit”.

Recently, Harvey has returned to this point in the presentation of an essay to the University of Izmir, Turkey in October. You can see a You tube screening of that presentation at https://www.youtube.com/watch?v=-ZJrNgb-iiY&spfreload=10

What was particularly interesting to me was that, in his paper, Professor Harvey singles me and my work out as an example of those who support Marx’s law of profitability as the cause of crises. He opens his paper with the words “In the midst of crises, Marxists frequently appeal to the theory of the tendency of the rate of profit to fall as an underlying explanation. In a recent presentation, for example, Michael Roberts attributes the current long depression to this tendency”. He continues: “Roberts bolsters his case by attaching an array of graphs and statistical data on falling profit rates as proof of the validity of the law. Whether the data actually support his argument depends on (a) the reliability and appropriateness of the data in relation to the theory and (b) whether there are mechanisms other than the one Roberts describes that can result in falling profits.”

Harvey is very sceptical of my work and that of others: “Before submitting pacifically to the weight of the empirical evidence that has been amassed by Roberts and many other proponents of the falling rate of profit theory, some serious questions have to be asked”. And he proceeds to ask them.

I think that it is significant that such an eminent Marxist economist (or I think he prefers ‘historical-geographical materialist’) should produce a paper that critiques my work. It is also revealing that he reckons there is a need for him to take to task the work of those supporters of Marx’s law as the cause of crises. Clearly, recent work by such as Carchedi, Kliman, Freeman, Moseley, Shaikh, Esteban Maito, Tapia Granados, Peter Jones, Mick Brooks, Sergio Camara and others, is gaining some traction. So much so that, recently, one Marxist economist from the ‘overproduction school’ called me a ‘monomaniac’ in my attachment to Marx’s law of profitability as the main/underlying cause of capitalist crises (see Mike Treen, national director of the New Zealand Unite Union, at the annual conference of the socialist organisation Fightback, held in Wellington, May 31-June 1, 2014, and a seminar hosted by Socialist Aotearoa in Auckland in November 10, 2014 — http://links.org.au/node/4156).

Anyway, I approached David Harvey for his paper and suggested that we conduct a debate on the issues involved. Professor Harvey graciously agreed that a debate would be a great idea and that we could conduct this debate in public, on my blog and elsewhere. So I attach Harvey’s paper Harvey on LTRPF but also point out to you that it will eventually appear in its final form as David Harvey, Crisis theory and the falling rate of profit; to be published in 2015 in The Great Meltdown of 2008: Systemic, Conjunctural or Policy-created?, edited by Turan Subasat (Izmir University of Economics) and John Weeks (SOAS, University of London); Publisher: Edward Elgar Publishing Limited.

It is not possible to do justice to Professor Harvey’s critique of the supporters of Marx’s law as the cause of crises. You must read the whole paper. But in essence, Harvey argues that the LTRPF is not the only or even the principal cause of crises. Thus it cannot be the basis of a Marxist theory of crisis. Indeed, as he said above: “There is, I believe, no single causal theory of crisis formation as many Marxists like to assert”. He is sceptical of Marx’s law being relevant and accepts the views of MEGA scholars like Michael Heinrich that Marx also probably became sceptical and dropped it. “I find Heinrich’s account broadly consistent with my own long-standing scepticism about the general relevance of the law” (see my posts on Heinrich, http://gesd.free.fr/mrhtprof.pdf). Indeed, Harvey has doubts that it is a law at all: “we know that Marx’s language increasingly vacillated between calling his finding a law, a law of a tendency or even on occasion just a tendency”.

Harvey argues that we proponents of Marx’s law as the basis of a theory of crises are one-sided and monocausal in our approach because: “proponents of the law typically play down the countervailing tendencies”. Thus we rule out many features of capitalism that may be better causal factors in crises. For example, we ‘monomaniacs’ (to use Mike Treen’s term) “suggest financialization had nothing to do with the crash of 2007-8. This assertion looks ridiculous in the face of the actual course of events. It also lets the bankers and financiers off the hook with respect to their role in creating the crisis.”

Moreover, Professor Harvey pours cold water over our “array of graphs and statistical data on falling rates of profit as proof of the validity of the law”. He doubts their validity because there is plenty of evidence in the ‘business press’ that the rate of profit, or at least the mass of profit, in the US has been rising, not falling. And even if it is correct that there was a post-war fall in the rate of profit, “Profit can fall for any number of reasons”. He cites a fall in demand (the post-Keynesian explanation); a rise in wages (the neo-Ricardian profit squeeze explanation); ‘resource scarcities’ (Ricardian); monopoly power (Monthly Review school view of rent extraction from industrial capital).

Professor Harvey prefers other reasons for capitalist crises than Marx’s law. There is the effect of credit, financialisation and financial markets; the devaluation of fixed constant capital in the form of obsolescence; and, above all, the limits on consumer demand imposed by the holding down of real wages relative to capitalist investment and profits. He wants us to consider alternative theories based on the “secondary circuit of capital” i.e. outside that part of the circuit to do with the production of value and surplus value and instead look at that part concerned with the distribution of that value, in particular ‘speculative overproduction’. Again, he wants us to look at the crises caused by a redistribution of the value created by ‘dispossession’, a form of ‘primitive accumulation’ where wealth is accumulated by force or seizure and not by the exploitation of wage labour in production as in fully developed modern capitalism.

Well, Professor Harvey has provided a new opportunity to debate these points and hopefully for all of us interested in this to gain a better understanding of what causes crises under capitalism so we can resist and overcome the power of capital eventually. I have replied to Professor Harvey’s paper as best as I can with my own, which can be found here reply-to-harvey.

Naturally, I do not agree with Harvey on any of his points. I think that Marx’s law of profitability does provide the cornerstone of the Marxist theory of crisis, which I think is coherent and ascertained from Marx’s works, mainly Grundrisse and Capital. I don’t think Marx’s law is logically incoherent or ‘indeterminate’ or that he dropped it in his later years, as Heinrich suggests. As for being monomaniacal or one-sided, I agree with G Carchedi: “if crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence. If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the ”monocausality” of crises.”

I don’t think that I or other supporters of Marx’s law as the basis of the cause of crises have ignored the countervailing tendencies to the tendency of the rate or profit to fall as capital accumulates. That’s because the law is both the tendency and countertendency. Henryk Grossman, supposedly the most ‘monomaniacal’ of all supporters of the law as a theory of crises, in his book devoted 68 pages to the tendency and 71 pages to all the countertendencies.

Anybody who has read my book, The Great Recession, knows that I fill large amounts of space to the role of the US housing boom and bust, the banking crisis, exotic and toxic derivatives etc. Indeed, my current blog has at least 25 posts on the relation between profitability, credit (debt), banking and the crisis. And in 2012, the year after DH gave the Isaac Deutscher memorial speech at the Historical Materialism conference, I presented a long paper entitled Debt Matters (Debt matters). The role of credit in crises is important and I and others have spent some time trying to incorporate that into a Marxist theory of crisis.

As for the data, well, I and many others have painstakingly tried to ensure proper empirical analysis and statistical techniques to justify the case that there has been a secular fall in the rate of profit of capital in all the major economies, as well as a cyclical process(or waves) of profitability when countertendencies come into play. If these data are wrong, then I await alternative data from Professor Harvey. I don’t think anecdotal evidence from the business press is sufficient.

My and the work of others have enabled us to get a causal sequence of the development of capitalist crises. As Marx himself argued, there is a point in the accumulation process when the rate of profit on the stock of investment falls to a level where new investment actually leads to a fall in the mass of profit and new value. This ‘absolute overaccumulation’ of capital is the trigger moment for the collapse of investment and then bankruptcies, unemployment and falling incomes – in other words, a slump. A study by Tapia Granados has shown this causal sequence holds for the US economy since 1945 (does_investment_call_the_tune_may_2012__forthcoming_rpe)_and I and G Carchedi have shown it holds for the Great Recession too (The long roots of the present crisis). Profits call the tune. This seems to me a much more compelling case for explaining crises (with even predictive power) than falling back on various theories from bourgeois economics based on credit booms (Austrian school), financial speculation (Minsky), lack of demand (Keynes); low wages and inequality (Stiglitz and the post-Keynesians), as I think Harvey does – see my paper, The causes of the Great Recession (The causes of the Great Recession).

All the alternative theories have one thing in common: that, if their particular theory is right, then capitalism can be corrected through financial regulation (Martin Wolf, James Galbraith), higher wages (post-Keynesians), or progressive taxation (Piketty) without removing the capitalist mode of production itself. That’s because these theories argue that there is no fundamental contradiction in capitalist mode of production that causes recurrent and cyclical crises (as Marx claimed); there are only problems with circulation.

I am ‘monomaniacally’ convinced that the theory of crisis must be found in the production process even if it manifests itself in circulation and realisation. Appearances can be deceiving.

Anyway, let’s discuss.

ADDENDUM

David Harvey has now posted his and my paper on his website.

http://davidharvey.org/2014/12/debating-marxs-crisis-theory-falling-rate-profit/

Japan: no mandate

December 15, 2014

Shinzo Abe’s Liberal Democratic Party won the snap general election. The LDP won 290 of 475 seats in the lower house of parliament — the more powerful of the two chambers — roughly matching its performance two years ago, Together with its coalition partner, the Buddhist-affiliated Komeito, which won 35 seats, the LDP has retained the two-thirds majority necessary to pass legislation without recourse to the upper house.

Abe called the election, he said, to get a ‘mandate’ from the electorate for his so-called Abenomics. This is a set of policies of monetary easing, fiscal tightening and ‘supply-side neoliberal ‘reforms’ designed to get Japanese capitalism out of its stagnation. On the level of accelerating real GDP growth, investment and ending deflation, it has miserably failed (see my post, https://thenextrecession.wordpress.com/2014/10/13/japan-the-failure-of-abenomics/). The economy remains flat at best.

But where he has succeeded is in reducing the real incomes of the average Japanese household and boosting the profitability of big business.

Japan real wages

Under Abenomics, household real incomes have fallen 4%, while profits and profitability has risen 6-9% (if still below the peak of 2007).

Japan NRC

But so far, this has been to no avail in raising business investment. Instead higher profits have been diverted into the stock market and property – the usual results of monetary easing and ‘labour reform’ everywhere since the end of the Great Recession.

Japan business investment

Abe claims he has his mandate for more of the same. But the election results hardly show that. The snap election exposed the weakness of the main opposition Democrat Party that did not even run enough candidates to win. Even so, the DP increased its number of seats from 62 to 73. And the Communists doubled their representation. Abe’s LDP did no better than last time and the coalition with the religious Komeito will be in the same position as last time.

Indeed, the most significant figure in the election was the historically low turnout, down from the previous record low in 2012 of 59.3% to just 52.3%. Many Japanese citizens either did not see the point of the election or were not enamoured of any the major parties. Once again in an election in a major capitalist economy since the Great Recession, the NO VOTE party won. Since 2009, over 20m voters have stopped voting.

Japan voter turnout

The estimated turnout is an all-time low since figures were kept in 1890! (see my post, https://thenextrecession.wordpress.com/2012/12/16/japan-election-lowest-turnout-since-records-began/).

Greece: Samaras gambles

December 12, 2014

Financial markets got very excited this week when Greece’s conservative PM Antonis Samaras announced that he was going to bring forward an upcoming parliamentary vote for a new president to this month from February. Greek stock prices fell nearly 20% in two days, the biggest fall since the global crash of 1987.

Investors are really worried that if Samaras fails to get his candidate elected as President after three voting chances in parliament, a general election will have to follow in January. That could lead to the victory of the leftist opposition party Syriza (Syriza leads by 6-8%pts in the polls). Then Greece would have a government pledged to renegotiate the debt owed to the EU/IMF and to reverse many of the austerity measures imposed by the Troika (the EU Commission, the IMF and the ECB) as conditions for loans of nearly €300bn made to Greece since 2010. That could provoke a new crisis in the Eurozone.

The term of Greece’s incumbent president is nearly up, and while the role is primarily ceremonial, the president still has the power to call elections and ‘arrange’ coalitions. The decision of Samaras to go for a snap presidential election vote in parliament two months early was forced on him.

Samaras and his junior partner in government, Venizelos from Pasok, are between a rock and hard place. They wanted to ‘exit’ the existing troika programme in 2015 without any ‘lines of credit’ being introduced, as Portugal has already done. But that has not proved possible because they still need a final tranche of funds from the Troika to tide them over and the Troika won’t deliver unless 1) the Greek government meets new fiscal plans and targets and 2) Greece takes a line of credit from the IMF to fall back on once the Troika program ends.

But it is political suicide in any 2015 parliamentary election for Samaras to accept more fiscal austerity beyond that agreed and a line of credit that ties him to the IMF, after having told the Greek electorate that austerity is over and the rule of the Troika is done with.

So Samaras has gambled by going for an early presidential vote without any agreement with the Troika, given that the Euro leaders have agreed to a two-month extension on the program without imposing extra austerity. This is a small window of opportunity for Samaras. However, he must win the presidential vote for his candidate or he will be forced into an early general election.

The coalition has a small majority in parliament (155 votes out of 300). But the presidency is only achieved with 180 votes, so he needs a minimum of an extra 25 MP votes. Samaras cannot get this from Syriza, the Communists and the Fascists, so he is left with independents, the Greek Independents and the smaller left parties. Up to now, they have been opposing his policies in parliament so he is up against it in getting the necessary votes.

Greek parliament

But he may get them for two reasons: 1) independent MPs may fear they will lose their seats if there is an early general election and 2) they may not want the populist left Syriza party to win an election. So the financial markets may be over-pessimistic because if Samaras can twist enough arms and offer enough bribes he may manage to get the extra votes he needs. There are three votes between 17 December and 29 December and it will probably go to the wire on the last vote.

His candidate is former European Commissioner Stavros Dimas, very acceptable to the Troika and possibly respectable in the eyes of MPs and even parts of the Greek electorate. If he can get Dilma elected, the crisis is over and the government will have another two years in office, with the hope that the Greek economy will recover along with the Eurozone and conditions for the average Greek will improve, giving him a chance to win another election in 2016.

If he manages to get this done, it will be a political blow to Syriza. Samaras’ motivation is to split the opposition, “removing uncertainty and restoring political stability ….. when the current parliament elects a president at the end of the month, the clouds will be gone and the country will be ready to officially enter the post-bailout era.” Samaras decided it was better to go now while he is still ‘resisting’ Troika demands for austerity rather than wait until February when his position would be even weaker.

But it is a gamble. Even if Samaras wins over every independent lawmaker, which is unlikely since some have openly promised to vote against the government candidate, he would still fall short by one vote. Indeed, if all opposition lawmakers vote against the government nominee, that will be enough to bring down the government: the five opposition parties control 121 seats, the exact number needed to prevent a government win.

If Samaras does fall short, then a general election in January would probably means a victory for Syriza in coalition with some smaller left parties. It is unlikely that the Euro leaders will agree to anything that Syriza wants and so a stalemate will ensue that will create huge uncertainty in financial markets and push the Greek economy back into an immediate crisis. Also, a Syriza government may well become a beacon to other populist movements in the periphery that could impel them forward.  This is the risk for the Greek ruling class. However, if Samaras can pull it off, he can ‘save’ Greek capitalism from disaster and a takeover by the ‘forces of labour’ as represented by Syriza.

The long-term problems remain, however. After five years of severe austerity and depression, when the living standards of the average Greek household have fallen by 40% and poverty (and starvation) haunt the streets of Athens and the countryside, the government is at last running a surplus on its annual budget (revenue over spending, excluding debt interest). So it does not need to borrow more from the Troika. And the government is forecasting a rise in real GDP in 2015 for the first time since 2009.

But really the best that can be said for the economy is that it has finally stopped plunging into an abyss and has hit the bottom – hard. Government debt still stands at 175% of GDP, even after a ‘restructuring’ of the debt owed to European banks back in 2012 (see my post, https://thenextrecession.wordpress.com/2012/03/09/greece-the-biggest-debt-default-in-history/).

There is no prospect of that debt ratio being reduced to 120% by the end of the decade as demanded by the Troika. And even that level is twice what is acceptable to the Euro leaders as the maximum in the decade beginning in 2020. Greece is burdened with a such a heavy level of public (and corporate) debt that Greek taxpayers and small businesses will have to service, that it will keep living standards at ‘third world’ levels for a generation. No wonder Syriza’s demand for a renegotiation of the debt with the EU is so vital.

Unemployment (26%), particularly youth unemployment (50%), remains near record levels with little sign of a significant reduction.

Greek unemployment and GDP

Those Greeks who are well off enough to leave the country have done so to seek work elsewhere and, of course, very rich Greeks have taken their money and capital already to the likes of London to purchase big mansions.

One thing has been achieved by the depression and the austerity: lower labour costs. Labour costs per unit of (falling) production have dropped 30% since 2010 (see https://thenextrecession.wordpress.com/2014/02/11/greece-cannot-escape/).

Greek ULC

And so the profitability of Greek capital has improved. But even so, profitability is still way below the peak of 2006 before the Great Recession and the Eurozone depression..

Greek ROP

… and has hardly recovered on a long term perspective.

Greek LT ROP

Investment is now lower than it was in the late 1960s! Even if Samaras succeeds in his gamble, Greek capitalism remains at the bottom of a hole.

Oil, the rouble and the spectre of deflation

December 8, 2014

Crude oil prices have dropped to five-year lows in just a few months.  And the reason is clear: it’s supply and demand!  On the supply-side, the most significant development has been the accelerating expansion of shale oil and gas production in North America, mainly in the US.

Oil and gas reserves are trapped in layers of shale rock and can be released by a process of hydraulic water pressure called fracking.  By sinking hundreds of rigs in quick succession, shale rock can produce significant supplies of tight oil and natural gas – and this process in North Dakota, Texas and other areas has turned US oil production round.  US oil output up to now had been based in traditional deep oil reserves in Texas, Louisiana and the Gulf of Mexico.  US production was in decline from the mid-1970s to around 4mbd and falling.  But with shale, annual output has rocketed back to 9mbd, near previous peaks.  Fracking for tight oil and gas is now spreading across the globe as those countries with large shale reserves look to exploit it in Poland, China, Europe and even the UK.

The other side of the price equation is demand.  Global demand for energy, particularly oil, has slowed.  That’s mainly because global economic growth has slowed since the Great Recession ended.  China has led the way with slowing growth, along with the other large emerging economies, like Brazil and India; and the major advanced capitalist economies remain in ‘low gear’ (see my post, https://thenextrecession.wordpress.com/2014/11/08/the-world-economy-in-low-gear/).  Industries are increasing their use of fossil fuels at a slower pace than expected, while transport demand is in decline (Americans are driving less).  Energy conservation has been stepped up and energy intensity (energy per unit of output) is falling everywhere.  All the international energy agencies now expect oil and gas prices to stay at these new lows for some years ahead.

The biggest losers are those countries that rely on energy exports to make their money: Saudi Arabia, the rest of the Arab oil states, super-rich Norway, super-poor Venezuela, Mexico and, above all, Russia.  The Saudis have launched a counter-offensive.  With more than five times the reserves of American shale, they are taking on the shale producers by increasing production in order to drive down the price to the point where shale producers start losing money (their production costs are way higher than the Saudis: about $50/b to $25/b).  So far this has not worked and shale production continues to rise.  But the Saudi policy is destroying the revenues of other OPEC producers like Venezuela – and Russia.

Putin may have faced up to ‘the West’ over Ukraine and refused to budge but, as I argued in a previous post (https://thenextrecession.wordpress.com/2014/11/10/from-poroshenko-to-putin-its-all-downhill/), the West has been winning the economic battle and the oil price has been the major weapon.  The collapse in the oil price has exposed the weakness of the Russian economy.

Just a year ago, Russia’s stockpile of dollars from energy exports stood at more than $515bn.  Now as oil revenues have dissipated and sanctions on Russia imposed by the West over Ukraine have been applied, Russia’s trade surplus has diminished and the flight of capital by oligarchs and others out of Russia and the rouble has rocketed to $120bn a year.  As a result, FX reserves have dropped below $400bn and the rouble has plunged in value to the dollar by 40% this year, invoking a sharp rise in the inflation of prices in Russian shops and shortages of imported goods.

Russian FX

$400bn is still a large reserve and the Russian central bank has tried to prop up the rouble by selling its dollars and buying the Russian currency in FX markets.  But it did not work.  Then the central bank just let the ruble go to save dollars.  And the rouble plunged further.  Now it has started buying roubles again with its reserves to stop the fall, again to no avail.

Russian rouble

Central bank policy is all over the place. And this is worrying Putin who has begun to criticise his own bank appointees.  The problem is that much of these reserves cannot be used to prop up the currency because enough must be kept to cover payments for essential imports (the IMF recommends at least three months worth of imports).  If reserves drop below that level, the rouble will go into even more meltdown as foreign lenders (mainly European banks) pull out their money.  Also the fall in the ruble means that all those Russian companies with big dollar debts and loans, particularly Russian banks, face huge dollar bills that they cannot meet.

According to the Russian Central Bank, the country has to repay $30bn of debt this month and another $138 bn in the next 18 months.  Only 2% of this debt is owed by the government, while non-financial enterprises accounted for more than 60%, the rest mostly belong to the banking debt, including Russia’s largest bank – the state-owned bank Sberbank.

So they are asking for (and getting money) from the government to bail them out.  State oil giant Rosneft, for example, has asked for $44bn, equalling more than half the remaining balance in the so-called Wellbeing Fund that’s earmarked to support the pension system.  VTB Bank and Gazprombank have already gotten more than $7 bn from the Wellbeing Fund and are asking for billions more.  If FX reserves and wealth funds are used up to bail out the banks, then planned infrastructure projects will be dropped and pensions will come under threat.  And the three-month import limit will get closer.  At current rates of decline in FX reserves, that limit could be reached by summer 2015.

Putin‘s annual address to the Russian parliament last week showed he was getting worried.  He even offered a complete amnesty to oligarchs who have been spiriting their money out of Russia like a waterfall in the last few months.  “I propose a full amnesty for capital returning to Russia,” Putin said. “I stress, full amnesty.”  “It means,” he continued, “that if a person legalizes his holdings and property in Russia, he will receive firm legal guarantees that he will not be summoned to various agencies, including law enforcement agencies, that they will not ‘put the squeeze’ on him, that he will not be asked about the sources of his capital and methods of its acquisition, that he will not be prosecuted or face administrative liability, and that he will not be questioned by the tax service or law enforcement agencies.”  

In Russia, two of the major classes of people who have large amounts of capital overseas are organized criminal groups and the so-called oligarchs. In stressing that there would be no prosecution, Putin appeared to explicitly leave the door open to money obtained illegally. “He’s talking to people who have engaged in corporate raiding,” said Professor Louise Shelley, founder and director of the Terrorism, Transnational Crime and Corruption Center at George Mason University in Fairfax, VA. “There are thousands of cases where people who have used criminal processes and false documents to acquire assets. He’s talking to organized crime figures who have taken over businesses.”  She added, “There are no large fortunes that are entirely clean money in Russia.”

Assuming the oil price stabilises at around $60/b next year, Putin can avoid a debt crisis next summer, if he can squeeze Russian corporations to buy roubles with their dollar export revenues (a form of capital controls) and to bail out the banks with government reserves.  Putin is doing just that.  But that does not save the domestic economy.  The sanctions plus the collapse in oil prices have pushed the Russian economy into recession.  The government admitted that the economy would contract by about 1% next year, with investment falling 3.5% and average household incomes down nearly 3% in a year!  Indeed, for the first time in 15 years, living standards for the average Russian will fall in 2015. A freeze on inflation-linked pay has been imposed and inflation is rising at nearly 10% a year now.

Putin may be very popular because of his foreign policy over Ukraine and ‘standing up’ to the West, but his popularity will now suffer because of his domestic policy.  Russian-style austerity is coming.  Whereas government spending has risen an average 10% a year in the past decade, it will now be cut.  Cutting military and police spending is politically impossible because Putin needs the support of the security establishment so he can rely on them in case of social unrest. This means the government will have to target investments, benefits and salaries. Last week, Putin announced a 5% cut in real terms from 2015-2017 by reducing “ineffective spending,” except for defence and security.  Putin used to promise Russians that their country would overtake Germany as the world’s fifth-largest economy by 2020. In May 2012, he signed a decree pledging to increase real wages by half by 2018. Those promises are now dead in the water.

Putin continues to rely on his Ukraine policy for popularity and Ukraine’s economy is in an even worse state.  Ukraine’s central bank reserves have dipped below the $10bn mark for the first time since 2005 after making a gas payment to Russia’s Gazprom (see my posts on Ukraine).  The IMF will probably hand over another $2.7bn in funding to tide the Kiev government over.  But it is clear that Ukraine needs another $20bn over the next two years to handle the war in the east and fund debt repayments.  An IMF mission arrives tomorrow to plan a massive austerity plan for the Ukrainian people in return for funding.

But probably the most important aspect of the collapse in the oil price is the spectre of global deflation.  World inflation has been very low since the Great Recession, another indicator of the Long Depression that the world economy has been locked into.  But what inflation of prices there has been has mainly been due to the sharp rise in energy prices.  Non-energy price rises have been minimal.  Now, with the sharp fall in energy and other commodity prices (metals, food etc), deflation is the spectre haunting the globe.

Global PPI

Oxford Economics finds that if oil prices were to fall to as low as $40/b, then 41 out of 45 countries it follows would experience deflation.

Deflation

Some argue that this is good news. This is the line of some neoclassical economists and the Austrian school.  Falling prices, particularly in energy and food, will raise consumer purchasing power, and help boost demand and thus economic growth.

But for profitability, it is bad news.  Inflation of corporate producer prices is another temporary counteracting tendency to falling profitability.  If it disappears, then the downward pressure on profitability from any new technology investment will be greater as falling prices squeeze profit margins.  In that sense, deflation is not good news for the capitalist sector, especially if it is burdened with heavy debts (small businesses in particular).  So the crisis brewing for Russian businesses may be followed by others.  It could be another factor leading to a new global slump, this time based in the non-financial productive sector of capitalism.

After May – even more austerity

December 3, 2014

George Osborne, Britain’s finance minister, delivered his so-called autumn statement (in December!) today.  This covers the current state of public finances and plans for future tax and spending measures.

The Conservative-led coalition faces an election next May and its main pledge when it came into office in May 2010 was to ‘balance the budget’ and reduce government debt.  After the huge bank bailout and the impact of the Great Recession of 2008-9 on tax revenues and welfare spending, the government deficit stood at over 10% of GDP and gross government debt had rocketed to over 75% of GDP.

The government blamed this on the profligacy of the previous Labour government.  This was nonsense, of course.  Labour had run relatively small deficits, has reduced government spending as a share of GDP and debt was low until the global banking crash.

Labour budget

And the Conservatives would have done exactly the same as Labour in bailing out the City of London with more borrowing.

The Conservatives are obsessed with the government deficit and debt – getting them down has been their measure of ‘prosperity’.  But even on this measure, they have failed.  Osborne made much of the reduction in the deficit ‘by half’ by April 2015.  But back in 2010, he forecast that he would balance the budget by April 2016.  He has now announced that this target will not be achieved until April 2019.

Osborne

And to meet this target, even assuming that Britain continues to grow at 2-3% over the next four years, the government will have to impose a massive round of public spending cuts on welfare benefits and services.  It will also have to raise taxes, although it claims that it can cut income tax again during the life of the next government (although that promise is pushed back to 2019).

And the deficit is one thing.  Government debt is still rising in real terms.  Debt is over £160 billion more than forecast back in 2010 and is now well over 90% of GDP on a gross basis and is not expected to peak on the best forecasts until 2019.

The government has failed because the UK economy has not grown in income anywhere near as much as the government forecast back 2010.  Osborne forecast real GDP growth would average about 2.7% a year; instead it has averaged up to this year only 1.3%, half the rate.  At the same time, although unemployment has come down, most of the new jobs have been part-time, low-paid and self employment (see my post,
https://thenextrecession.wordpress.com/2014/07/18/uk-cost-of-living-crisis-contin).
This has meant that real incomes (ie after inflation) have fallen by the largest amount since the Great Depression of the 1930s.

UK real wages

As a result, tax revenues have nowhere matched that expected by the government.  So the budget forecasts have proved woefully wrong.  Revenues from income tax and national insurance during the most recent 12-month period have grown at an annual rate of only 1.8% compared with the budget forecast of 5%.

The government stood back from imposing too severe a reduction in the budget deficit after 2012, for fear that the economy would drop back into a new slump – and it nearly did.

Austerity

But that just means, in its obsession with the deficit, that if the Conservatives win the election in May, they will launch a new round of austerity measures.

Maybe a new round of austerity won’t happen because the Conservativces won’t win next May.  But all three major parties are committed to more spending cuts in bowing to the God of ‘fiscal probity’.  “All parties support balancing the current budget in the next Parliament. Deficit spending is clearly still deemed to be politically untenable in the UK.” Gavyn Davies, FT.

Compared to the Chancellor’s plan, Labour would permit extra borrowing to finance investment (1.5% of GDP) and would allow themselves longer to attain balance for the current budget.  But they would still impose austerity to the tune of half the amount of the Conseravtives.

Behind the obsession with deficits and debt lies the real agenda.  It is two-fold: to reduce the size of the public sector and destroy any vestiges of the ‘welfare state’, opening up public goods and services to deliver profits to the capitalist sector.  The other aim is lower the burden of tax on and increase the subsidies to the capitalist sector over the long term to boost profitability.

This hidden agenda is sometimes exposed.  Only this week, a Conservative MP called for huge cuts.  “The Chancellor could make a £20 billion start by culling Whitehall’s sprawling bureaucracy, enforcing public sector pay settlements, freezing benefits, reducing the welfare cap, scaling back middle-class welfare and looking again at the state pension.” Dominic Raab, Conservative MP for Esher and Walton.

Note the attack on the state pension.  This has been sacrosanct up to now.  But the Conservatives are now preparing to dismantle it, using the argument that the young should not have to pay for the old and that’s unfair.  The right-wing Economist magazine took up this call: “Britain’s fiscal problems are partly the result of over-generous spending on the old. They should pay off some of the debts instead of passing them all on to the young.”

But apparently it is not unfair for the poor to pay for the rich.  In the UK the bottom 10% of income earners pay more in all taxes as a percentage of their income than the top 10%.

The government could switch its priorities on spending from defence, subsidies to industry, lowering corporation tax, more tax cuts for the rich to boosting public investment, services and welfare.  Despite its headline noise on a few infrastructure projects (rail, flood protection etc), it is doing no such thing.

Faster growth would soon deal with any deficit anyway.  In terms of real annual GDP growth, the OBR estimates that a 0.1% point increase would do as much over the four years from 2015-16 for the deficit as roughly £3 billion of spending cuts.  The trouble is that the UK economy may be growing at 3% a year currently, but nobody expects that to last.

The Office for Budget Responsibility has actually revised down its forecasts for growth after this year for every year up to 2019.  Even Osborne admitted that the “warning lights” are flashing over the health of the global economy, and Britain “cannot be immune”.

Yes, any new downturn in the world economy would soon push the UK economy back into recession too.  Osborne raises only that risk to a booming UK economy (the fastest in the G7 this year).  But there are serious domestic risks too.  Most of the contribution to the ‘boom’ of 2014 is coming from the unproductive sectors of the economy (housing – prices rising at 12% a year; and financial services as the City of London ploughs on).

Manufacturing output is still struggling and despite a huge devaluation of the pound back in 2010, UK exports have failed to get anywhere near the government’s expectations.

UK boom

Productivity growth remains appalling.

UK productivity

That’s  mainly because the business sector is unwilling to invest in new technology or skilled labour at good rates of pay.  Investment to GDP in most major capitalist economies has been falling.  But it is particularly low in the UK.

Investment

And that is because profitability in the corporate sector, although improving a little after all the austerity measures so far, is still below levels seen in the late 1990s or even 2005.

UK profitability

After six years, the UK economy has only just got back to where it was before the Great Recession.

recovery

But the economy is standing on the chicken legs of a credit-fuelled property and services boom, sustained, ironically, by cheap labour provided by hard-working, young immigrants from Europe and elsewhere.

The Conservative government aims to cut back that immigration and impose a new and severe round of public spending cuts, while big business stands by with its arms folded.  The economy will falter, especially if there is new world economic downturn, and the government’s targets on public finances will fall short, just as they have done up to now in this parliament.

The seven-year itch

November 28, 2014

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC (http://www.deanbaker.net/index.html#about). He is frequently cited in economics reporting in major media outlets. He writes a weekly column for the Guardian Unlimited (UK), the Huffington Post, TruthOut, and his blog, Beat the Press, features commentary on economic reporting. Dean was cited by the Real Economics Review as one of the few economists that predicted the global financial crash of 2008, as he had been warning about the credit-fuelled housing bubble in the US. He often speaks at trade union and labour seminars presenting a Keynesian-style analysis and policy solutions to the current crisis.

Baker has just written a blog post in which he reminds us that it is now seven years since the Great Recession started across the major economies (http://www.truth-out.org/opinion/item/27614-seven-years-after-why-this-recovery-is-still-a-turkey). Looking at the US, he points out: “usually an economy would be fully recovered from the impact of a recession seven years after its onset. Unfortunately, this is not close to being the case now….It would still take another 7-8 million jobs to bring the percentage of the population employed back to its pre-recession level.” He continues: “it would take us more than four years to get back to pre-recession employment rates.” And “the economy is still operating close to 4% points. This translates into roughly $700 billion a year being thrown in the garbage because we don’t have enough demand in the economy. That comes to more than $2,000 per year for every person in the country”. And “If the economy sustains a 3% annual growth rate, it would take us close to four years to close the demand gap. And next to no one thinks the economy will be able to sustain a 3% growth rate for the next four years”.

It is a damning indictment. We could add to Baker’s list that, outside the US (an economy that has done better than most since the Great Recession ended in mid-2009), unemployment rates have hardly fallen from high levels in most of Europe, where GDP is still below the level of 2007 in many countries and GDP per person is even lower. Above all, real incomes for the average households have stagnated or fallen significantly in most counties including the US and the UK. So this is not a normal ‘recovery; it is not ‘a return to normal’ (see my post, https://thenextrecession.wordpress.com/2014/08/14/the-myth-of-the-return-to-normal/).

The question is: why has the Great Recession morphed into what I call a Long Depression? Baker reckons that it is “weak demand”. Baker: “The basic problem since the collapse of the bubble is finding a way to replace the demand that it had been generating.” Well, that is not entirely true if we mean weak consumer demand. As I have shown in many previous posts, household consumption did not fall hugely in the Great Recession and in most countries it has returned, as share of GDP to levels of 2005 as the OECD pointed out recently (https://thenextrecession.wordpress.com/2014/11/08/the-world-economy-in-low-gear/).

G7 demand

The other part of ‘demand’ is investment demand. Investment (both private and public) plummeted during the Great Recession – indeed, it is my argument that investment fell before and that led to the laying off of labour, the closure of old technology and the collapse of incomes and the slump. Investment remains seriously down from seven years ago. A new study by the Institute of International Finance, an international banking research group, provides new evidence for that (http://www.voxeu.org/article/causes-g7-fixed-investment-doldrums).

The IIF study shows that total investment relative to GDP in the G7 economies stood at 19.3% in 2013 – a decline of 2.6 percentage points relative to 2007. Business investment (i.e. investment in machinery, equipment, transport, structures, and intangible assets) has been especially weak. In the second quarter of 2014, G7 private non-residential investment amounted to 12.4% of GDP, compared to the peak of 13.3% in 2008.

G7 private non-residential fixed investment

G7 investment

The question is: why did investment fall and why has it failed to recover and so get the major capitalist economies back up to previous levels and potential trend growth? Dean Baker says investment demand is weak because the economy is weak: “Firms don’t go on investment splurges in a weak economy.” But this is tautological. There is no explanation in this of why things are worse this time. Investment is the issue, as Baker says. But why?

It has been my argument that the major capitalist economies have been suffering from low profitability of capital plus a huge build-up in debt (household, corporate and public) that weighs down on the ability or willingness of capitalists to step up investment.

This is despite that fact that capital in all the major economies has been squeezing wages and reducing employment to get profit margins and the mass of profit up to record levels (ie raising the rate of surplus value as the main counteracting factor to low or falling profitability).
Deleveraging of debt (fictitious capital) has been minimal, indeed to the contrary, as central banks pump in more money to get interest rates down and stock markets booming in an attempt to stop economies slipping back into slump.

In a future post, I shall try to analyse the latest position on the US rate of profit now that we have the latest key data for 2013 and see if my proposition holds that profitability has failed to return to pre-crisis levels even in the US and is still below levels seen in the late 1990s. This is certainly the case for the UK and of course in most of the Eurozone and Japan.  But what is significant is that the mass of profits in the US has nearly stopped rising (see my post,
https://thenextrecession.wordpress.com/2014/11/25/us-gdp-up-but-profits-down/).

And indeed, according to the IIF, the huge cash hoards that the largest companies in the G7 economies built up by squeezing wages and jobs and not investing is also beginning to decline as companies buy back their own shares and pay out dividends to their shareholders.

G7 non-financial corporations’ net cash flows

G7 cash
Marxist economist Michael Burke has pointed out before that business investment has been falling in the major economies since the late 1990s (see https://thenextrecession.wordpress.com/2014/06/22/investing-in-finance-but-not-in-people/.). And the IIF shows that, investment relative to GDP has exhibited a downward trend since the 1990s in Germany, UK, Japan, and Italy.

G7 total investment rates

G7 investment gdp
In my view, this is because the profitability of capital has fallen in the major economies since the peak of the late 1990s (see my post, https://thenextrecession.wordpress.com/2014/04/23/a-world-rate-of-profit-revisited-with-maito-and-piketty/).

A proxy for falling profitability is the capital-output ratio. This measures the growth of new value compared to new investment. This ratio has been rising in most major economies since the 1990s, according to the IIF – in other words the value returned from investment has been falling. Compared to 2000, all the major economies (including the US but excepting Japan which has had a huge rising ratio for decades) now have higher capital output ratios.

G7 capital–output ratio

G7 capital output

Dean Baker in his post goes on about the need for ‘more demand’ which he sees coming from government spending “We can spend more on infrastructure, on education, on retrofitting buildings to make them more energy efficient and reduce greenhouse gas emissions.” Or through work-sharing to get unemployment down: “increased family leave, sick days, and vacation. This is the secret to Germany’s low unemployment rate. The average work year there is more than 20% shorter than in the US.” But he admits this won’t happen. No government is planning to boost government spending, on the contrary; or introduce work sharing.

Actually that is not entirely true. The IMF, the OECD and others are calling for programmes of infrastructure spending to replace the failure of business to invest. And the EU leaders have announced a new Europe-wide investment plan. The EU projects claims to create 1.3m new jobs over three years, by ‘seeding’ €21bn in public money to ‘spark’ €307bn ($383bn) of additional private investment. This is nonsense, of course. The public money had already been earmarked for projects in previous EU budgets so it is not new money but merely a transfer to this scheme. And it is very unlikely to inspire businesses to join in a public-private initiative. The EU Commission itself estimates that the annual investment gap in Europe stands between €230-370bn, while the plan only offers €€100bn a year for three years.

Anyway, the question is whether even a Keynesian-style government spending programme, either directly through public works or through subsidies to the capitalist sector, would deliver faster growth or full employment. It is a Keynesian illusion that it would. Such projects may boost the profits of those companies that get the contracts to build, but at the expense of the rest as they face the cost of higher government borrowing and taxes that will be needed to pay for it (see my post https://thenextrecession.wordpress.com/2013/01/13/multiplying-multipliers/). More likely what is ahead is another slump in the major economies rather than a sustained recovery and a new period of expansion.