Archive for 2014

The US recovery, the Long Depression and Pax Americana

August 29, 2014

Revised figures for growth in the US economy in the second quarter of this year were released yesterday. Most analysts were pleased as the rise in real GDP in Q2 2-14, was revised up from a 4.0% annualised rate to 4.2%. The drop in real GDP for the first quarter of this year was confirmed at -2.1%. When compared to the prior quarter, the new measurement is up about 6.3% pts from the -2.1% contraction rate for the 1st quarter of 2014. This is the largest positive quarter to quarter improvement in GDP growth in 14 years.

The reason for the slight rise in the revised figure was that business investment (i.e. investment by companies in new equipment, offices and technology as opposed to residential investment by household buying houses) was revised up from 5.5% to a 8.4% annual rate of growth. At the same time, the first figures for corporate profits in the second quarter were announced. Profits rose $155bn compared with a drop in profits of $202bn in the first quarter of this year.

So it would appear that the US economy is now growing quite strongly and the terrible first quarter was really just due to a ‘bad winter’ as was argued by the mainstream at the time. But looking at quarterly rates of growth (annualised) may be useful to show how an economy is doing from one quarter to the next. But it does not show the trend of activity. For that, it is better to compare year-on-year growth. And here the story is less exciting.

After the revisions, the US economy in real terms has grown 2.4% compared to this time last year. Not bad, and certainly better than anywhere else among the top economies, apart from maybe the UK. But growth in the first quarter was only 1.9% yoy, so in summing up, in the first half of this year, the US economy expanded in real terms by 2.2%.  But as you can see, this growth rate is pretty much in line with the trend since end of the Great Recession.

US real GDP

Indeed, the current rate of 2.2% yoy for H1 2014 compared with the average rate of growth since mid-2009 of 2.0%, hardly higher; and with the average in the credit boom between 2002 and the onset of the Great Recession of 2.6% yoy. And the current rate is still one-third below the long-term average rate in the post-war period for the US economy of 3.3% a year. So, not so great. Indeed, US GDP per-capita is 9.8% below the pre-recession trend (graph below from Doug Short).

US real GDP per cap

Also to get the real GDP figure, the official stats assume an annualized quarterly inflation of 2.15%. Yet during the second quarter, the seasonally adjusted inflation index rose at a 3.53% annualized rate. If that inflation rate were used to deflate nominal GDP growth, the Q2 growth rate would be 2.9% not 4.2% and real growth would be close to 2%, with per-capita GDP growth (after taking into account a growing population) just 1.1%.

And this recovery does not feel like one to most Americans. Real annualized per-capita disposable income is now $37,481, up only 2.19% in total since the second quarter of 2008 — a miserable 0.36% annualized growth rate over the past six years. And that’s the average – for most Americans disposable income has fallen. Of course, the forecasts are for a huge pick-up in the rest of this year to take US growth up to 3% or more and so start to change the whole picture – we shall see.

The US economy is clearly stuck in below-trend growth.  I have called the period since 2008 a Long Depression and it now seems that even some of the mainstream Keynesian economists are prepared to use a similar term.  Brad de Long has now noticed that the US “did not experience a rapid V-shaped recovery carrying it back to the previous growth trend of potential output.( Indeed, the recession trough in 2009 saw the US real GDP level 11% lower than the 2005-2007 trend. Today it stands 16% below (see De Long’s graph below).   Cumulative output losses relative to the 1995-2007 trends now stand at 78% of a year’s GDP for the United States, and at 60% of a year’s GDP for the Eurozone.

Dropbox 20140825 Financial Crisis to Great Recession to Lesser Depression to Greater Depression htmlDropbox 20140825 Financial Crisis to Great Recession to Lesser Depression to Greater Depression html

De Long goes on: “A year and a half ago, when some of us were expecting a return to whatever the path of potential output was by 2017, our guess was that the Great Recession would wind up costing the North Atlantic in lost production about 80% of one year’s output–call it $13 trillion. Today a five-year return to whatever the new normal might be looks optimistic–and even that scenario carries us to $20 trillion. And a pessimistic scenario of five years that have been like 2012-2014 plus then five years of recovery would get us to a total lost-wealth cost of $35 trillion.”

De Long concludes that “At some point we will have to stop calling this thing “The Great Recession” and start calling it “The Greater Depression”. When?”  How about now?

As for business investment, which has been performing really badly since the Great Recession, optimism was expressed at the upward revision in the second quarter data. But the yoy rise in business investment at 6.4% was only slightly higher than the post-recession average of 6.1% and business investment as a share of GDP is still lower than it was before the Great Recession.

In my opinion, sustained growth that would be close to the trend average would require a significant rise in the rate of business investment. And business investment growth depends in turn on the movement in corporate profits.

The latest corporate profits figures are really not encouraging on that basis. The data show that corporate profits have been falling in the first half of this year compared to the first half of 2013. As the figure below shows, business investment tends to follow the direction of corporate profits (CPBT) with a lag. As I have shown before, and as the graph below confirms, US corporate profits went negative some six to nine months before the credit crunch began in mid-2007 that kicked off the global financial collapse in 2008 and the Great Recession. Indeed, US real GDP did not contract until mid-2008. In reverse, corporate profits began to rise in mid-2009 well ahead of investment (some nine months later) and GDP. Profits lead investment.

US profits and investment

The latest data for corporate profits, if sustained in the next few quarters, would suggest that business investment will eventually drop towards zero. Again ,we shall see.  A further decline in the mass of corporate profits will depend on whether the profitability of capital, and in particular, the rate of return on new investment, falls or not. The best data on this will not be available until November, but I shall try to make some forecasts in a future post. If that happens, then it could herald a new recession by the end of 2015.  But we are getting ahead of ourselves.

Talking of the US rate of profit, I have been looking again at the long-term trajectory of the profitability of US capital. Dumenil and Levy made an estimate of the US rate of profit a la Marx going back to 1870 ( Recently, as part of his analysis of the ‘world rate of profit’, Esteban Maito also made an estimate of the US rate of profit over the same period (see His data are exactly the same, because he takes his figures directly from Dumenil and Levy.

Dumenil and Levy measured the US rate of profit using current cost estimates for fixed capital and excluded variable capital (the cost of labour). This is not the best way theoretically to do it (see my paper, Using historic costs for fixed assets and including variable capital would be the closest to the rate of profit a la Marx. Using current costs can distort the level and direction of the rate of profit for periods of time, as Andrew Kliman has pointed out ( But as Deepankar Basu has shown, over a very long period of time, these distortions will tend to disappear as the impact of inflation or deflation on fixed asset values is ironed out (see BASU capmeasure).

If we take D-L’s data as the best we have for the rise of American capitalism from 1870 into an imperialist power in the 20th century, what it shows is that, over the whole period, there is actually a slight trend upward in the US rate of profit, not down. We can see why in the graph below.

US profitability since 1870

In the post-Civil War boom, a rising American capitalist economy had very high rates of profit. The Depression of the 1880s drove that down sharply. Then there was a recovery that peaked at a lower level in the mid-1890s before falling again. World War 1 got the rate up a bit with a rise to a new peak in 1924. The decline after that presaged the Great Depression of the 1930s. World War 2 pushed the US rate of profit into the stratosphere and signalled a new hegemonic role for US imperialism and the age of Pax Americana. World wars are great for profitability, particularly for the US.  The US rate of profit is still higher than in the inter-war period. Indeed, only the post-civil war boom period of 1870s saw higher rates. WW2 transformed the US ROP and its global power status.  So US capital has had a higher ROP in the last 70 years since 1945 than it did in the 60 years before 1945.

The drop in profitability post-1965 coincided with revolutions in Europe: Spain, Greece, Portugal; in Vietnam, Latin America and parts of the Middle East; as well as intensified class struggle in France, the US and the UK. A rising rate of profit in the so-called neoliberal era of the 1980s and 1990s coincided with reaction, the collapse of the Soviet Union, the end of the cold war and a brief New World Order around US dominance.

But since the late 1990s, the US rate of profit has stagnated at best, now engendering a long depression in growth and investment, as discussed above.  Pax Americana has waned too (as the failure of US imperialism’s objectives in Vietnam, Somalia, Iraq, Afghanistan, Syria and Ukraine show).  American hegemony is increasingly difficult to sustain as the profitability of American capital stagnates or falls.


Getting off scot-free

August 27, 2014

The banks and bankers that triggered or caused the global financial crash with their reckless drive for grotesque profits continue to get away with the consequences of their actions.  The latest fine by US regulators on the Bank of America was a whopping $17bn.  But, as has been pointed out by various bloggers and the Economist, it was not really so whopping.  That’s because of the $17bn fine, for selling misleading mortgages to poor householders and distributing rubbish mortgage bonds to customers and investors, only $9bn is in cash.  The rest is an amount reckoned to be equivalent to revising mortgages for householders in difficulty.  That’s something that should have been done anyway by the banks.  Instead, the US Justice department has done sweetheart deals with the banks so that they can count part of the fine as providing the service they ought to have done before.

The ratio of these corrections to cash is 89% in the case of the Bank of America deal; 44% for the JP Morgan fine of $13bn and 56% for the Citigroup deal of $7bn.  The non-cash element keeps rising in every new deal.  So it seems that bankers can avoid prosecution for offences that have devastated millions of livelihoods (loss of homes, jobs, savings etc) and can get a special deal with the authorities that increasingly does not involve even cash but simply a form of corporate ‘community service’.  It’s time the banks were a public service and not money-making sharks designed to fleece the public (see my posts, and

Not one banker in the US has faced a criminal charge out of the global financial crash while the fines are piddling compared to the estimated trillions of dollars lost by their customers and investors.  And the fines will come out of the profits of the current shareholders, not from the gargantuan salaries and pensions of the chief executives (many of whom have done a runner) or even from the original shareholders.  And the bulk of the settlements will be tax deductible.  For destroying trillions in wealth and thousands of jobs, banks will get a write-off.  And this is after former Fed Chairman Ben Bernanke, recently described the crisis in the banking system as worse than in the Great Depression: “September and October of 2008 was the worst financial crisis in global history, including the Great Depression….Of the 13 most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”  This is how far the bankers had destroyed America’s credit system.

The deals with the US Justice Department for JP Morgan or Bank America also mean that all the scandals are buried and won’t be revealed to the public – unlike the scandals revealed with HSBC’s laundering of Mexican drug cartel money or BNP’s laundering of cash for Iran and warlords in Sudan etc – all against US law.  So US bankers are getting off scot-free with not even a slur on their characters, let alone a charge.  After ‘fining’ Bank of America $17bn, the public will not know why.

Getting out of a Jackson Hole

August 24, 2014

Every August, the great and august among central bankers and strategists of the world economy meet as guests of the Kansas City Federal Reserve for an economic symposium at Jackson Hole, Wyoming, a ski resort under the Teton mountains. After the planes, helicopters and limos have transported them all to the luxurious lodge, the participants make and hear presentations and speeches on the economic issues of the day.

This year, the theme was ‘labour market dynamics’, in other words, the strategists of capital (mainly US capital) were considering whether labour markets in the major economies were sufficiently ‘flexible’ to reduce the high levels of unemployment engendered by the Great Recession and to look for the causes and solutions to the very slow recovery of employment. (

In one paper, mainstream economists, Steven Davis and John Haltiwanger, of the University of Chicago and University of Maryland, reckoned that “the US economy became less dynamic and responsive in recent decades.” And the reason was too much government regulation. They calculated that the fraction of workers required to hold a government-issued licence to do their jobs rose from less than 5% in the 1950s to 29% in 2008. Adding workers who require government certification, or who are in the process of becoming licensed or certified, brings the share of workers in jobs that require a government-issued licence or certification to 38% as of 2008, they say. So the slow recovery from high unemployment is the fault of government regulation and not the market economy.

In contrast, Giuseppe Bertola, economics professor at EDHEC Business School, reckoned that it was more government action, not less, that was needed to get unemployment down. Bertola argued that some job protection and unemployment assistance may offer a positive ‘trade-off’ not only for the individuals receiving them but also for the economy as a whole. What was needed was not more ‘flexibility’, but more ‘rigidity’! “Rigidities can be beneficial in imperfect economies, where the flexibility that employers like is the other face of the precariousness that workers fear,” he wrote. Bertola cited the German model of work-sharing through reduced hours, made possible by strong cooperation between labour unions and large corporations, as having allowed unemployment to remain lower in Germany than in the United States during the crisis–and to come down consistently since.

Bertola’s line is not welcomed by the mainstream in analysing the causes of high unemployment. Indeed, in another paper for Jackson Hole, Jae Song, an economist at the Social Security Administration and Till von Wachter, a professor at the University of California, Los Angeles argue that the problem of long-term unemployment does not really exist. “In contrast to the behavior of long-term unemployment, long-term non-employment behaved similar in the Great Recession” to previous recessions, they say. So the level of permanent unemployment is no worse than before and there is no need to wait to tighten monetary policy. The economy is not permanently damaged and indeed is ready to go.

To sum up, the mainstream economists at Jackson Hole generally found that the US unemployment situation was not too bad and any unemployment left was due to too much government regulation and lack of flexibility. So there would be no problem if the Federal Reserve ended its quantitative easing measures and started hiking interest rates. The US economy would cope and ‘return to normal’ without any serious repercussions.

Janet Yellen is not so sure. Both Janet Yellen, the first woman head of the Federal Reserve and Mario Draghi, the first Italian head of the European Central bank, made speeches on the state of the economy, the pace of ‘recovery’ (or otherwise) and what they as central bankers would do about it with monetary measures. The US Federal Reserve board members are split on whether the US labour market has recovered sufficiently for the Fed to start raising interest rates and ‘return to normal’. For the hawks (still in a minority), the rapid decline in the unemployment rate shows that ‘slack’ in the economy is disappearing so the Fed should ‘tighten’ monetary policy soon. For the doves (led by Yellen), the low rate of wage growth suggests there’s plenty of slack and tightening should wait.

In her Jackson Hole speech, however, Yellen seemed to less sure about the slow pace of ‘recovery’ ( She dithered. As one commentator noted, she used “1 coulds, 20 buts, 11 woulds, 7 mights and a magnificent 56 ifs.” The doves argue that the huge drop in the labour participation rate, which measures how many of those of working age actually have a job, showed that there many people who wanted a job, but had just given up looking and so were not counted among the unemployed but should be. And many of those working are in part-time or temporary jobs (see my posts on this, In other words, the labour market was still slack.

Labour participation

But Yellen presented a new argument for the hawks. She cited a paper by the San Francisco Fed that argued during the Great Recession wages were not cut by most firms, but now that recovery is under way, employers are holding back on pay rises. This was a form of “pent-up wage deflation.” At some point, as the labour market ‘tightens’, this will end and wages would then rise quite rapidly. So maybe the Fed should pre-empt the impact on inflation by raising interest rates sooner than originally planned.

But this assumes that rising wages from the end of ‘pent-up wage deflation’ would cause higher inflation. It depends on how the value of the national product is shared between the owners of capital in profit and labour in wages. Way back in 1865, Marx dealt with this issue in a debate inside the International Workingmen’s Association eventually published in a pamphlet entitled, Value, Price and Profit. Marx argued that wages can rise without any effect on prices if profits fall. Indeed, that would be the usual result. (

In mainstream economic terms, we can pose it this way. There has been a huge divergence between productivity growth and wage growth since the 1980s in the US and elsewhere. Profit shares as part of value added have rocketed to record highs. Indeed, it is estimated that wages in real terms could rise 10% to restore the gap with current productivity growth, a measure of the non-inflationary leg room from a rise in wages now.

Productivity and wages


Of course, such a wage rise would hit profits and that is the real problem for capitalism, not inflation. If companies cannot raise prices to compensate because of weak demand for their goods and services and strong competition nationally and internationally (prices are rising just 1% a year in international traded goods), then profit share will fall and the mass of profits will also probably fall, triggering a new slump in investment. After all, despite the massive rise in profit share, US corporate profits are now starting to drop. A 10% wage rise would be a last straw.

corporate profits

In the Great Depression of the 1930s, wages recovered sharply but inflation of prices did not. What the rise in wages did do was contribute to a fall in profitability (as Marx posed in Value, Price and Profit), engendering a new slump in 1937. And the Fed helped to tip the economy into a slump by hiking interest rates to stem ‘inflation’. See my post

Wages and inflation in 1930s

Even the Federal Reserve finds little connection between wage rises and inflation (see a new paper by some Chicago Fed economists ( “We do find that wages are sensitive to economic activity and the level of slack in the economy, but our forecasting results suggest that the ability of wages to help predict future inflation is limited. Thus, wages appear to be useful in assessing the current state of labor markets, but not necessarily sufficient for thinking about where the economy and inflation are going.”

Yellen is not sure what would happen. If the Fed were to tighten too soon, it could abort the recovery and send the economy back into a new slump. On the other hand, if inflation starts rising then interest rates will have to be hiked even if the price is a new recession. But Yellen does not know which.

The problem for the ECB appears to be different. The Eurozone economy shows no sign of ‘recovery’ whatsoever and the risk is more that it will slip into an outright deflationary depression, something that the southern Eurozone states of Greece, Portugal, Italy and Spain are already experiencing. The average inflation rate for the whole area is already near zero and the Eurozone is beginning to look like Japan in its stagnation of the 1990s that Abenomics is trying to end (see my post,

In his speech, Mario Draghi talked about taking action to provide more credit for the banks and companies and keep interest rates near zero for much longer – the opposite of Yellen’s musings (

He hinted at new measures similar to that of the Fed, namely quantitative easing, i.e. buying up government bonds through the printing of more euros. “The risks of doing too little outweigh the risks of doing too much,” he said.

So the prospect for 2015 (the seventh year since the Great Recession began) is of the Fed tightening credit and raising interest rates and of the ECB doing the opposite. The risks are aborting the relative US economic recovery and/or the collapse of the Eurozone into outright depression (see my post,

Capitalism: stagnation or hypochondria?

August 22, 2014

Are the major capitalist economies now stuck in a state of long-term stagnation? The idea that capitalism has been in a ‘secular stagnation’ since the end of the Great Recession was first raised by Larry Summers, the former Treasury secretary under President Clinton, ex Goldman Sachs economist, then Harvard University scholar and general all-round super star mainstream economics expert. And Summers’ idea has been enthusiastically adopted by Paul Krugman, doyen of Keynesian economics.

The term ‘secular stagnation’ was first coined by the Keynesian economist, Alvin Hansen, in 1938, when he predicted that after the war, modern economies would stagnate because of a crisis of underinvestment and deficient aggregate demand. Investment opportunities had significantly diminished in the face of the closing of the frontier for new waves of immigration and declining population growth. So, according to Hansen, the US was faced with a lower natural rate of growth to which the rate of growth of the capital stock would adjust through a permanently lower rate of investment.

This turned out to be wrong, as in the post-war period, the major capitalist economies experienced a ‘golden age’ of relatively fast real GDP growth, rising employment and incomes as the teeming population of emerging economies were sucked into the capitalist mode of production, the unemployed of Europe were put to work and American capital was used to finance investment globally. And all this was possible because of the record level of profitability for capital in the US during the war.

I criticised this idea of secular stagnation in a post last year ( Hansen was wrong and his idea of secular stagnation has recently been described by leading neoliberal Chicago economist Steve Williamson as “the delusions of a hypochondriac rather than the insightful diagnosis of a celebrated economist.” Nevertheless, the idea has been revived by Summers and now various strands of argument around this theme have been published in an e-book called, Secular stagnation: facts, causes and cures ( with all the leading proponents of the idea contributing.

The reason that Hansen’s idea of ‘secular stagnation’ and its revival by Summers has gained new traction is because it is obvious to all observers that, since the end of the Great Recession, the world capitalist economy is struggling at below trend growth and employment and, above all, with very low investment levels, keeping ‘effective demand’ inadequate just as Hansen predicted would happen in the post-war period.

So maybe Hansen’s idea is right now? As the editors of the e-book put it: “Six years after the Global Crisis exploded and the recovery is still not going well. Pre-Crisis GDP levels have been surpassed, but few advanced economies have returned to pre-Crisis growth rates despite years of near-zero interest rates. Worryingly, the recent growth is fragranced with hints of new financial bubbles.”

There are two basic arguments for secular stagnation in the e-book. There is the argument that what drives economic growth are the factor inputs for production i.e. more and higher quality labour, more and better technology and that unfathomable extra factor of innovation and human ingenuity. Back in the 1960s, Robert Solow developed a factor model of economic growth that concluded that the main driver of growth was this last factor, called total factor productivity (TFP), which was measured as the residue in the contribution to growth after taking into account the impact of capital and labour inputs. Solow reckoned that 80% of growth was accounted for by ‘human ingenuity’ or TFP. A modern study by Hsieh and Klenow found that we can account for 10-30% in income differences across countries by differences in human capital, about 20% by differences in physical capital, and 50-70% by differences in TFP.

Now, according to Robert Gordon (in the e-book), TFP growth has been in long term decline since the 1970s in the major capitalist economies – they are just getting more unproductive and unable to take the productive forces forward at the same pace in the past. “US real GDP has grown at a turtle-like pace of only 2.1% per year in the last four years, despite a rapid decline in the unemployment rate from 10% to 6%.”

I have discussed Gordon’s thesis before ( and it remains a worrying one for the future of the capitalist mode of production. Gordon is at pains to say that he is not expecting future TFP growth to drop away post the Great Recession, but simply return to the slow rate of TFP growth experienced after the end of golden age between 1950-70. That’s enough to keep economic growth low, along with other factors. “US economic growth will continue to be slow for the next 25 to 40 years – not because of a slowdown in technological growth, but rather because of four ‘headwinds’: demographics, education, inequality, and government debt.” The population is stagnant, life expectancy is increasing rapidly. The mass education revolution is complete, no further increase in the average US education level is to be expected. The rising share of the top 10% of the income distribution has deprived the middle class of income growth since 1980 and the gloomy outlook for public debt makes current public services unsustainable.

Gordon’s pessimism about capitalism is attacked in the e-book by Joel Mokyr who reckons that Gordon underestimates human ingenuity and the impact of technology. After all, modern capitalism since the ‘industrial revolution’ has dramatically expanded the productivity of labour, as Marx recognised as early as 1848 in the Communist Manifesto. Indeed, capitalism is growth driven by technological progress. Right now, says Mokyr, there is much important scientific advance happening right under our noses and much of the effects of current and future innovations on economic welfare may not be measured well. For example, information has become much more accessible in myriad ways that make us better off, but not all of that is captured in GDP. The contribution of IT to our wellbeing is not evident from the productivity statistics because the way “we measure GDP and productivity growth is well designed for the wheat-and-steel economy. It works when pure quantities matter; it does not for measuring the fruits of the IT revolution.” The key is that the development of high value-added services by Google, Microsoft, Amazon, Facebook and the like require relatively little investment. Summers makes a similar point in noting that WhatsApp has a greater market value than Sony but required next to no capital investment to achieve it.

This is the optimistic view that capitalism will come through with a new burst of innovation that will boost TFP growth as it has done in the past, at least in the post-war golden age. Gordon retorts sarcastically that “techno-optimists” like Mokyr “are whistling in the dark, ignoring the rise and fall of TFP growth over the past 120 years. The techno-optimists ignore the headwinds, seeming ostrich-like in their refusal to face reality. ”  They claim that GDP is fundamentally flawed because it does not include the fact that information is now free due to the growth in internet sources such as Google and Wikipedia. But says, Gordon, TFP growth sagged decades before the popularisation of smart phones and the internet.  And GDP has always been understated. Henry Ford reduced the price of his Model T from $900 in 1910 to $265 in 1923 while improving its quality. Yet autos were not included in the CPI until 1935.  Indeed, the most important omission from real GDP was the conquest of infant mortality, which by one estimate added more unmeasured value to GDP in the 20th century, particularly in its first half, than all measured consumption.

No says, Gordon, “Future generations of Americans who by then will have become accustomed to turtle-like growth may marvel in retrospect that there was so much growth in the 200 years before 2007, especially in the core half century between 1920 and 1970 when the US created the modern age.”  For Gordon, the golden age of American imperialism in the mid-20th century is over and will not return.

This particular debate about long-term economic growth has little to with the original theory behind ‘secular stagnation’ proposed by Hansen and taken up again by Summers and Krugman. The issue for them is a permanent lack of ‘effective demand’, not the failure of capitalism to innovate. Capitalism can grow faster if only investment and consumption rise faster. But capitalism is stuck below its true potential because, despite interest rates being reduced to near zero, the real rate necessary to boost demand is still too high. As Krugman puts it: “Secular stagnation is the proposition that periods like the last five-plus years, when even zero policy interest rates aren’t enough to restore full employment, are going to be much more common in the future…And Summers adds: “We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential.”

So what’s the answer? Increase government spending and print money. This may create credit ‘bubbles’. But “bubbles are an alternative way for society to deal with excess saving when fiscal policy does not take up the challenge. Buying bubbly assets with the intention of selling them at a later date is an alternative route of saving for future consumption. When nobody wants to invest because r is below g, and hence buys bubbly assets, the price of these assets goes up, yielding windfall profits to their sellers who are therefore able to increase their consumption. This additional consumption restores the balance between supply and demand for loanable funds on the capital market”.

So we need to print money, give it to speculators in financial assets and when they make profits from speculation, they will spend. In other words, give the already rich even more money to spend! Summers recognises that this could produce a new contradiction. If we deliberately create bubbles “this might involve substantial financial instability.” But the choice is between the risk of financial instability or having permanently high unemployment. Great!

Summers’ argument came under deflected criticism from the current governor of the Reserve Bank of India and former IMF chief economist, Raghuram Rajan. He criticised the idea of more quantitative easing or ‘unconventional’ monetary boost as endangering the capitalist economy: “We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” Rajan told the Central Banking Journal. “Investors are counting on “easy money” being available for the foreseeable future and thinking they can sell before everyone else does; They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time,” he said. “There will be major market volatility if that occurs.”

Now Rajan has ‘form’. This week, the annual Jackson Hole economic symposium in the US is taking place with all the world’s leading central bankers and other top economic strategists meeting to discuss how to handle the faults of capitalism. Back at the 2005 symposium, two years before the global financial crash began, Rajan presented a paper warning of the coming crisis. ( Rajan argued that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people’s money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a “full-blown financial crisis” and a “catastrophic meltdown.” When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a “Luddite,” dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)

It seems that the debate has not moved on between those Keynesians who prefer the risk of another financial crash in trying to avoid high unemployment and those mainstream economists who want ‘financial stability’ over more jobs. That’s Rajan’s position (see my post

Neoliberal economist Steve Williamson dismisses the Summers’ thesis and solution as so much hot air. He reckons that, far from getting the government to print money indefinitely to raise inflation (Summers wants a 4% inflation rate target compared to the usual 2%) and so get the real rate interests down to achieve lower unemployment, all that will do is lead to financial ‘moral hazard’ and the same financial bust that the major economies have just come out of. For Williamson, it is would be better to restore interest rates to ‘normal’ levels and let the market economy do its good work. Secular stagnation is just hypochondria: capitalism is fine.

This sums up the essence of the division among mainstream economics about the future of capitalism. Most think that capitalism will eventually ‘return to normal’ (see my post,
without ‘unconventional policies’ and new technology will drive things forward. Summer and Krugman reckon that cannot be done without permanent government intervention to drive down real interest rates through more inflation and speculation. Gordon thinks the productive powers of capitalism are exhausted and only permanent government intervention to foster human ingenuity through education and research can help. Not a pretty picture on the whole.

The problem with the thesis of secular stagnation is that it does not address the heart of the issue. It either considers the problem for capitalism to be one of lower productivity growth (supply) or one of the wrong monetary policy and too high interest rates (demand). But the heart of the issue is the capitalist mode of production: production for profit by the private owners of the means of production. Profitability and its potential lies at the heart of whether capitalism will go into new crises or stay stagnating.

At a presentation to the Communist University summer school in London this week (, I raised the issue of whether capitalism would eventually come out of the current Long Depression and so avoid ‘secular stagnation’. I argued that it could do so if profitability could be restored to levels not seen the late 1990s at the very least (see my paper, A world rate of profit (roberts_michael-a_world_rate_of_profit). That would require major deleveraging of private sector debt (still not completed) and probably another slump or two to liquidate and devalue costly unproductive assets. It’s not so much ‘stagnation’ that capitalism faces, but yet more violent economic upheavals that will destroy capital values and, of course, the lives and livelihoods of millions across the globe.

The myth of the return to normal

August 14, 2014

The latest economic data for the main capitalist economies is not encouraging for the optimists that the world economy is set to resume normal service.

Last week, we had the first estimate for US GDP for the period April to June (see my post, ). The US economy has been the better-performing top economy over the last few years. But even here, real GDP growth was just 2% yoy, well below the long-term average since 1946 of 3.3% a year.

The recovery has been weak.  In the five years after the Great Depression troughed in 1933, US nominal GDP (that’s before inflation is deducted) rose 52%. In the five years since the end of the Great Recession in mid-2009, US nominal GDP has risen only 18%.  The gap between US nominal GDP and where it would have been without the Great Recession remains wide – and even getting wider.

US nominal GDP

Indeed, US economic growth appears to be in secular decline. In the 1980s and 1990s, the US economy generated nearly 40 quarters where GDP was 4% or higher on an annualised quarter or quarter basis (not yoy). But there have been just seven of these “hypergrowth” quarters since 2000, if you include the last quarter. But that will be revised down when the huge rise in stockpiles of goods that were included in the 4% quarterly figure are reduced. So US real GDP growth was less than 2% yoy last quarter.  And yesterday, figures for American spending in shops came out and they were not pretty either. Retail sales were flat in July and the yoy rate slowed from 4.3% in June to 3.7% in July.

Things are far worse elsewhere. The data from the Eurozone are appalling. Industrial production has been shrinking for some time, down 1.1% in May over April and another 0.3% down in June over May. Today, the figures for real GDP growth for April to June came out – and there was little or no growth. The French economy was flat for the whole of the first half of 2014, while business investment fell 0.8% in the latest quarter. The French government has accordingly reduced its previously optimistic forecast for real GDP growth of 1.1% for this year to 0.5%. France may be lucky to see even that.

Even more worrying, the key economy in the area, Germany, contracted in the second quarter, falling 0.2% from April to June. If you put this together with a contraction in Italy already reported and growth of just 0.5-0.6% in the Netherlands, Spain and Portugal and yet another contraction in Greece, the whole Eurozone area failed to grow at all in the last quarter and rose just 0.7% over the last 12 months.

Japan too is a very poor shape, refuting the hopes and talk that Abenomics could turn the Japanese economy around (see my post, The huge hike in sales tax imposed by the Abe government in April, brought in to try and reduce the Japanese government’s large budget deficits and debt, has led to a collapse in consumer spending much greater than expected. In Q2’14, Japan’s GDP fell at an annualised rate of 6.8%, the biggest fall since the 2011 earthquake and tsunami. Japanese households cut their spending by 18.7% on an annualised basis! And businesses cut investment by 9.7% annualised. Indeed, investment in new machinery is down 3% from this time last year. Housing investment fell by 35%! And this GDP figure included a 4% rise in the stockpile of goods. If this is excluded, then the contraction was even worse.

Japan GDP

Now supposedly, the UK economy is the shining star in these clouds of doom elsewhere. I have had already cast some doubt about the nature and sustainability of the apparent pick-up in economic growth in the British economy (see my posts, and

At his press conference at the Bank of England yesterday on the release of the BoE’s quarterly inflation report, our overpaid governor Mark Carney raised his growth forecast for 2014 from 3.4% to 3.5%. A positive boom! But even the BoE recognised that this could be a one-off. Its own forecast for growth in future years is lower.  Carney claimed that the ‘recovery was broad-based’, but this is difficult to justify, when we see that GDP per person is still well below the 2007 peak, that manufacturing output is even further down and above all, average real wages continue to decline.

Indeed, nominal pay for employees (that’s before the impact of inflation and taxes) fell in the period April to June by 0.2% (black line in graph below). And yet inflation is rising by 1.9% yoy (yellow line in graph below). So wages are being outstripped by prices in the shops, in utilities and other daily expenses. Average real incomes have been falling since the Great Recession and there is little sign of any ‘recovery’ for most British households. Indeed, the Bank of England actually reduced its forecast for wage growth this year to just 1.25% from a previous 2.5%. Real wages will continue to fall.

UK real wages

On the other hand the BoE expects the official unemployment rate to fall further towards 5.5%, but this rate would be still higher than before the Great Recession – that will be the new normal for jobs in the UK.

UK unemployment

In previous posts, I have discussed why the UK unemployment has fallen even though economic growth has been weak since the Great Recession. But the key consequence of this has been the abysmal state of productivity per worker in the UK, which remains well below pre-crisis levels. More people in Britain have been getting jobs, but nearly half of these are in self-employment where incomes are generally lower than in full-time employment and where productivity (value per worker) is poor, even though many self-employed work long hours 9for little reward). Large corporations are flush with cash but unwilling to invest in new technology or R&D that could boost productivity.

UK productivity

Flat productivity growth plus even employment growth of 1% a year (very strong, but achieved in the six years before the Great Recession), means long-term real GDP growth of just 1% a year – and that’s assuming no new recessions or slumps. No return to normal there.

Inequality – the mainstream worry

August 13, 2014

The argument that rising inequality in the US and the other major capitalist economies, as expressed in the work of Thomas Piketty and others (see my posts ;
was the major cause of the global financial collapse and the Great Recession, continues to gain traction.  As Paul Krugman put it only last week: “there is solid evidence that high inequality is a drag on growth and redistribution can be good for the economy”.

Now even mainstream economics and financial institutions have taken up the idea.  In a new report, economists at Standard & Poor’s, the US credit agency, reckon that unequal distribution in incomes (they don’t refer to wealth as Piketty does) is making it harder for the nation to recover from the recession.(“How Increasing Inequality is Dampening U.S. Economic Growth, and Possible Ways to Change the Tide.”)

That the S&P, at the heart of Wall Street, should take up this theme, shows that the near-record levels of inequality of income in the major economies is becoming a serious worry for the strategists of capital.  They fear a social backlash and/or a breakdown of economic harmony unless this is reversed or at least ameliorated.  Indeed, Piketty’s main worry about his forecast of rising inequality in wealth was the social consequences.

But the argument of some on the left and now the S&P is that inequality is not just a threat to social harmony, but actually damages the capitalist economy and is the main cause of crises.  “Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the US is dampening GDP.” (S&P).  Beth Ann Bovino, the chief economist at S&P, commented: “What disturbs me about this recovery — which has been the weakest in 50 years — is how feeble it has been, and we’ve been asking what are the reasons behind it.” She added: “One of the reasons that could explain this pace of very slow growth is higher income inequality. And that also might also explain what happened that led up to the great recession.”

US distribution of income

Then she expounded the usual Keynesian argument that, because the rich tend to save more of what they earn rather than spend it, as more and more of the nation’s income goes to people at the top income brackets, there isn’t enough demand for goods and services to maintain strong growth and attempts to bridge that gap with debt feed a boom-bust cycle of crises.  It’s a similar argument to that used by Atif Mian and Amir Sufi’s in their recent “House of Debt,” (see my post,

As usual, the S&P economists have no real answer to this problem, except to call for more investment in education to improve the skills of the workforce and thus raise their income potential.  That lack of education and skills is the cause of inequality has been refuted on many occasions (see my post  It is not the differences in income between the skilled and the unskilled, but the sharp rise in income from capital (dividends, rent and interest plus bonuses for top management) and above all huge capital gains (in the value of property and stocks) that is the cause.

The S&P report outlines all the failures of the US economy and expects its weak growth recovery to continue.  But it offers little in the way of solutions.  Reducing inequality would at the very least require huge increases in wealth and income taxes on the very rich, along with raising wages for the lowest paid.  None of this, of course, is advocated by our newly found Keynesian economists of the S&P.  “Any clear-headed consideration of these options must recognize that heavy taxation–solely to reduce wage inequality–could do more damage than good.” Also the solution of greater investment in education is a joke in most post-Great Recession economies, where state spending on education is being reduced to meet fiscal and debt targets.

But anyway, is rising inequality the main cause of the Great Recession and the subsequent weak growth since it ended?  I have argued against this thesis as the cause of capitalist crises in several posts
( and

The argument presented by Joseph Stiglitz, Paul Krugman, and now by the S&P, is that the US is a ‘consumer economy’, with 70% of spending by households.  So if the rich have most of the money, then spending will slow or fall and we get a crisis through a ‘lack of effective demand’.  Well, the actual evidence for a causal connection between rising inequality and consumer spending is very weak.  In the period leading up to the Great Recession, consumer spending raced along and so did rising inequality.

US consumer

In the Great Recession, consumer spending fell a little, but nothing compared to investment.  And in subsequent  ‘recovery’ period, consumer spending as a share of GDP has hardly altered.  This suggests that both consumer spending and GDP change according other factors and there is no causal link between the two directly.

Capitalist booms and slumps and ensuing financial crashes have taken place even when inequality was much lower than now.  As I said in a previous post, surely, no one is claiming the simultaneous international slump of 1974-5 was due to a lack of wages or rising debt or banking speculation?  Or that the deep global slump of 1980-2 can be laid at the door of low wages or household debt?  Every Marxist economist reckons that the cause of those slumps can be found in the dramatic decline in the profitability of capital from the heights of the mid-1960s; and even mainstream economists look for explanations in rising oil prices or technological slowdown.  Nobody reckons the cause of the 1970s and 1980s crises was low wages or rising inequality.

Inequality experts, Professors Atkinson and Morelli, found little regular connection between inequality and crises. Looking at 25 countries over a century, they find ten cases where crises were preceded by rising inequality and seven where crises were preceded by declining inequality. Inequality was higher in two of the six cases where a crisis is identified, which is exactly the same proportion as among the 15 cases where no crisis is identified. (

Rising inequality is a product of the recent rising rate of exploitation in the process of capitalist production.  It does not cause crises of capitalism but is inherent to capitalist production as capitalists own the means of production and build up their wealth and income from profit while trying to keep wages to a minimum.

And yet inequality continues to rise not just in reality, in the economies of the major capitalist economies, but also in the thoughts of economists as the cause of crises.  I suspect this is because, if rising inequality were the cause of crises, it may be possible to avoid crises in future by a judicious set of tax and spending measures that do not threaten the basis of capitalism.   Up to now taxation has made very little difference to inequality as the S&P graph below shows.


after tax

This shows that the rich will not concede even the slightest loss of their gargantuan wealth and incomes without a fight.

But the likes of the S&P, the IMF, Thomas Piketty et al to want stick with changes in inequality in income and wealth (distribution) rather than the drive for profit and the accumulation of capital (the capitalist mode of production) as the cause of all our misery.  For them, there is nothing wrong with the capitalist mode of production, it’s just the unfair distribution of the value created that is the problem.


You can see my recent presentation on the nature of the current long depression made to the Marxism Festival in London in July here.

I am making a presentation to the Communist University summer school in London next week along similar lines.

Ukraine: a rock and a hard place

August 11, 2014

The news that Ukraine PM Yatsenyuk has resigned shows that, while the fighting continues in eastern Ukraine between the Ukraine armed forces and the Russian-backed separatists, the crisis in the Ukraine economy is worsening.

Even before the separatist struggle erupted, Ukraine was suffering from a flight of capital as rich Ukrainians spirited their money out, and ordinary Ukrainians tried to buy dollars and put their savings under mattresses. Bank withdrawals have rocketed and the cost of borrowing has surged.

UKraine bank deposits

Not only is Ukraine’s capitalist state machine is tatters with the break-up of its borders, so is its capitalist economy. Indeed, Ukraine has performed the worst among Eastern European states since the collapse of the Soviet Union. Belarus has more than doubled its real GDP (from the post-collapse low of 1993 and even Russia is up 50%.  But Ukraine’s GDP is at the same level that it was in 1993!  And the economy will contract 6.5% this year (an increase in the drop forecast back in February), while neighbouring states will manage at least a little growth.

Ukraine GDP

As I pointed out in my post on Ukraine’s economy back last February, Ukraine’s economy is no bigger than that of Ireland, but it must support a population of 45m compared to Ireland’s six ( The economy is dominated by a bunch of oligarchs, or billionaire owners of the major sectors of the economy, who took them over through the usual corrupt privatisation process under successive pro-capitalist governments.

Indeed, new president Poroshenko, now conducting the war against the separatists, is one such oligarch, from the confectionery business – the “chocolate king”. The resigning PM Yatsenyuk is a creature of discredited former PM Yulia Tymoshenko, who is also a gas oligarch. She was previously imprisoned by the pro-Russian regime under ousted Yanukovych for corruption in gas deals.

Yatsenyuk was desperate to impose the will of the IMF on the Ukrainian parliament and people. The IMF is offering funding to the government in return of a programme of ‘reforms’. The government needs to find $9bn to cover payments to Gazprom (unpaid debts of $5bn). But so far it has failed to reach a deal with the Russian gas company in making back payments on its gas imports. The Russians want cash up front and Ukraine wants credit. In addition, the economy needs another $20bn to cover the trade gap and other maturing debt. It has only $18bn in FX reserves and these are set to fall fast, along with the value of the currency, the hryvnia, reducing the ability of pay for its imports (particularly energy). At the same time, debt owed to foreigners is rising sharply as a share of GDP as the economy shrinks.

The IMF has already insisted on a huge rise in energy tariffs to try and cover a government budget deficit now hitting 10% of GDP.  The government is imposing energy price rises of 40%-55% in 2014 and a further 20-40% in each of the next three years. The government and the IMF claim this is manageable because these price hikes start from a low level, are spread out over time and include “provisions to protect the most vulnerable 25-30% of the population”. So the IMF claims that they only raise heating and gas expenditures moderately from 3-7% of household budgets to 5-11%. Yet, despite these huge rate hikes, this will reduce the deficit being run up by the energy utility by only 1% of GDP by 2016 and not recover costs until 2018.

Winter approaches and the need to heat the people’s homes is becoming vital. As the government cannot reach an agreement with Gazprom, it must rely on its underground gas-storage facilities. They are full, but this gas is supposed to be passed onto Europe for their use. And “the EU has no intention of repaying Ukraine’s debts for Russian gas,” said Dominique Ristori, the director general of the European Commission’s Directorate-General for Energy, adding that all debt problems should be settled through the IMF. So the government will start to steal this gas for its own use, hardly likely to endear it to its EU and IMF financiers.

The IMF wants a complete ‘liberalisation’ of the gas sector i.e. privatisation and deregulation. When Yatsenyuk put this to parliament, as the IMF’s lapdog, it was rejected. So he has now resigned. At the same time, parliament increased taxes on private gas companies, which made them so upset that they have announced an end to further investment.

Thus, the Ukraine government is being pressed by the IMF and the EU to apply neo-liberal ‘reforms’ in return for funding but is opposed (partially) by a parliament that does not want to impose too much of burden on the people after the ‘Maidan’ uprising. And the war in the east splutters on.

Gaza – the prison economy

August 5, 2014

Think of a prison.  It’s overcrowded; it lacks modern facilities and it is a daily struggle for the prisoners to survive.  The prison wardens are well equipped for security. Their governors come and go. Some are ‘liberal’ and try to reach a harmonious relationship with the prisoners and even improve conditions, although they do not release them. They would prefer that they did not exist.

The problem is that the prisoners to a man and a woman feel that they are unjustly imprisoned with the judge and jury in the pockets of the corrupt and racist governors.  So occasionally, they rebel and even kill some of the wardens in prison riots or assassinations.  Then tyrannical and sadistic governors take over and, with the backing of enraged wardens, carry out punitive attacks on the prisoners, killing and injuring many of them. The wardens also destroy the prison facilities every so often, reducing the conditions of the prisoners to the level of barbarism.

Eventually, the wardens, with the help of foreign money, agree to allow the prison to be rebuilt with the labour of the prisoners themselves.  But the prisoners do not end their burning hatred of the wardens, the governors and the system behind them.  That system is composed of militarists backed by religious fanatics and foreign money looking to support the governors and to make money out of their prison.  So nothing is resolved.  Prisons don’t work to restore social harmony but releasing the prisoners, in the eyes of the governors and their backers, would open the door to fatal attacks on them.

This is Gaza and Israel in a simplistic way.  The terrible cost of human life and injury or ‘collateral damage’ – as the Israeli wardens prefer to call it – on the prisoners of Gaza is compounded with the collapse of Gaza’s fragile economy.  The Israelis say their attacks are aimed at destroying the tunnels used by Hamas (the prisoners representatives) to attack Israel.  Actually most of the tunnels are in the opposite direction and designed to smuggle into this prison that is Gaza the raw materials for construction and the economy. Everything from diapers to steel rods has been ferried through the tunnels.  The tunnels are inevitably also used for conflict, both as a staging ground for Hamas fighters and as a route through which to resupply. There are no alternative supply routes for anything else either, so it is only natural the tunnels would get repurposed during a warden attack or to attack the wardens.

In 2010, when ‘liberal governors’ in Israel relaxed the economic siege following an international outcry over the deadly raid on a Turkish-flagged humanitarian flotilla, this allowed Gazans to import more consumer goods.  The Hamas prison leaders took the opportunity to transform the tunnels, which were previously used for only basic consumer goods, into a government-sanctioned trade route for raw construction materials and cheap Egyptian petrol, fuelling the economic boom of 2011 and 2012.  The tunnel trade accounted for 27% of job growth in the Gaza Strip in 2011.

Sky-scraping apartment complexes, glitzy new shopping malls and extravagant hotel retreats sprouted up amid the rubble and unemployment dropped to 28% from a record-high of 45% at the height of the blockade.  Per capita gross domestic product also increased by 19% in 2011. Hamas imposed heavy sales taxes that made a car, a sofa, or a gallon of gas sell in Gaza for more than twice the price in Egypt.  However, Hamas failed to supply proper electricity, water and sanitation, but that was difficult to do, restricted as it was by the wardens.

Hamas received handouts from Iran, about $200 million annually, with which it salaried 42,000 teachers, doctors and other public-sector employees.  Other handouts, most notably Turkey’s $350 million, were earmarked for specific projects including schools and hospitals.  But while the Hamas government raked in some $170m in annual ‘tax’ revenues from the tunnel trade, 44% of Gazan refugees remain reliant on food aid and 60% of households are either food-insecure or vulnerable to food insecurity, according to the United Nations Relief Works Agency.  Ironically, Israel is the main destination of these exports (82% in 2012).  After all, prison contraband must go through the wardens.

And ironically, it was Egypt which closed the tunnels, as the generals there took action against Hamas, the main supporter and beneficiary of the Muslim Brothers in Egypt.  Since then, Gaza’s economy has been on a sharp decline.  GDP growth fell from 5.9% in 2012 to less than 2% in 2013, reflecting mounting political uncertainty, continued accumulation of arrears to the private sector and a sharp deterioration of economic conditions in Gaza from mid-2013 on. Unemployment in the Gaza reached over 40% in Q1 2014, up from 32% at end-2012

The IMF explains: “Without a comprehensive removal of Israeli restrictions it will not be possible to set the economy on a significantly higher growth path.”  The IMF outlined the nature of these restrictions: the movement of people and goods, trade between the West Bank and Gaza and access to Area C (60% of the West Bank controlled by the wardens) and East Jerusalem, including the right to issue construction permits and to develop land and water resources.  If that happened, the World Bank reckoned the potential for growth in Area C to be equivalent to 35% of GDP – but not Gaza.

As for Israel, as governors of the prison, they will gain only a temporary respite by crushing Hamas militarily.  The Israeli military like to see the war against Hamas and the other Arab groups as one of ‘nail clipping’.  You cannot stop nails growing but you can keep clipping them so they don’t scratch you.  But this nail clipping is expensive and maintaining prison security with prisoners full of burning hatred and unrelenting bravery in the face of overwhelming might is very expensive.

The Israeli government is telling its people that the current ‘security operation’ may knock 0.5% pts off growth this year.  That sounds small, but with the economy already slowing down, it is not good news.  The military cost will be $2.9 billion, or 1% of GDP.  Before the conflict, the central bank forecast a slowdown in growth to 2.9% in 2014 from 3.3% last year.  So economic growth could be as low as 2% as a result of the attack on Gaza, or nail clipping.

The government is hoping that US subsidies will continue and that foreign investment into Israel will not be affected.  To ensure that, the Netanyahu regime has imposed a stringent austerity programme on the Israeli public, while expanding defence expenditure.   The defence ministry is reportedly seeking an additional 5 billion shekels in extra funding in 2015, over 51 billion shekels in 2014. But prior to the wardens’ attack, the Bank of Israel had said significant spending cuts and higher tax income of nearly 20 billion shekels was needed to meet the 2015 and 2016 fiscal targets.

It is the ordinary people in Israel who will pay for the conflict. Households in Israel have stopped spending. The area around Tel Aviv saw consumption drop by a third.  The tourism industry is particularly badly hit. Around 40% of the sector’s revenue is generated in the summer season. The poverty rate in Israel (near 20%) remains among the highest among OECD  countries. Much of this high poverty incidence is in the Haredi and Arab-Israeli communities.  In the next 20 years, the  population of these two groups is projected to exceed 40% of  the total population – a future issue for the governors.

The prisoners are being crushed brutally.  But the prison wardens are paying for it with their own future.

The risk of another 1937

August 1, 2014

Financial markets responded to the news of US economic growth jumping to a 4% annual rate in Q2 2014 by selling off. The reason was that faster growth in the economy would imply an earlier move by the Federal Reserve to raise interest rates and ‘normalise’ monetary policy. The Fed’s monetary policy committee said it was sticking to its existing ‘easy money’ policy, although it was tapering its rate of credit injection and stopping altogether in October. However, one Fed board member dissented and wanted a rate rise now. This spooked markets into reckoning that the era of cheap money since the Great Recession might soon be over.

The whole situation reminds me of the move to tighten monetary policy in 1937 during the Great Depression. Then it appeared to the US authorities that the slump was over and it was time to ‘normalise’ interest rates. On doing so, the economy promptly dropped back into a new recession that was only overcome when the US entered the world war in 1941. The reality was that the profitability of capital and investment had not really recovered and raising the cost of borrowing tipped the economy back (see my post,

That is the danger this time also. The headline growth figure for Q2’14 was a 4% annual rate and the first quarter disaster was revised up to a contraction of -2.1%. But this jump mostly reflected a sharp rise in inventories, namely stocks of goods that companies are piling up and have not been sold. This contributed 1.7% points of the 4% uptick. This suggests that US companies may have produced more but cannot yet sell it all. We’ll see in the next quarter.

US GDP contributions

Moreover, if we look at the level of US gross product compared to this time last year, the growth rate in Q2 was only 2.4%, a much better gauge of the level of expansion that the annualised figure. So even if growth accelerates in the second half of this year, the IMF forecast for the whole year of 1.7% that I mentioned in a recent post is likely to be confirmed. If you look at the graph below, you can see that the red line of year-on-year growth is pretty static at about 2% a year.


Indeed, the US official statistics were revised in this latest report. In the three-year period 2011-13, the real GDP growth rate averaged exactly 2% a year, revised down from 2.2%. So the ‘recovery’ since the end of the Great Recession in mid-2009 remains the weakest since the Great Depression. And the gap between where the trend growth rate would have taken the US economy without the Great Recession happening and the reality remains unbridged, with some $1.5trn of output lost forever, or about 10% of GDP.

GDP gap

The majority of the Federal Reserve board remains reluctant to move on tightening monetary policy as the dissenters want. They stick to the view that there is still a sizeable gap between potential output and effective demand in the economy. This is the Keynesian view, as propounded by the likes of Paul Krugman and Larry Summers, who fear that that the US is in ‘secular stagnation’ that requires keeping interest rates near zero and more printing of money

The dissenters are growing in strength though. Recently the Bank of International Settlements (the central banks association body) published its annual report and raised fears that unending printing of money and credit injections was creating financial and property asset ‘bubbles’ that would eventually burst and renew the financial crash of 2008 ( This was not a new debate kicked off by the BIS. The BIS pushed the same story last summer (see my post,

Jaime Caruana, head of the BIS, said the international system “is in many ways more fragile than it was in the build-up to the Lehman crisis”. Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since then. Credit spreads have fallen to to wafer-thin levels. Companies are borrowing heavily to buy back their own shares.  Caruana correctly pointed out how stock and bond markets were racing up to new highs but the ‘real economy’ of output and investment was stuck in very low rates. This suggests a dangerous bubble as higher risk corporate leverage (debt) has risen to new highs.


And the Fed dissenter, Robert Fisher put it: “the money we have printed has not been as properly circulated as we had hoped. Too much of it has gone toward corrupting or, more appropriately stated, corrosive speculation.” And Fisher quoted Neil Irwin of the NYT who pointed out that “Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals.” (

A good measure of how far financial markets are out of line with reality is Tobin’s Q, a measure of the market value of stocks against the actual value of the stock of fixed assets owned by companies. This measure was invented by James Tobin, a leftist economist back in the 1980s.


The great collapse in equity prices in 2000, which led to the secular ‘bear market’ in stocks since then (see my posts, and,
was clearly suggested by Tobin’s Q peaking at an astronomical high then. The Great Recession saw the ratio drop below the historic average. But since then it has risen back to the highs of the 1990s. So are we due for another fall?

The BIS critique is really based on the ideas of the so-called Austrian school of economics. This school reckons that there are financial crises under capitalism but that they are caused, not by faults in the banking system or by flaws in the capitalist mode of production. On the contrary, the market economy is a wonderful piece of social engineering and the ‘invisible hand’ of market forces is the only viable way for economies to operate efficiently. The problem is that governments (departments of finance and central banks) interfere with the smooth operation of financial and product markets and try to fix interest rates or the quantity of money. This just leads to ‘malinvestment’ and credit bubbles. Then these bubbles will need to be burst like a blister to get rid of the poison of speculation, even if it leads to a slump in production.

Actually, the BIS does not adopt Austrian economics outright. It follows the work of Kurt Wicksell, a Swedish economist, and now backed up by the work of BIS economist Claudio Borio. They reckoned that modern capitalist economies with a large financial sector are subject to endogenous cycles of credit booms and busts spread over 15-20 years (Borio says 16 years – see my post, The BIS reckons that if no preemptive action is taken, then the major economies, particularly the US and the UK, are heading for another credit bust.

These ideas are, of course, anathema to the Keynesians, who reckon the Great Recession was the product of a huge drop in ‘effective demand’ and the capitalist economy must be given huge dollops of ‘free money’ to boost demand before it can be allowed to stand on its own two feet. They reckon that, as demand has not fully recovered (unemployment may be falling, but wage income is stagnant and business investment is pitiful), the Fed’s printing presses must continue to pump out dollars and at the very least, the cost of borrowing should not rise.

However, stock market investors have become worried that the gravy train they have been on for the last few years as the Fed pumped in ‘free money’ to borrow in order to speculate in stock and property markets might be coming to an end soon. The strong headline US GDP figure and the split in the Fed’s board between the BIS and Keynesian wings was the trigger for a sell-off.

I think the stock markets are right to be worried, but not just for the reason of ‘uncontrollable credit’ that the BIS cites. There is also the productive sector of the economy. There is a huge gap between the value of financial assets and property prices and the productive growth in the major economies. And now there is a significant turn in profitability appearing.

Profits are the key to investment and the correlation between the movement in the mass of profits and business investment is well documented (at least for the US) – see my post,
and my joint paper with G Carchedi, The long roots of the present crisis.

And US corporate profits have stopped rising. In the first quarter of this year, they fell absolutely for the first time since the end of 2006. When they fell in 2006, investment slumped about one year later and the Great Recession began. If corporate profits continue to fall, it will be a clear indicator of new recession in the offing just a year or so away, perhaps exactly when the Federal Reserve starts to raise interest rates.

corporate profits

It could be 1937 all over again.

Abenomics: raises profitability… and misery

July 30, 2014

In June 2013, I poured cold water on the positive views expressed by the likes of Paul Krugman on PM Shinzo Abe’s plans to turn the Japanese economy round through a mixture of Keynesian monetary and fiscal stimulus and neoliberal ‘supply-side measures – the so-called three arrows of reform in ‘Abenomics’ ( I reckoned that Keynesian policies did not work in the 1990s to restore the rate of 1980s average growth after Japan’s credit bubble burst and they would not work this time either.  I finished that post with the phrase: ‘watch this space’.

Well, over one year later, it looks as though Abenomics is failing, at least the Japanese people.  The Bank of Japan has expanded its balance sheet by ‘printing money’ (or more accurately, increasing commercial bank reserves) to 50% of GDP, more than twice the level of the Federal Reserve and the Bank of England after their ‘quantitative easing’ programmes.  The Japanese yen has fallen in value and the Japanese stock market has boomed, but Japan’s economy continues to crawl along.  Japan’s economy has expanded at no more than 1% a year since the Great Recession ended.  Under Abe, the growth rate has risen to 1.8%, but still no better than before the crisis.

Indeed, industrial production has been falling in 2014 after an initial boost in 2013.

Japan IP

Retail sales, an indicator of consumption growth is also dire, especially after the sharp hike in sales taxes imposed by the Abe government in April.

Japan retail sales

At the same time, inflation has risen as a deliberate policy of the government, designed to ‘stimulate’ businesses to invest on the expectation of higher profits.  As a result, real incomes for the average Japanese household have fallen significantly.  The so-called misery index (the sum of inflation and unemployment rates) is at a 33-year high!

Japan misery index

So what has happened under Abenomics is a sharp rise in the rate of exploitation of Japanese workers and a fall in their living standards in order to boost profitability.

As in the late 1990s, when right-wing ‘Thatcherite’ prime minister Koizumi took over, his neoliberal policies managed to drive up profitability from all-time lows in the 1990s.  But the Japanese public rebelled and threw out the Liberal Democrat government, hoping for relief from the ‘leftish’ Democrat opposition.  They were sadly disappointed and then the Great Recession came to drive down profitability back to the previous low.  Eventually, the Liberal Democrats under the right-wing nationalist Abe came back to power (in an all-time low turnout – see my post  The real agenda behind Abenomics is the restoration of the profitability of Japanese capital.  Abenomics aims to do that by squeezing the living standards of Japanese households.  This is the area where it is succeeding.  And this is the outcome of Keynesian policies!

If we look at the net return on capital in Japan, as measured by the Eurostat AMECO database, we can see that after 1990, profitability dropped 30% before recovering dramatically under Koizumi until the Great Recession came along.  Then it plummeted 25%.  The subsequent recovery in profitability after the Great Recession ended then faltered in 2011 with the earthquake and nuclear disaster.  But Abenomics is now having an effect.

Japan NRC

Higher profitability (albeit only little higher than in 1990 and still 50% below the golden age of the 1960s) has not translated into rising business investment and export growth until recently.  Instead Japan’s companies, just like in the US and the UK, built up huge cash reserves and/or invested in financial assets.  And companies took more profits rather than boost exports by cutting export prices.  In 2014, business investment in real terms has recovered somewhat, given the rise in profitability under Abenomics.  But it is still below the pre-global crash peak and not much higher than in 2012.

Japan business investment


And the Japanese trade account continues to deteriorate …

Japan trade

….while the government debt remains at astronomically high levels.

Abenomics may be working (a bit) for Japanese businesses, but it’s not doing so for most Japanese people.