There is a growing talk among mainstream economists and the financial media of a new global economic recession. Until the last few weeks, the locus of this new slump has been focused on China. But, as I have argued in a previous post, it is unlikely to start there. Much more important to the world economy is the largest economy in the world in terms of national output and financial fire-power, the US.
In the last few weeks, there has been a continuous series of poor data for the US economy: falling manufacturing output, weakening business sentiment and capital goods orders and falling corporate profits. And globally, international agencies by the week seem to announce reduced forecasts for economic expansion.
The latest of these agencies, after the IMF, the World Bank and the OECD, is the United Nations. In its report on global economic perspectives, it concluded that “the world economy stumbled in 2015 and only a modest improvement is projected for 2016/17 as a number of cyclical and structural headwinds persist”. 2016wesp_full_en
UN economists downgraded their final estimate for global growth in 2015 from 2.8% to just 2.4% – remember the average prior to the Great Recession for global growth was 4-5% a year. Naturally, like the other agencies, it expects an improvement this year and next: “The world economy is projected to grow by 2.9 per cent in 2016 and 3.2 per cent in 2017, supported by generally less restrictive fiscal and still accommodative monetary policy stances worldwide.” But then each year these more optimistic forecasts are dashed and revised.
The UN also confirmed a key indicator of the Long Depression, that I call the period since the end of the Great Recession of 2008-9. As Professor Joseph Stiglitz put it in a recent article: “Moreover, the UN report clearly shows that, throughout the developed world, private investment did not grow as one might have expected, given ultra-low interest rates. In 17 of the 20 largest developed economies, investment growth remained lower during the post-2008 period than in the years prior to the crisis; five experienced a decline in investment during 2010-2015.” Indeed, the average growth rate in developed economies has declined by more than 54% since the crisis. An estimated 44 million people are unemployed in developed countries, about 12 million more than in 2007, while inflation has reached its lowest level since the crisis.
Stiglitz went onto consider “what’s holding back the world economy?” He noted what some of us have been saying for years: that quantitative easing by central banks, as used in the US, Japan, the UK and belatedly in the EU, has failed to boost growth and investment. The problem was that the banks used the cheap cash from central banks not to lend onto companies to invest or households to spend, but to build up their cash reserves or buy government bonds or their own shares.
As Stiglitz concluded: “Clearly, keeping interest rates at the near zero level does not necessarily lead to higher levels of credit or investment. When banks are given the freedom to choose, they choose riskless profit or even financial speculation over lending that would support the broader objective of economic growth.” Of course, this is something that many Marxist economists have been saying for years – in opposition to the hopes of Keynesian economists like Paul Krugman or Noah Smith. Moreover, what could provide a better case for the public takeover of banking systems in the major economies so that credit can be directed productively and not for bank profits?
Stiglitz also directs our attention to the massive reversal of capital inflows to so-called emerging economies. “An unintended, but not unexpected, consequence of monetary easing has been sharp increases in cross-border capital flows. Total capital inflows to developing countries increased from about $20bn in 2008 to over $600bn in 2010. Very little of it went to fixed investment. This year, developing countries, taken together, are expected to record their first net capital outflow – totalling $615bn – since 2006.” Actually, according to the Institute of International Finance, the outflow figure was even larger, with net capital outflows of an estimated $735bn during 2015, the first year of net outflows since 1988!
As another international agency, the Bank for International Settlements (BIS), put it in its latest quarterly review, the surge in lending to emerging markets that helped fuel their own — and much of the world’s — growth over the past 15 years has come to a halt, and may now give way to a “vicious circle” of deleveraging, financial market turmoil and a global economic downturn. “In the risk-on phase [of the global economic cycle], lending sets off a virtuous circle in financial conditions in which things can look better than they really are,” said Hyun Song Shin, head of research at the BIS, known as the central bank of central banks. “But flows can quickly go into reverse and then it becomes a vicious circle, especially if there is leverage.”
The BIS reported that the total stock of dollar-denominated credit in bonds and bank loans to emerging markets — including that to governments, companies and households but excluding that to banks — was $3.33tn at the end of September 2015, down from $3.36tn at the end of June. This was the first decline in such lending since the first quarter of 2009, during the global financial crisis, according to the BIS.
In previous posts I have pointed out that the huge rise in credit to emerging markets threatens a major bust especially if the profitability of capital should begin to fall in these economies.
And that is just what is happening. The return on equity capital in advanced capitalist economies is below levels before the Great Recession but it partially recovered from 2009 and only started to fall in the last year or so. But profitability in emerging economies has been falling since 2012 and is now below that of advanced economies for the first time.
The head of IIF, Caruana commented, “The issue is not just for emerging markets. It is spilling back into developed markets. The broader financial markets are recoiling from risk, and that spreads across all markets. The problem now is that the real economy is being affected.”
In my last post, I took up the issue of negative interest rate policy (NIRP). This is the new policy forced upon central banks to try and get the world capitalist economy out of this Long Depression. Zero interest rate policy (ZIRP) has failed, quantitative easing (QE) or printing money has failed, so now let’s charge banks and other financial institutions for keeping cash and try to force them to lend or invest. Several small central banks had already adopted NIRP (Switzerland and Sweden) but last week, one of the largest, the Bank of Japan, applied NIRP.
The BoJ vote to do so was only 5-4 because the minority were not convinced that it would work. Indeed, NIRP could make things worse, they thought. NIRP is the last throw of the dice in monetary policy and if it did not work in getting the Japanese economy out of its stagnation, the Bank would be seen to be helpless. And why should NIRP work any better in stimulating business investment than ZIRP or QE?
Within weeks, it is becoming clear that NIRP is not working. Japanese government ten-year bond yields dropped into negative territory. This means that banks and other corporate investors would prefer to pay the Bank of Japan and the government for holding bonds for the next decade rather than spend cash or invest! And that behaviour is happening increasingly globally. The volume of government bonds trading below zero interest has now reached $6trn, or one-third of the entire global sovereign bond market!
So what is to be done? Martin Wolf, the Keynesian economic journalist for the UK’s FT, asked the question in a recent article. His answer seemed to be more of the same ‘unconventional’ monetary policy. “It is crucial to recognise that something more unconventional might have to be done”. Another recession was bound to come along and doing nothing about it was not an option.
Wolf went through the various options that I have discussed above and eventually concluded that the only one left with the possibility of success was “helicopter money” — dropping money directly into people’s bank accounts in so that they spent more. This is similar to the People’s QE advocated by some of the current leftist Labour opposition in the UK and has been mooted before by heterodox economists. I have discussed this option in a previous post when it was proposed by maverick Bank of England economist, Andy Haldane.
In my view, it won’t work because it assumes that what is wrong with the capitalist economy and the reason for the continued Long Depression and the prospect of another slump is the Keynesian explanation of a ‘lack of demand’. For Keynesians, you can create extra spending through money creation. This leads to increased employment and then to increased income and growth and thus to more profits. But the reality of the capitalist system is the other way round. Only if profitability is sufficient, will investment increase and lead to more jobs and then incomes and consumption. The demand for money will rise accordingly. Artificial money creation by fiat from the government does not get round this – as the experience of ‘quantitative easing’ has already shown.
Instead, we must look at what is happening with profits and profitability. And as I have shown in several previous posts, the profitability of business capital in the major economies is near historic post-1945 lows and the limited recovery in profitability since 2009 has come to an end. Indeed, global corporate profit growth has ground to a halt and is now falling in China, the UK and most important in the US.
Last week, the investment bank, JP Morgan, noted that US corporate profit margins (the share of profit in each unit of national output) have started to fall back from its record highs. After the slowdown in US productivity growth to near zero, as reported last week, JPM’s economists now expect US corporate profits to fall by 10% this year.
And here is the rub. As I and (a few) other Marxist economists have argued, JPM points out that every time there is such a large fall, an economic recession is not far behind, because such a fall is seldom not followed by an economic recession. I quote: “this week’s larger-than-expected productivity drop in 4Q15 points to a 10% drop in corporate profits from year-ago levels. A double-digit decline in profits is a rare event outside recessions, having been recorded only twice in the last half century”.
JPM has raised the probability of a US economic recession from 10% to 25% in 2016. And that probability is greater than 50% before 2017 is out.
I have commented on the possibility of a new global recession in previous posts. My view is that it is due and will take place in the next one to three years at most. Some mainstream economists are now forecasting a more than 50% chance for 2016. Citibank economists reckon that there is a 65% chance in 2016.
This doom-mongering is dismissed by others. Bill McBride from Calculated Risk trashed those recession mongers who think it is on the cards for next year. Says McBride: “For the last 6+ years, there have been an endless parade of incorrect recession calls. The manufacturing sector has been weak, and contracted in the US in November due to a combination of weakness in the oil sector, the strong dollar and some global weakness. But this doesn’t mean the US will enter a recession. The last time the index contracted was in 2012 (no recession), and has shown contraction a number of times outside of a recession. Looking at the economic data, the odds of a recession in 2016 are very low (extremely unlikely in my view).”
Maybe it won’t be in 2016. But the factors for a new recession are increasingly in place: falling profitability and profits in the major economies and a rising debt burden for corporations in both mature and emerging economies. And the Fed set to hike the cost of borrowing in dollars. As I said before, it’s a poisonous concoction.
Can we avoid this slump? Stiglitz’s answer to avoid this is to ‘direct’ banks to lend for investment or household spending and to introduce “large increases in public investment in infrastructure, education, and technology” to be financed by higher taxes on ‘monopolies’. No doubt, increased public investment would help to compensate for the failure of capitalist investment. But the world is capitalist: governments are not going to boost public investment if it means higher taxes for corporations, reducing their profitability even more. So even this moderate policy for more public investment is a challenge to capitalism in an environment of low profitability, rising debt and depressed growth – something that Keynesian/Marxist Michel Kalecki at the end of the Great Depression of the 1930s pointed out.
Wolf’s ‘helicopter money’ and Stiglitz’s tax-funded public investment are poor options. It is not the banking system that has to be by-passed or directed but the capitalist system of production for profit that has to replaced by planned investment under common ownership.
Michael Roberts Blog 
For me we are still living in the world brought about by the 2007/8 crash.
This was an historic moment for me, where all the normal rules have to be revised.
The least I would say is that people such as Bill Jeffries and Boffy, who view 2007/8 as an insignificant moment, are way off base.
I don’t consider 2008 an insignificant moment. Look at what I wrote, when I correctly predicted it was about to happen, and why it was about to happen – Severe Financial Warning. My point is that the nature of that crisis was that it was a financial crisis, much as was the 1847 Financial Crisis, analysed by Marx. His analysis of that crisis, as such a financial crisis was what led him to note the difference between such crises that are located entirely within the financial system – banks, stock exchange etc. – as opposed to the phase of every economic crisis, which assumes the form of a money crisis.
In 1847, as Marx points out, the consequence of the financial crisis, intensified by the wrong headed policy of the 1844 Bank Act, much as today the wrong headed policy of austerity, in the UK and Europe, has intensified, and prolonged the effects of the 2008 financial crisis, was that economic activity fell by 37%! But, when the Bank Act was suspended, and the credit crunch was removed – but without the continued injection of liquidity to keep over inflated asset prices from collapsing – the underlying economic fundamentals asserted themselves, and the period of rapid economic growth continued up to 1865, only interrupted by a further financial panic in 1857.
Just as in the period 1843 to 1865, in the end it was the underlying economic reality that ultimately determined the longer term events, and not the financial crises, and wrong headed government policies, so to today, it will be the fact that the global economy remains within the conditions of a long wave upswing – which may even be prolonged as a result of government policies restricting the strength of growth – which will ultimately be determinant, and not the financial crisis of 2008, or the even bigger financial crisis I expect is not too far away, or the wrong headed policies of QE, which goose asset prices and thereby drain money away from productive investment, in search instead of quick, guaranteed capital gains, combined with austerity, which undermines aggregate demand, and encourages a growth of private debt.
But, there have been people crying world, and claiming that “The Next Recession”, is always just at hand, and those claiming that even the final and inevitable collapse of capitalism was at hand, much like those who walk around Hyde park corner with their sandwich boards, proclaiming the end of the world is nigh. Both have been repeatedly proved wrong. The predictions here a while ago, that US growth was going to be only 1.7%, were proved wrong, and it turned out at 2.4%.
The official forecasts of the UN and others referred to above have been revised down, but not only are they still forecasting growth, but read it again, and you will see that it actually says that growth will show an improvement over this year. But, even if there were to be a recession, so what? Such business cycles are natural for capitalism. There were many such recessions, crises and periods of stagnation when Capitalism was in its vibrant youth, it didn’t prevent it from growing even more strongly. Indeed, as Marx describes, it is the means by which it does so! In the long wave post war boom, there were at least five recessions.
I don’t think Marx claimed the crisis was a financial one, just that the Bank Act made things worse than they would have been.
The only reason a capitalist will invest productively, as you call it, is if they believe the investment will bring a return. At the end of the day the main motive for a capitalist company is enriching the owner, either now or in the future.
I do not agree with the argument that investment is related to expected demand, it is surely related to expected future profit. A huge corporation would not employ highly paid finance people to only look at future income, they will be expected to calculate future costs also!
The significance of another recession now is the weak growth since the 2007/8 crash. And the fact that all the usual tools at the disposal of institutions have failed, despite staggering amounts thrown at the problem.
I do not believe that capitalism can collapse on purely economic terms, more important is the class struggle. I tend to believe that capitalism has economically collapsed at certain points in history and governments have stepped in to effectively suspend capitalism, or manage it through the difficulties. Thus far capitalism has survived these scares, I wouldn’t want to say anymore than that.
Though capitalism is so far away from the economic models that I don’t even know if we can call it capitalism anyway!
Edgar,
Yes, he did see 1847 and 1857 as financial crises. It is why he and Engels point out that in both those crises, the suspension of the Bank Act and the release of liquidity to end the credit crunch was sufficient to end the crisis, and see a rapid return to growth. It is what he is referring to when he distinguishes such purely financial crises from economic crises. In his analysis of crisis in Theories of Surplus Value, he refers to crises of the second form, which is where an economic crisis appears results in a payments crisis, which gives the appearance of a lack of money, but is actually about a lack of capital.
But, Marx says in Capital I, that there are purely financial crises.
“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.” (note 1 p 137)”
The owners of capital will seek to invest it where they can make the greatest return not just any return, though that also has to take into consideration risk, the ability to shift capital and so on. At the moment, if you can make huge capital gains from speculation in shares, government bonds, or property the prices of which are more or less guaranteed by state intervention, why would you risk money by investing it in actual productive capital?
Moreover, the vast majority of available money-capital is in the hands of a few very rich money-capitalists, along with a small number of global financial institutions. None of these are in a position to actually invest money-capital themselves in productive activity, because they are money capitalists, they became so because they wanted to avoid getting their hands dirty by being engaged productively, and were happy to settle for a low rate of interest on huge amounts of loan capital, rather than a higher rate of profit, on a smaller amount of productive-capital, which might take years to produce a return.
Those who choose to seek profit rather than interest are necessarily going to be mobilising smaller amounts of capital in smaller ventures, many of which may be in new areas of production, though there is always the mavericks like Branson and Musk with their space technology and so on.
Of course, companies look at future costs, but a central aspect of Marx’s theory as opposed to marginalist theory is that as output expands, those costs tend to decline, so that profits expand. But, the fact is that what companies are interested in when they get beyond a certain size is expanding the mass of profit. In fact, even smaller companies are interested in expanding the mass of profit too, as Marx and Engels demonstrate at length in analysing rent.
The fact that a firm will always be on the look out to invest capital in those areas where it can obtain the highest rate of return does not at all preclude the fact that they will invest capital so as to obtain an additional return, whether it is at a higher or lower rate than that currently obtained, provided that rate on the additional investment is the best available to it. Marx and Engels give lots of examples of such behaviour in examining rent.
All the usual tools have not failed since 2008. The Keynesian tools of fiscal intervention worked pretty much as well in 2008/9, as they did in the previous long wave boom recessions of the 1950’s and 60’s. That is why Obama was able to point in his speech last week to the fact that the US has performed much better than Europe, because the US continued to use those tools, whereas the UK and Europe inflicted unnecessary damage on their economies, and thereby also slowed global growth by the imposition of austerity, whilst flooding financial markets with liquidity to reflate asset price bubbles, and divert loanable money-capital into such speculation, and away from productive investment.
Even in the US, those policies of fiscal expansion were curtailed as a result of the blocking tactics of the republicans and Tea Party, who created additional damage with their artificially created political crises over the Debt Ceiling, Budget and Sequester. The reason conservative governments have inflicted such damage, is because they are there to look after the owners of fictitious capital, not productive-capital. They are there to keep those bubbles and fictitious wealth inflated, even if it means crucifying real productive-capital.
Capitalism has not collapsed economically. If you take the 1930’s, for example, the basis of the recovery was already present. The situation in the US and Europe has to be distinguished, because in the 1920’s when the US was still booming, Europe was already in recession. But, by the mid 1930’s, there were already a series of new industries growing strong in Europe.
The Midlands and South-East of England saw a rapid growth of the car industry, consumer electronics and so on, paying relatively high wages. It also fuelled a housing boom in those areas, as new suburban settlements were developed, often using new more productive building techniques. Its often forgotten that one reason for the Jarrow Marches was to remind the workers in these newly growing, more affluent areas, that elsewhere in the country, the workers in the old industries were still suffering.
It was the new industries that provided the basis for the post-war boom, and that arose from the normal working of capitalism.
First transmission from planet Boffy on Marx’s (and Engels’) take on 1847 (and 1857): “It is why he and Engels point out that in both those crises, the suspension of the Bank Act and the release of liquidity to end the credit crunch was sufficient to end the crisis, and see a rapid return to growth.”
Second transmission from planet Boffy regarding Marx’s take on 1847: ” It is what he is referring to when he distinguishes such purely financial crises from economic crises.”
Boffy regards 2008 as the equivalent of 1847, so it is fair to conclude here on planet earth that Boffy regards 2008 as purely a financial crisis.
So…. on planet earth we should expect in 2008 the “the release of liquidity to end the credit crunch was sufficient to end the crisis and see a rapid return to growth.”
Well on planet earth, the release of liquidity to end the credit crunch has being nothing short of massive, astronomical, astounding– with the Fed quadrupling its balance sheet, followed by the ECB, and of course both following Japan’s Central Bank. So has there been a rapid return to growth? In Japan? Europe? the US? Nope.
China’s central bank unleashed a veritable tidal wave since 2008 and what is happening to growth in China now? That’s not the fault of the central bank or the liquidity policies, says the transmission from planet Boffy? Exactly. And for just that reason 2008 is NOT a monetary crisis– by the very conditions Boffy claims define and remediate said crisis.
Third transmission from planet Boffy: “All the usual tools have not failed since 2008. The Keynesian tools of fiscal intervention worked pretty much as well in 2008/9, as they did in the previous long wave boom recessions of the 1950’s and 60’s. That is why Obama was able to point in his speech last week to the fact that the US has performed much better than Europe, because the US continued to use those tools, whereas the UK and Europe inflicted unnecessary damage on their economies, and thereby also slowed global growth by the imposition of austerity, whilst flooding financial markets with liquidity to reflate asset price bubbles, and divert loanable money-capital into such speculation, and away from productive investment.”
Well, no. On planet earth the recovery has been the weakest, the shallowest, the slowest of any since WW2. The US has continued to use those tools? and Europe hasn’t? No, not exactly, the US has ended its QE policy, and raised interest rates, which is supposed to reduce liquidity,but according to the oracle of planet Boffy, those are “good things” for workers as they will deflate the fictitious asset values, and shift capital to real production and accumulation.
Of course, on planet earth, it ain’t working out that way, is it? Money in the US did not flow into productive investment over the entire economy, and where money did flow into those sectors– energy, mining, shipping– gross inflation of asset values did occur, only to be followed by severe deflation of precisely those productive asset values as overproduction worked its anti-magic against the spells of the Keynesian wizards.
Planet Boffy claims Europe hasn’t used those monetary tools, despite the ECB’s QE policy and adoption of negative interest rates. Well, if those aren’t the tools of liquidity, if those aren’t Keynesian ploys, then Keynesian ploys on planet Boffy must be different than those on planet earth– but they can’t be, because the Fed, which last time I checked was on planet earth, continues to use them, according to Bobby and successfully.
“Oh,” says our alien life form, “that’s because Europe imposed austerity, inflicting unnecessary damage.” Here, on planet earth, Boffy makes the most basic of errors– confusing and conflating monetary policy with fiscal policy. Austerity is a fiscal policy practiced by government in sectors of social expenditure, not monetary policy. If the crisis is a monetary crisis, as Boffy claims, then fiscal policy as bollocks to do with the course, and the resolution, of the crisis.
If fiscal policy is of critical import, then it is not simply a monetary crisis. On planet earth.
Boffy is confused. Understandable, of course, in someone who is not of this planet and is so unfamiliar with the terrain. Doesn’t mean he’s a bad person, just means he’s lost.
I don’t see where these new industries are which will make companies invest. We are still in the research stage, these products are not coming to market anytime soon. Where now does the capitalist put his money to gain ‘super profits’ before the bubble bursts again?
All this in the context of a fragile economy.
To use a metaphor, the current economy is like a liver transplant patient, susceptible to infection. We have an economy with a weak immune system. I believe we are still living in the shadow of 2007/8. And I don’t see any new industries riding to the rescue. Well, not industries that capitalists can make hay with.
Edgar,
Really, you don’t see any profitable industries? Part of the thesis of Paul Mason’s recent book was the conundrum of why it is that there are so many new profitable industries, and yet they have seen so little investment.
In fact, we have global rates and masses of profit at historically high levels, that rose from the late 1980’s onwards, driven by huge rises in productivity, which in turn drove massive moral depreciation of existing fixed capital, reductions in the value of circulating constant capital, reductions in the value of labour-power, increase in the rate of surplus value, huge releases of capital, and increase in the rate of turnover of capital.
Have you not noticed things such as the fact that these processes have reduced the cost of gene sequencing from being in the realm of billions of dollars down to less than $1,000 have driven whole new industries, not just for forensic science, but to provide every individual with their own individual data, and the potential for tailored health care, capable of being addressed by toyotist systems of flexible specialisation, as opposed to Fordist mass production healthcare solutions?
Have you not noticed how these new technologies are driving the development of space technology, and lots of spin offs, made possible by satellite navigation systems and so on? And as Marx sets out, it is the development of these new industries, which in turn enables the existing industries to find additional demand for their own production. The old industries, thereby grow more slowly than the new industries, but they still grow, they still absorb additional capital.
The fact is that there is no shortage of very profitable areas into which capital could invest. But, as Marx points out, in relation to the reason for foreign investment, it does not require that it becomes impossible to make profits on existing investment in order to drive foreign investment – as some of the crude applications of Lenin’s ideas in “Imperialism” would have it – but only that it is possible to obtain higher returns from such investment. That after all is what drives the formation of an average rate of profit.
Similarly, if the owners of money-capital see the potential to make huge, quick capital gains on their money, by speculation in financial markets, that have been rigged by central banks who guarantee those gains, and who socialise any losses, why would they not choose that option, as opposed to lending that money-capital to productive-capital? That is why huge swathes of SME’s have found it impossible to borrow money for investment, which has driven the growth of peer to peer lending, but at much higher rates of interest.
It is similarly, why the high rates and masses of profit generated by companies like Apple, has resulted in them amassing tens of billions of dollars of cash on their balance sheets, which in many cases is again used for financial speculation rather than productive investment, because the representatives of fictitious capital who control the resources of these companies, see the potential for making large short term capital gains from financial speculation, buying back the company stock, buying the stock of other companies and so on, as opposed to productive investment. That especially as such financial operations, act to boost the earnings per share of the company, and the value of the stock options of such executives in the process.
A clear example of that can be seen in a wider context in Europe. You talked above about all the old tools having been used, and failing, but as I pointed out that is clearly not the case. A look at the period immediately after the 2008 crash shows that the injection of liquidity brought the credit crunch to a halt, just as Marx and Engels describe that happening in 1847 and 1857. But, also the use of Keynesian fiscal stimulus, also ended the contraction in economic activity.
Compare the path for the US economy, and that for the UK and Europe, however. The US economy continued to show that growth, despite the actions of the Republicans. In the UK, the last quarter that Labour were in office showed growth of 1%, for the quarter, or about 4% annualised. But, the Tories talk of austerity was enough to send that in reverse in the middle of 2010, and that was quickly deepened as they introduced their austerity policies thereafter. The same is true with the crazy policy of austerity that was imposed on Greece that caused its economy to plummet, and imposed on Spain, Portugal and so on.
What compounded the situation in Europe was the fact that alongside this policy of austerity that was cratering aggregate demand, went the policy of QE, which inflated asset prices even further, sucked money out of productive investment, and as a consequence undermined growth even further!
Just look at the actions of the European banks. They were stuffed with currency by the ECB to paper over the fact that they were insolvent, and the policies of the ECB, in guaranteeing European bonds, acted to set a base under them, so that those banks were encouraged to use all of that liquidity to speculate further in financial assets, rather than to lend to productive-capital.
It has been known for some years, and I have discussed it on my blog, that Deutsche Bank has exposure hidden away on and off its balance sheet, to derivatives with a value equal to the entire global GDP – around $75 trillion. The chickens are coming home to roost on all of that. Because herein lies the problem of a global economy that has been built up around the interest of fictitious capital, and the ability of its political representatives to rig things so as to keep the prices of that fictitious capital, and thereby the fictitious wealth of money-capitalists inflated, at the expense of productive investment.
It is not that there are not huge potential areas of profitable investment available, it is the fact that the owners of loanable money-capital, have had thirty years of instant gratification, of huge immediate, capital gains, made year after year, as central banks have underpinned them, via the “Greenspan Put” followed by the Bernanke Put, and now the Yellen Put, which is why the representatives of that fictitious capital are so keen to see and play up economic weakness, so as to pressure central banks to goose those financial markets one more time.
They have no interest in real economic activity, only the illusion of financial wealth. As I discussed recently.
As I quote John Weeks, there,
“Policy change, not “globalization”, liberated financial capital to break free of the production-distribution cycle which severely limited its potential for profit-taking. Suddenly, financial capital had a new and powerful mechanism to garner profit, speculation….
The pervasive control of the UK economy reveals itself in what passes as economic news, more correctly named “speculation news”. Since the beginning of 2016 the media’s reporting of the movement in stock markets has reached the point of obsession. Each day’s business news headlines focus on whether these market indices fall or rise. Commentators present a fall as a harbinger of disaster, with a rise provoking optimistic cheers that we escaped disaster.”
And, as Michel Husson puts it,
“In the “financial sphere”, quantitative easing is feeding stock-market bubbles rather than productive investment, which is stagnating. And the mere prospect – held back so far – of a renewed rise in Fed interest rates hangs like the sword of Damocles and is destabilising the currencies and markets of many countries. In short, “Uncertainty, Complex Forces Weigh on Global Growth”, to quote the IMF’s formula in its latest survey.”
This is just a further illustration of Marx’s analysis of the contradictory interests of this interest-bearing capital to productive-capital. As he puts it in Capital III,
““… profit of enterprise is not related as an opposite to wage-labour, but only to interest.” (Capital III, p 379)
and,
“The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.” (Capital III, Chapter 33)
I wouldn’t dispute that financial crises can happen, but I don’t believe this is one of them.
You talk about the last thirty years being one in which finance capital has enjoyed instant gratification etc but if memory serves me right you also claim that 25% of products created were created in the last 20 years, or some such statistic. So what has the last 20 to 30 years been, one of finance strangling the real economy or one of finance fostering spectacular levels of productive investment unseen in all human history?
And if we have had a period of spectacular productive investment while at the same time we have had a dominance of finance, then why are you blaming finance for the crash and why are you not giving it credit for the spectacular levels of productive investment?
And how can you talk of capital gains strangling productive investment given you believe we have had the most incredible spurt in productive investment precisely at the time when capital gains were the main focus of the capitalist class?
I personally see interesting research but I personally do not see the creation of new industries on the scale that is required. Maybe I frequent the wrong shops?
Edgar,
First of all you would need to show that “this” is any kind of crisis. I don’t know what “this” is that you are referring to. If you mean 2008, then I think its quite clear that it was a financial crisis created on the back of low interest-rates, that initially arose, because of the huge rise in the rate and mass of profit from the late 1980’s onwards, which, as in 18443-7, led to a surplus of loanable money-capital over the demand for it.
That financial crisis centred in the banks, and stock exchanges was quickly ended, by the provision of liquidity, just as happened with the financial crises of 1847 and 1857. What was different about 2008, was that having resolved that credit crunch, which impacted on the real economy, the central banks continued to goose the financial markets, further inflating the bubbles in stocks, bonds and property that had been the foundation of the financial crisis in the first place.
By contrast in 1847, the financial bubble of the Railway Mania was allowed to burst, and the prices of government bonds and so on were also allowed to collapse, which meant that the drive for such speculation was ended, providing the incentive for available money-capital, particularly from realised profits, to be used for real productive investment.
But, if by “this” you mean the current situation, then it is a strange definition of crisis, because although in many developed economies economic growth is not stellar, it is still economic growth, and not contraction. It is perhaps a reflection of the desperation of those who always want to paint capitalism as being in some form of crisis, that they now have to even describe economic growth as being “crisis”!
“So what has the last 20 to 30 years been, one of finance strangling the real economy or one of finance fostering spectacular levels of productive investment unseen in all human history?”
That seems a very odd proposition. It is not financial-capital, interest bearing capital which has fostered spectacular levels of productive investment over the last thirty years, but productive-capital itself, which generated huge amounts of surplus value, which in turn were converted into realised profits, which were both accumulated as vast amounts of new productive-capital, for example, in the development of whole new economies in China and elsewhere, as well as whole new industries in micro-electronics, biotechnology and so on, and also purloined by interest-bearing capital, in interest payments, and capital transfers.
You seem to have swallowed the myth purveyed by the bourgeois apologists of capitalism that all capital somehow derives from the savings of money capitalists, as opposed to the reality, which is that it is created from the accumulation of profits produced by productive-capital itself.
There is absolutely no contradiction between the idea that the rise in the rate and mass of profit was so great that it enabled a massive accumulation of productive-capital, particularly from around 2000 onwards, which indeed saw the global working-class increase by a third, saw global GDP double, saw global fixed capital formation double, and which saw because of the huge rise in both the mass of capital, and the rise in productivity, that astronomical rise in output – 25% of all goods and services produced in Man’s entire history, produced in the first decade of this century – and a large portion of that surplus value going also to feed interest payments, rents, and capital transfers that boosted fictitious capital prices, and the wealth and power of the owners of those financial assets.
It is in fact, identical to the situation described by Marx and Engels ahead of the 1847 financial crisis, when that same process had led to low rates of interest, financial speculation as the basis of the bubble and subsequent crash, alongside huge amounts of productive investment. As Engels describes it.
“At the close of 1842 the pressure which English industry suffered almost uninterruptedly since 1837, began to lift. During the following two years foreign demand for English manufactured goods increased still more; 1845 and 1846 marked a period of greatest prosperity. In 1843 the Opium War had opened China to English commerce. The new market gave a new impetus to the further expansion of an expanding industry, particularly the cotton industry. “How can we ever produce too much? We have to clothe 300 million people,” a Manchester manufacturer said to this writer at the time. But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire. With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844. Stock was fully underwritten, i.e., so far as there was money to cover the initial payments. As for the rest, time would show! But when further payments were due — Question 1059, C. D. 1848/57, indicates that the capital invested in railways in 1846-47 amounted to £75 million — recourse had to be taken to credit, and in most cases the basic enterprises of the firm had also to bleed.”
(Capital III, Chapter 25)
I remember in the mid to late 1980’s that personal computers were only interesting ideas, which a few had interest in; just as I remember in the mid 1990’s, mobile phones held the same position.
Dear Boffy,
“First of all you would need to show that “this” is any kind of crisis.”
I am not only thinking of the volatility in markets and the fragility of the economy, the weak growth etc but also the rise in food banks, the impoverishment of the ‘middle class’ in the US, the problems in Greece etc, not to mention the rise of ‘radical’ politicians such as Bernie Sanders. All this is surely a reflection of a crisis of some sort.
“You seem to have swallowed the myth purveyed by the bourgeois apologists of capitalism that all capital somehow derives from the savings of money capitalists”
No you have completely missed the point. I am trying to understand how on the one hand you say finance has strangled productive investment while at the same time saying that productive investment has been spectacular.
You comment on feb 11 at 08:45pm is littered with tales of finance capital strangling productive investment.
Looking at *your* position the least we can say is that you believe finance capital has had zero detrimental affect on the real economy, furthermore the rise of finance capital has at the same time seen the biggest splurge of productive investment in human history. Looking at your reasoning I don’t see how you could possibly correlate high capital gains with low productive investment or even a rise of finance with a decrease of productive investment.
Actually, given all you have said, I would infer from *your* position that high capital gains and the rise of finance have been a veritable boon for productive investment.
Yours, a confused Edgar!
Cry wolf, cry wolf is the constant refrain of many defenders of the system. They seem to forget the point, that the wolf is real and sooner or later it does come.
Since the coming world recession has already begun, it can scarcely be avoided!
Boffy1: “The official forecasts of the UN and others referred to above have been revised down, but not only are they still forecasting growth, but read it again, and you will see that it actually says that growth will show an improvement over this year.”
Fact 1: 2015 was the 13th time since 2000 that the initial forecast for growth was overoptimistic and exceeded actual growth throughout the year. With a record like that, we, those of us not living on planet Boffy might want to take our salt tablets before listening to any more blather about “official forecasts.”
Boffy2: “My point is that the nature of that crisis was that it was a financial crisis, much as was the 1847 Financial Crisis, analysed by Marx.”
Fact 2: Neither 1847 nor 2008 was a “financial crisis,” as Boffy would like it to be, isolated from the underlying constraints, contradictions, barriers to capital accumulation. Real overproduction, beyond the capacities of “the market” to return an adequate rate of profit triggered the crisis which took its severe expression in the “most sensitive” sector, where all good things and bad things are tallied, the money sector. That Boffy even bothers to abstract, to disconnect 1847 from what happened next, the revolutions of 1848-1849, tells us all we need to know about the Ersatz Marxism practiced on planet Boffy.
Boffy3: “Just as in the period 1843 to 1865, in the end it was the underlying economic reality that ultimately determined the longer term events, and not the financial crises, and wrong headed government policies, so to today, it will be the fact that the global economy remains within the conditions of a long wave upswing – ”
Fact 3: Love it. Remember those words. And remember these: Rates of growth since 2001– the “upturn”– are below rates of growth during the last phase of the long wave “downturn” 1992-2000. The rate of trade expansion has been halved, after experiencing a real decline in 2009; overcapacity plagues everything from oil, to iron ore, to capesix dry bulk carriers, to semiconductor fabrication, to flat-panel glass displays; the recovery from 2009 has been the weakest on record; mountains of non-performing debt are on, and off, bank balance sheets around the world. With upswings like this, who needs a downswing?
Boffy4: “In the long wave post war boom, there were at least five recessions.”
Fact 4: Indeed and each recovery from each of those five was stronger than the current recovery, which is why another recession does mean something other than Boffy’s “so what?”
“But, even if there were to be a recession, so what?”
Boffy has been claiming that every bit of economic data is good news for workers and now he asking, so what if there is a recession. Is this good news for workers also?
Boffy wisdom = Capitalism is good news for workers. Period.
Looks to me like the financial system has become detached from the real economy and so any productivity measure that does not strip out the money machine activity will show a growth in GDP even when we are in recession.
The monetary stimulus was used to fill the banking holes but did little to cure the underlying problem of the global economy…debt!
The credit taps were turned on decades ago and it was only a matter of time before we hit the real debt ceiling…that point where we have to borrow more and more just to service existing debt, and so now all new money created is virtual zombie money.
Rising inequality is a symptom of a failing economy and even though those at the top of the pyramid may be doing well, they only need look down and see the crumbling foundations to get the real picture of where they are headed.
The Governments will come up with some new deal that will solve the problem short term. Massive infrastructure projects including Green energy projects, public housing, health and education. Slowly but surely we will rebuild the fabric of the real economy…the people, and if we’re sensible! this time, we won’t let the money men take it away ever again.
Best post ever. I have been follow the blog from Brasil in the last 6 months, and for me is clearly that is a lack of surplus value in capitalist mode of production that is squeezing profits around the world. The productive forces of labour are more eficient than capital can support, even with mass destruction of use values. The capitalist answer will be war and facism after those policy ends, and hopefully the labour class will arise with his program and next years. Sorry for bad english
I normally do not do this sort of thing, but I believe this is the second time you have called Noah Smith “Noel”.
Sorry. It was late at night
Good job, thanx !
Boffy references Paul Mason’s new book but he conveniently leaves out that in this new book Paul Mason states that the Fifth Kondratiev Wave has stalled. Boffy believes that the Fifth Wave started in 1999 just like clockwork. Its strange that we are now more then half way through yet still the industries of this wave are starved of cash. Could you say that major industries were starved of cash in the mid-sixties? He refers to innovation a lot but you can have plenty of innovation during a depressionary long wave. As I pointed out in an argument with him before he decided I was a sock puppet, the assembly line was developed during the depressionary long wave that started with WW 1. I say Boffy is the sock puppet, for capital.
“The fact is that there is no shortage of very profitable areas into which capital could invest. ”
Meanwhile 4Q profits for the US S&P 500 are down app 4% from a year earlier, and yest 70% of that decline is concentrated in the energy sector– which shows how important that sector is to the determination of the general or average rate of profit; how important the general rate of profit truly is to capital reproduction; and is, at the same time, just a bit of irony, a bit of history giving capitalism the old “how’s your father…” in that during the last stages of the previous expansion– going into 2007, profits in the oil industry accounted for 35% of all the profits registered by non-financial companies in the S&P 500.
Payback? No. No-pay back.
From: Jim Drysdale.
Michael Roberts writes…
Wolf’s ‘helicopter money’ and Stiglitz’s tax-funded public investment are poor options. It is not the banking system that has to be by-passed or directed but the capitalist system of production for profit that has to replaced by planned investment under common ownership.
Quite correct. However, that statement requires theoretical unpacking before the ruling capitalist class begin to feel threatened.
Marx continues to terrify the bourgeoisie. Only Marx continues to be demonised. Empirical data and statistics offer no real concern to the rule of the capitalist class. However, if the working class become aware of the production process that IS the exploitation of the worker, i.e., become aware of what exactly determines the relations of domination and servitude in capitalist society, then the capitalist class will be very concerned. capitalismnofuture.co.uk
Boffy Says:
February 11, 2016 at 8:45 am
Edgar,
Really, you don’t see any profitable industries? Part of the thesis of Paul Mason’s recent book was the conundrum of why it is that there are so many new profitable industries, and yet they have seen so little investment.
From Jim Drysdale
Paul mason and other commentators on the capitalist mode of production have not understood Marx.
Capitalist society is a class society. When we’re at work we labour. Capitalist society is a mass producing mass consuming of commodities society. Commodities, things, include all machines and technology.
We live in a society based on the capitalist mode of production.
A society that presents us with a world of commodities. A society where the most general form of the use of labour power is engaged in commodity production.
Mason and many others see labour as the source of value. Marx, by unveiling that the use of labour power i.e. abstract labour is the source and substance of value.
‘ The fact, that in the particular form of production with which we are dealing, viz., the production of commodities, the specific social character of private labour carried on independently, consists in the equality of every kind of that labour, by virtue of its being human labour, which character, therefore, assumes in the product the form of value -…’ (Karl Marx Vol.1 page 85)
‘The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units.’
(Capital Vol.1
Reblogged this on Reconstruction communiste Comité Québec and commented:
«Into their place stepped free competition, accompanied by a social and political constitution adapted in it, and the economic and political sway of the bourgeois class.
A similar movement is going on before our own eyes. Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. For many a decade past the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeois and of its rule. It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.
The weapons with which the bourgeoisie felled feudalism to the ground are now turned against the bourgeoisie itself.»
Karl Marx in Communist Manifesto
Edgar says:
Though capitalism is so far away from the economic models that I don’t even know if we can call it capitalism anyway!
From Jim Drysdale:
Edgar,decline of capital is, of course, part of the evolving process of capital accumulation. i.e, it remains capital / capitalism /capitalist society. i.e., Marx’s scientific analysis takes awareness beyond all appearance only so-called models.
The tendency for capital to undermine itself:
The drive of capital towards ever increasing production. The need, also, for constant expansion of value and capital accumulation. The ongoing change in the organic composition of capital, i.e. the tendency for the rate of profit to fall. The requirement for increasing the exploitation of labour so that even more commodities are overproduced more cheaply that must be sold in the drive for a higher rate of profit, i.e. the need to create, sustain and expand the global market, the global consumer society..…all of these bring deepening periodic crises to the process of capital accumulation, deepening periodic crises in the realisation of an acceptable rate of profit.
That is Edgar, capital, despite the desires and activities of the ruling capitalist class, is not eternal. This is why Marx continues to be demonised. capitalismnofuture.co.uk
Public investment does not need to be funded by taxes, because public spending logically precedes taxing in a sovereign fiat money economy.
Conflating QE with fiscal stimulus aimed at the working class (“helicopter money” or “PQE”) is wrong. QE is an asset SWAP, while helicopter money is an INCREASE in assets held by the working class.
Capitalism is unstable, we need to socialize large parts of the economy, and surely fiscal stimulus is not enough, but it is still sorely needed.
AS a matter of interest: http://www.heraldtribune.com/article/20160202/COLUMNIST/160209956