Global debt crisis ahead?

Argentina is seeking International Monetary Fund aid after a series of drastic interest rate rises failed to stop the slide in the peso, pushing the country towards a financial crisis. Mauricio Macri, Argentina’s right-wing, pro-big business president, announced the approach to the IMF in a nationally televised address, saying international assistance would enable the government to “avoid a crisis like the ones we have faced before in our history”.  Asking the IMF for funds will mean more fiscal austerity and a hit to living standards.  One foreign investor said “The most effective way would be to restrict wage hikes.”

In recent weeks, the right-wing government in Argentina has been forced to hike its policy interest rate (which sets the floor for all borrowing rates) dramatically from an already high 27% in April up to 40% last week.  In January, the Argentine central bank had been experimenting with reducing its interest rate but that came to an end very quickly.  Why? For three reasons.

First, foreign investors (who are key to the success of the austerity and pro-business policies being adopted by the Macri government) were concerned that inflation was not under control and began to withdraw their capital.  Even the government admitted that inflation was heading towards 15% this year.  The Argentine peso started to slip against the dollar.

Second, the dollar started to jump in the last month because of fears of an international trade war, which always leads to investors rushing to the ‘safe haven’ of the dollar and because the US Federal Reserve is pressing on with raising its policy rate, thus making investing in other countries’ currencies less attractive to speculators.

And third, there has been a sharp rise in the crude oil price, driven by attempts to boost it from the OPEC cartel in the Middle East and growing political tensions between the US and Iran.  That means extra costs of importing energy for many economies like Argentina, Turkey or South Africa.

Those economies with large trade deficits, high inflation and apparently little control over their government spending, and above all, high levels of debt, are the most vulnerable to foreign investors taking their money away.  And that means Argentina, Turkey, South Africa and others.

The Argentine peso has now fallen to a record low (fuelling even more inflation) and its government bond prices have plummeted.  Only last year the Macri government issued a 100-year bond, confident that enthusiasm for the ending of the left-reformist Kirchner administration after 12 years would lead to a flood of foreign demand.  The value of the bond has now dropped to 83 cents to the dollar.  With the government now offering over 6% interest on that bond, compared to just under 3% for the ‘safe’ US government bond, the government is hoping to stem the outflow of capital. The central bank in Buenos Aires has blown $5bn of foreign exchange reserves in a week and enacted three shock rate rises in an attempt to halt the slide in the value of the peso.

But rising interest rates in the US threatens to put many emerging economies, both their corporate and government sectors into new difficulties.  Many have borrowed dollars to cover their deficits, to invest or to speculate, and now the cost of that debt is going to rise.  Turkey is now seriously in trouble.  The Turkish lira sank, in spite of the central bank intervention. Dollar-denominated government bond yields jumped to new post-crisis highs and the stock market extended its decline this year to 22 per cent — the worst performance of any bourse in the world outside of Venezuela. If the central bank hikes rates, as Argentina has done, it risks inflict severe damage on the local economy.

In previous posts, I have raised the risk that the hiking of interest rates by the Fed could provoke a debt crisis, particularly in the so-called emerging economies, because debt levels have reached record high levels in those economies.  Also global debt is at a record high because governments and corporations have borrowed heavily at cheap rates in order to stabilise the banking system and boost stock markets and spending.

The Washington-based Institute for International Finance (IIF) argues that, in addition to Argentina and Turkey, Ukraine and South Africa are relatively vulnerable to a sharp shift in ‘risk appetite’ by foreign investors – see graph below.

The IIF now reckons that global debt rose another $21trn in 2017 to take the total to $237trn.  Sure much of this extra debt has been incurred by China, but that economy is much more able to manage that debt.  Most of it is in local currency not dollars and China has huge foreign currency reserves in dollars ($3trn) that provide a buffer for any debt collapses.

But other ‘emerging’ economies are not so well placed.  Dollar and euro debt now tops $8trn in these countries or 15% on average of all debt.  Argentina’s debt is over 60% owned by foreigners, while Turkey has seen one of the biggest rises in FX debt since the end of the Great Recession in 2009.

As interest rates rise on this debt, servicing it has become more difficult.  According to the IIF, ‘stressed’ firms now account for more than 20% of corporate assets in Brazil, India and Turkey and those companies where profits are greater than interest costs are shrinking fast. “Even with low global rates, many non-financial corporates are running into trouble with debt service,” the IIF added.  In Argentina, interest rates for smaller companies have moved above 15%.  “Companies have burned through their working capital since then as they can’t get rational financing,” he said. “Big corporates with access to international financing are in a better position, but medium and small companies are in trouble.”, said one analyst.

The crunch will come when corporate profits in many economies begin to fall as debt servicing costs rise.  My latest estimate of global corporate profits (based on a weighted average of profits in the US, Germany, the UK, Japan and China, showed a fall in the last quarter of 2017 for the first since mid-2016.  It remains to be seen how things went in the first quarter of 2018.

Watch this space.

41 thoughts on “Global debt crisis ahead?

  1. Thing about the developing world (in the sense of Parag Khanna’s book, “The 2nd world” etc) is that they don’t often pursue their self interests properly. They are very diverse, and their ruling class autocracy are “not all on the same page” as a country. The more powerful countries are able to exploit them with ease.

    I don’t think Macri knows what he’s doing with a 40% rate here. I don’t think Macri is in Argenina’s “self interest” for the country as a whole. My 2 cents.

  2. It is incorrect to speak of a debt crisis, as if this single variable were capable of precipitating, or deepening, or prolonging a downturn in either real or financial markets. Debt alone is not the problem. It is the failure to continue to ‘service’ the debt–i.e. pay principal and interest or both. So long as income is rising–due to rising prices and or sales or other income source–debt may continue to rise as well. It is when income slows or contracts, as debt does not, that a crisis may begin. Business debt even in these conditions can be postponed, thus delaying the crisis. The creditor may issue more debt to refinance the old, it may retire the old and issue new, it may evoke what are called ‘covenants’ that allow the debtor to postpone interest or even principal payments, etc. If none of these occur, then the debtor defaults on the debt. That may lead to bankruptcy, and firesales of the debtor’s assets. Or an acquisition of the debtor by another. Or even an acquisition by the government, sometimes called a ‘nationalization’.

    It is also necessary to distinguish between household debt (and default), business debt-default, and government entity debt and default. Also, how all three sectors mutually interact and feedback on the other in the event of a general crisis.

    What’s going on in Argentina is the Macri government is raising rates to protect the value of the assets of the wealthy–at the expense of the rest of society, aka the working class. Rising interest rates and the value of the dollar in the US now is provoking money capital flight from emerging market economies like Argentina. Others, like Turkey,are not far behind. To slow capital flight from Argentina, Macri is raising rates to prevent wholesale and widespread conversion of currency exchange to dollars. But the escalating interest rates, at 40%, will collapse the real economy in Argentina and usher in a depression. But Macri and his finance capital friends don’t care, so long as the currency doesn’t collapse and with it the market values of the financial securities that class has accumulated. Brazil’s depression is similarly due to its central bank raising rates and provoking a collapse of the real economy there.

    I’m sure my friend, Michael Roberts, will disagree since according to his interpretation of the falling rate of profit tendency hypothesis, it is the decline of the profit rate that explains the imminent depressions in Brazil and now Argentina. But I will remind him, once again, that Marx’s falling rate of profit (which he never felt confident to publish as a final view) has nothing to do with capitalist business cycles. It is about the long run breakdown of capitalist commodity production, where capitalists intensify exploitation in response to the rate and workers, eventually in response resist by economic and then political organization and resistance. Which means Marxist economists today should pay less attention to the falling rate thesis and more to the new, and increasingly intensive forms of exploitation that have been emerging. Marx’s real contribution was the analysis of extending the workday, i.e. absolute surplus value extraction, and relative surplus value as well. They should be trying to understand the effects of the gig economy, amazon’s business model, and artificial intelligence and machine learning that are, and will, intensify exploitation in the coming degrees to an extent even Marx could not imagine. In addition, Marxists should focus more on what Marx called ‘secondary exploitation’, that is how capitalists have developed now various ways to take back the value of labor power they initially paid in wages to workers. But that occurs not in the production of value (where the falling rate of profit tendency is limited to) but in the exchange circuit of the reproduction of capital.

    OK. Got at it y’all…..

    1. Jack Thanks for your comments. I think I make the point in this post and in many previous ones that servicing the debt is the issue – and that depends on three things: 1) the size of the debt 2) interest cost 3) the timing of repayments. So I think we agree on this. If the debtor does not get enough income to pay, yes it can borrow more to keep going Ponzi style, but eventually default will follow – again we agree, i think.

      Yes, we must distinguish between household, corporate and government debt and they interact with each other. I have analysed this in many places, including my books, The Great Recession and The Long Depression. Again I think we agree.

      I agree with your para on Macri although I think the elite have already got their assets in dollars – it’s only the workers and small domestic businesses that will suffer from high interest rates and the falling peso. It’s an irony that in the previous Argentine crisis in early 2000s, the Keynesians argued for devaluation as the way out!

      So I agree (not disagree) with your first three paras. Indeed, I spend much of my book, The Long Depression and many posts on the role and nature of debt as part of capitalist crises. For me though, it is a question of the levels of causation – see my book.

      But I dont agree that Marx’s law of profitability is a “hypothesis”. For me, it is a law, as it is logical, coherent and backed by plenty of empirical evidence. Regular reader of my blog and my latest book, Marx 200, can find the basis of my arguments there. And it is a matter of debate whether Marx ‘dropped’ this law – see my debate with Michael Heinrich on this blog.

      Actually, I reckon Marx’s law of profitability is both secular (long term) and cyclical. See all my books and see the work of Esteban Maito and many others.

      Marx’s theory of exploitation (law of value): that surplus value is created in the exploitation of labour in capitalist production remains just as potent now as it did 150 years ago. ‘Secondary exploitation’ (eg high interest rate gouging, mortgage scams, pharma prices) where workers incomes are siphoned off after being exploited at work is just that, ‘secondary’, and still not decisive in any explanation of crises, but merely a part explanation of rising inequality. So there we beg to differ. But I’m sure the debate will continue.

      1. But surely the point could be that there are tendencies within capitalism, rather than laws. If the capitalist economy did develop in line with scientific laws then we could make predictions about what would happen next. Marx wrote at the time of Darwin when his scientific socialism fitted with the scientific optimism of the day- we now seem to be in a place where natural science has marched ahead and social science isn’t scientific in the same way. In other words, what would it take to convince you that an “economic law” was out of step with reality? How much empirical evidence would be needed to persuade you that there could be some doubt about a law? If it is not possible to predict the timing of events via laws then are they laws at all? The social world is so complex and unpredictable that the only crisis it seems safe to bet on is the ecological crisis. Now, I’m ignorant of the development of the Argentinian economy, and very impressed by your work, but I don’t understand how laws are helping you to understand what is unfolding. Laws may be coherent or logical, but my understanding of capitalism is that it is not necessarily either of those things. If there is a mismatch between the logic of law and the messy reality of the world then perhaps updating theory is the best way forward?

      2. I ask myself the same questions as you do. I try to answer them in my book, The Long Depression and my latest book, Marx 200. There is always doubt but, yes, it is the job of scientific inquiry (and scientific socialism – to use Marx’s own definition) to look at the evidence supporting or refuting a law (especially refutation) and yes, make predictions. A law must have predictive value. By the way, you can have a law of a tendency (it is not contradictory). A tendency implies a countertendency, but the tendency is the law ‘as such’ and the countertendency is the restriction on that law (which cannot override the tendency permanently.) We seek to find laws and evidence of the motions of capitalism to understand and yes, predict – with varying degrees of success and continual revision if necessary.

      3. In support of Michael’s hypothesis one simply has to follow the financial blogs in and around Wall Street. They focus on one issue and one issue only, will the mass of corporate profits continue to grow based on profit margins. For them rising interest is refracted by their view on the outlook of profits. It is simply incorrect to view Marx as being obsessed by the rate of profit, the capitalists are more obsessed and correctly so because the rate of profit is the pulse of capitalist production. They know when the mass of profits fall (and with it the absolute rate of profit) that the game is over and all the bubbles will burst. I concur with Michael, the final quarter of 2018 did see a fall in global rates of profit which may or may not mark a turn in the trend. If not that quarter then certainly by mid-year. China remains an outlier. China will prop up its economy in order not to show weakness in the face of impossible US financial demands. Where I depart somewhat from Michael is that the debt problem is concentrated not in EM countries but in the USA, Britain, EU and Japan and it is around corporate debt which in the US stands at $10 trillion composed of $6 trillion in bonds and $4 trillion in bank and non-bank lending, with the latter more interest rate sensitive and having grown faster than the increase in bonds.

      4. Laws and tendencies can be the same. The 2nd law of thermodynamics is a tendency of entropy to increase, but given the large numbers, it becomes a law.

    2. Dr. Rasmus to the rescue: “Policymakers’ failure to come to grips with how fundamental changes in the structure of the 21st century global capitalist economy—in particular in financial and labor market structures—make the global economy more systemically fragile can only propel it toward deeper instability and crises.”

      The giveaway is the “failure of policymakers.” If the policymakers of capitalist economies would listen to Dr. Rasmus’ refinement of Keynes, they would spare us “deeper instability and crises.”

      1. And if you read my work you would see that I make it clear that neither fiscal or monetary policies work in the 21st century of globalized and financialized capitalism.

      2. “Dr. Rasmus to the rescue: “Policymakers’ failure to come to grips with how fundamental changes in the structure of the 21st century global capitalist economy—in particular in financial and labor market structures—make the global economy more systemically fragile can only propel it toward deeper instability and crises.”

        The giveaway is the “failure of policymakers.” If the policymakers of capitalist economies would listen to Dr. Rasmus’ refinement of Keynes, they would spare us “deeper instability and crises.”

        Yes, and if a frog had wings it wouldn’t bump its ass on the ground.

        Policymakers? If the bourgeoisie weren’t the bourgeoisie, they might be able to devise policies to eliminate the instability of capitalism, but then if the bourgeoisie weren’t the bourgeoisie, there wouldn’t be capitalism at all period. So if private ownership of the means of production did not constitute the forces of production as values, and for the purpose of extracting value, social labor would not be compelled to express itself as a commodity, as wage-labor, and then there wouldn’t be overproduction and the tendency for the rate of profit decline.

        If my sister had had a Y chromosome, she would have been my brother.

      3. Dr. Rasmus, you re-package an old left-Keynesian remedy: “In today’s world of 21st Century Global Finance Capital, don’t expect capitalists to invest in real production and thus jobs and income in the US economy as they did decades ago. They are too busy making greater profits offshore and in financial asset speculation, leveraging the trillions of dollars of free money and credit created for them by the Federal Reserve. If real investment in the US economy is ever to return, it will have to come via major public investment initiatives.” (“On the Causes of Investment Decline in the US Economy,” July 27, 2014) Sure sounds like a fiscal policy. And it begs the question: can capitalists and workers agree on a mutually satisfactory policy that works for both classes?

  3. This is a really important and I hope will prove to be a fruitful debate.

    Michael says,

    ”Marx’s theory of exploitation (law of value): that surplus value is created in the exploitation of labour in capitalist production remains just as potent now as it did 150 years ago. ‘Secondary exploitation’ (eg high interest rate gouging, mortgage scams, pharma prices) where workers incomes are siphoned off after being exploited at work is just that, ‘secondary’,”

    This is clearly true at the level of relations of production. I doubt that Jack would dispute this; but surely one of the ways that such exploitation manifests itself is in personal and household debt, which has become for many a kind of latter-day peonage. One recalls that Marx himself had argued that the class struggle in the Ancient World took place between debtors and creditors on the pedestal of slavery. How the propertied upper class exploited slavery is obvious enough, but how did they exploit the free plebeian class (excluding the limited class of day labourers) unless through rent and debt? And this certainly manifested itself at the political level in class struggle. Michael Hudson has demonstrated that debt has been one of the main driving forces of class struggle since the rise of class society. Consequently debt relief or cancellation ought to be in the Manifesto of every Marxist Party.

    1. I think it is important to understand exploitation in the round as it applies to productive, unproductive and domestic labour. All three kinds of workers are exploited. Two produce paid labour, productive and unproductive workers, but not domestic labour. All three produce unpaid labour, but in only one case does that unpaid labour take the form of surplus value, therefore becomes capable of profit making and that is productive labour, for it and it alone is sold. In the case of productive labour there are the two exchanges that constitute the circuit of capital, in the case of unproductive labour there is only one exchange, the purchase of labour power, and in the case of domestic labour both exchanges are absent, there is neither a purchase nor a sale. The same concrete labour can thus have three entirely different social outcomes, which Marx detailed. I would caution against the use of the term secondary exploitation.

      Michael is right to use the term law. A law, any and every law is mediated, no matter where it is found. If it wasn’t, then all laws would be perfectly obvious and being uni-directional, we would already be basking in our well deserved socialist paradise. The real secret, and the purpose of the intellectual hunt, is to determine how the law expresses itself in a complex world.

  4. ”By the way, you can have a law of a tendency (it is not contradictory). A tendency implies a countertendency, but the tendency is the law ‘as such’ and the countertendency is the restriction on that law (which cannot override the tendency permanently.)

    I think this is spot on. Marx’s “Tendency for the Rate of Profit to Decline” cannot be interpreted as asserting that the rate of profit is always in a state of decline, and consequently if the rate of profit can be shown to be rising, Marx’s thesis is thereby refuted. (This was Samuelson’s argument, like a silly schoolboy who claimed to have refuted Newton by constructing a heavier than air flying machine. Whether a plane is rising in the air, crashing to the ground or indeed lying at rest there, all three conditions are a manifestation of the operation of the force of gravity). Clearly the rise in productivity can shorten the turnover period, thus causing the rate of profit to rise.

    Marx argues that, ”The progressive tendency for the general rate of profit to fall is thus simply the expression, peculiar to the capitalist mode of production, of the progressive development of the social productivity of labour” ( Capital Vol.3 P 319). Here the predictive power of Marx’s analysis has been only too triumphantly confirmed, unless one were to argue that the social productivity of labour has progressively declined these last 150 years.

    The TRPD posits barriers that capital has ever to struggle to overcome.

    “‘The barriers to the capitalist mode of production show themselves as follows:
    (1) in the way that the development of labour productivity involves a law, in the form of the falling rate of profit, that at a certain point confronts this development itself in a most hostile way and has constantly to be overcome by way of crises” ( Ibid. P367).

    Moreover the concentration and centralisation of capital on the one hand and the immiseration of the direct producer on the other are expressions also of the TRPD:

    ” A fall in the rate of profit and accelerated accumulation are simply different expressions of the same process in so far as both express the development of productivity. Accumulation in turn accelerates the fall in the profit rate …and hence a higher composition of capital. On the other hand the fall in the profit rate again accelerates the concentration of capital and its centralisation by dispossessing the smaller capitalists and expropriating the final residue of direct producers” ( Ibid. P 349).

    Yet again, the development of capitalism has followed only too manifestly the paths Marx predicted 150 years ago. A case in point is China. After the Revolution the landlords’ property was redistributed among the peasantry. As the revolution progressed communes were set up, whose aim was to be as self sufficient as possible, to combine agriculture with industry and to be able to reproduce themselves as sustainable communities. Once China took the capitalist road, the peasants are gradually being expropriated and forced into cities as low-end people or Untermenschen in order to enable the introduction of capitalist industrial farming. This will certainly be more productive of surplus value, but its sustainability is dubious indeed.

    As several Marxists have argued, Marx was unable to complete ‘Capital,’ in particular the book on the world market. His research in later years more and more embraced the study of pre-capitalist and non-western societies and their forms of landed property and agricultural organisation, and this caused him to rethink his previous position of the universalising role of capital.

    ”Taking into account the deepening of Marx’s theory of metabolism, it is plausible that Marx in 1881 recognised not only non–Eurocentric, multilinear ways to socialism, but also developed a more ecological vision of socialism. However, this expansion of Marx’s interest made it extremely hard to complete his project of ‘Capital”’ (Saito, ”Capital, nature and the Unfinished Critique of Political Economy”. MR. 2017).

    For how Marx’s Russian studies led him to modify his ideas and cause Engels no little consternation cf the forthcoming (Sept. 2018) ”Marx and Russia: The Fate of a Doctrine” by James D. White.

  5. Michael you still didn’t address my main point that the tendency (not a law if it’s a tendency, which means ‘sometimes’ while ‘law’ means virtually always) of the rate of profit to fall in Marx is NOT about business cycle causation, but about long run. All classical economics, and Marx, focus on long run forces. They simply lacked sufficient data to consider short run business cycles (or else just speculated on the causes, like Malthus).

    Here’s what’s wrong with focusing on profits, let alone just the ‘rate’ of change: First, the focus must be worldwide, since capitalism and multinational corporations are global. That means reliable data on profits must be worldwide in acquisition. Unfortunately, the data collection and definition of profits globally varies significantly from country to country’s statistics. What is meant by profits? There’s scores of definitions. Second, profits are underestimated globally due to government policies of state owned enterprises, which control prices and ensure tax collections are such that there’s little profits reported. Moreover, multinational corporations’ intra-subsidiary pricing is manipulated to reduce profits (for tax purposes). Corporations hoard profits unreported in offshore shelters. There’s widespread tax fraud that further reduces profits. And so on. Problems in data collection, definition, and tax and other revenue accountability all make profits estimation highly questionable.

    I especially have a problem with the FROP thesis you use when you refer to US or OECD corporate profits (pre or after tax). That leaves out trillions in non-corporate business income, as it’s called. Moreover, business income is underestimated itself. In the US, 65% of it is considered wage income (thus over-inflating wages as a share of national income).

    Another problem with corporate earnings as profits is that it includes financial asset portfolio profits from financial investments and speculation producing capital gains. As you know, that kind of profits are not included in Marx’s definitions of productive labor, surplus value extraction and therefore the FROP thesis. Portfolio profits now account for one third of S&P 500 corporate profits. You can’t use that indicator for estimating the FROP.

    There are furthermore dozens of ways corporations ‘squirrel away’ revenue to avoid reporting it as profits. Not just diverting it to depreciation funds as a holding place they’ll never spend it. EBITDA is just the beginning.

    The data and charts you post only show correlations between profits (improperly defined and globally underestimated). What you need to prove is there’s a causation, and clarify if profits are a lagging or leading indicator of business cycle shifts (which Marx never intended again).

    Then there’s the question of ‘rate’ of profits. How do you define ‘rate’? Is it just the percent change from one period to the incremental next? (i.e. t+1 minus t)? Are you using an index and a base period that’s prior to time t? Is there any smoothing (averaging) of the changes over time? Etc.

    By the way, in your previous post on Keynes and Marx you note that Keynes also had a rate of profit thesis. That’s just flat incorrect. Keynes’ theory of investment addressed three variables: Expectations of return (profits), the replacement cost of capital, and the real interest rate. Expectations of investors (corporate or other) drove the investment function. Expectations are by definition future defined. One expects the future, not the past. Expectations were highly subjective and psychological. So there’s no way to estimate them quantitatively. And if they can’t be quantitatively estimated, one can’t determine a ‘rate’ of change. So there’s no profit rate variable in Keynes’ investment function theory. Moreover, Keynes focused on the investment variable as key to the business cycle (not profit per se) and, as noted, there are three variables that determine that function. Marxists would do better to focus as well on capital accumulation (a kind of investment variable) rather than on profits as a determination of investment. As is well known, studies show profits ‘determine’ only 20%-30% of investment. Equity (stock) financing and Debt (bond) financing are far more determinative today in 21st century capitalism. Traditional commercial banks are now less important than the so-called ‘capital markets’ (and therefore shadow banks like Goldman, Deutsche, Blackrock, Carlyl, State Street, Asset management companies, and now even crowdfunding.)

    I might add re. Keynes, that his chapter 12 in his General Theory laid the groundwork for considering the effects of professional investors vs. enterprise investors, and the drift in capitalism toward more financial asset investing and speculation–at the expense of real asset investment (aka capital accumulation). Which raises the question to what extent is the shift to financial investing negatively impacting real asset investing (and therefore stagnating productivity, slower real growth, falling real wages, etc.)?

    Rather than perpetually focusing on FROP, which has so many weaknesses as a determinant of business cycles, Marxist economists should focus more on capital accumulation per se (aka investment), how financialization is undermining capitalist real investment in the 21st century, and how capitalists are developing new more intense ways to exploit (both in production and in exchange), new development of absolute and relative surplus value.

    But that focus on growing exploitation outside of the productive labor-FROP scenario, and the negative effects of financial forms in the post-production of value cycle of the full circuit of capitalist reproduction, must be explained more by forces not within the limited definition of FROP outlined by Marx in vol. 2 of capital. Instead of perpetual preoccupation with a hypothesis (FROP) Marx himself never felt was worked out enough to publish, Marxists should focus more on the new forms of exploitation (Marx’s absolute and relative surplus value explanations are more relevant today than ever, as you note and I agree), as well as on how financial forms of (fetish?) capital disrupt, delay and divert the circuit of value and capital in the exchange sphere of reproduction. In other words, apply and expand Marx’s method and abandon ‘philogical’ Marxist analysis (or what I called in my chapter 16 of my 2016 book, ‘Systemic Fragility in the Global Economy’, “Mechanical Marxism”).

    1. Jack thanks again for your further comments. I think I did answer your first point: I said Marx’s law of profitability is both secular and cyclical (ie it is the basis of regular and recurring crises of overproduction in capitalism in the last 160-200 years). Capitalist production is a mode of production for profit not need, and so surely profit movements must be relevant to investment and production in capitalism. You reckon Marx’s law of profitability should be discarded as a theory of crises as it is probably wrong and certainly outdated and Marx (probably) dropped it too. I disagree.

      I did not say that Keynes had a rate of profit theory – I said that is what many think; who like to make Marx and Keynes the same.

      And I don’t think it is impossible to analyse empirically the rate of profit from existing data – indeed, later this year, G Carchedi and I will publish a book containing such work from young authors across four continents who deliver empirical support to the operation of Marx’s law.

      You reckon crises are now caused by ‘systemic financial instability’, which apparently is a late 20th century/early 21st century development in capitalism. What caused crises before finance took over from the productive sector back in the old days?

      I urge everybody to read Jack’s intriguing book ‘Systemic Fragility in the Global Economy’ and my ‘Long Depression’ and make up their own minds which is closer to the reality of the causes of crises in capitalism in the 21st century (and before). You can see my short review of Jack’s book here.

      1. Michael, you misread my book when you first quickly reviewed it back in 2016. What I argue is that crises, defined as severe business cycle contractions (which may be normal recessions, epic recessions, or bonafide depressions) are the result of the interaction of financial cycles with real cycles.

        Normal recessions are the result of overproduction or other policy errors by government and don’t involve financial instability events; great depressions are always the result of severe financial crises interacting with non-financial forces; and what I called ‘epic’ recessions in my 2010 book by that title are hybrid versions of ‘normal’ and ‘great depressions’, which start out as normal recessions but experience financial instability events (i.e. banking crashes, etc.) and take on characteristics of depressions. Epic recessions can contract and become great depressions (as the 1929-30 epic recession did), or they can, without subsequent financial crashes, end up as long periods of low growth and stagnation (which occurred in 1909-14 following the financial crash of 1907 and 1908-09 epic recession). Epic recessions are characterized by short shallow recoveries followed by periodic short, shallow contractions. This can then go on for years. That’s also what has happened in 2008-09 and the stagnant growth that followed until 2017, during which double dip recessions occurred in Europe and the US circa 2012-13, and in Japan four recessions. (Which means I disagree with your thesis that it is period of ‘long depression’).

        An example of how financial cycles interact and exacerbate real recessions is the US great depression of the 1930s. It starts as a normal contraction in manufacturing and construction in early 1929. The stock market then crashes in October. 1930 is still a recession that deepens, but the contraction is still limited to construction and manufacturing. 1929-30 is an ‘epic’ recession. Then there’s a series of four banking crashes in the US, in late 1930, 1931, 1932 and 1933. These financial events drive down the real economy in stages deeper each time. When the banking crashes stop in 1934, the economy levels off. But it doesn’t begin to recover until the New Deal that begins in 1935. In the interim, 1933-34, FDR passes the business friendly NRA (National Recovery Act), which fails to generate recovery.

        I would have liked you to respond specifically to the points I made previously about the problems of profit data collection, definition, the minor role profits now play in determining investment compared to debt, equity, and other determinants, etc. Yes, profits have a role–in certain industries, companies, but not generally any more, as in the 19th century when capital markets were undeveloped and bank lending was the primary source of finance along with internal generated earnings (i.e. profits). But the world of banking and finance has changed since Marx. And corporate capitalism now earns a third of its profits from financial portfolio investment. That’s an empirical fact. Capital accumulation is not financed by profits to the extent it was 150 years ago. (Marx began to realize this when he began to critique joint stock companies).

        That profits data you use are composed of profits from productive labor exploitation as well as from financial portfolio investing further undermines your falling rate of profit thesis, by the way. You are using profits from other than productive labor. The profits data you use (from the National Income Accounts for example) contains profits from financial asset investment and speculation by corporations. You would call that fetish capital, right? So how much, and in what manner, do you separate out financial profits to get the ‘true profits’ that Marx’s theory defined from productive labor only? You are using profits data that is ‘corrupted’ by financial asset speculation to make your case. If you do that, you’re no longer working with Marx’s profits concept as surplus value from exploitation of productive labor. You are using capitalist definitions of profits, that include financial asset speculation.

        I’ve read some of Carchedi and he makes the same errors you do. (as well as Kliman, Fine, and others).

        By the way, here’s an important misreading you’ve made of my book and position: I never said that surplus value (and profits) from exploitation of productive labor was wrong. Marx was not wrong. He was just ‘half right’ (so far as his theory of exploitation of productive labor only as the determinant of surplus value-profits is concerned). I don’t argue your view is wrong; I argue it is ‘half right’.

        You argue that financial cycles and financial instability is the consequence of the fall in the rate of profits on the real productive side of the economy. You then say I take the opposite position: that it’s financial instability that generates the rate of profit decline on the real (productive labor) side of the economy. You’re wrong on both counts. I argue that it’s the interaction of the real side and the financial side that creates cyclical capitalist crises like the 1930s and 2008-17.

        Marxist economics’ unfinished task is to explain how the circuit of capital (and value forms), post production of value, diverts, distorts, destroys value en route to its potential transformation of value into physical and variable capital. Marxist economics has virtually ignored the exchange circuit side of the full reproduction of capital. You keep focusing on half of the story, exploitation of productive labor only, which the falling rate of profit tendency thesis is limited to.

        I think Marx realized his rate of profit from productive labor only was insufficient. They are only notes. He always planned to get from the general to the particular, abstract to the more concrete is subsequent volumes. But he never finished. Marx’s theory is profound, but it is profoundly incomplete.

        That you and other traditionalists see only half the picture. Profits from production is not the whole picture. Profits from exchange relations must now be considered, and that’s financial asset investment as well as real investment. Its the relationship between the two forms of profit–from production and from exchange that must be considered (or to say the same thing, financial cycles and real cycle mutual determinants and interactions).

        I spelled this all out in Chapter 17 of my Systemic Fragility in the Global Economy book in 2016. I don’t think you read that very closely. (Nor my critique of bourgeois economics, Ch. 16, or Minsky-Keen, Ch. 18).

      2. Jack, thanks for your further comments. Apologies for not answering all your points in my last reply.

        I don’t think I misread your book in my review but I leave others to make up their minds on that when they read your book.

        Actually I agree that financial cycles should be considered, even integrated, with profit cycles. I did some work on that and it appears in my book, The Long Depression, in the chapter on cycles pp 225-7. But the key point for me is that in this system of production for profit, profit comes only from the exploitation of labour in production; profit ‘from exchange’ is a redistribution of that profit between sections of capitalists. A collapse in the profitability of the productive sectors can be compensated by a rise in profitability of the financial sectors for a while, but eventually the former will cause a collapse in the latter and expose its ‘fictitious’ nature. There is plenty of empirical evidence for this. See Carchedi’s latest paper,

        Yes, measurement of Marxist categories of profit etc from official data is difficult. I devote a whole appendix to these issues in my book. But that is the job of scientific inquiry, with varying degrees of success. I think we can distinguish between profitability in productive and non-productive sectors and this can help us clarify the causal process in capitalist crises. Much work has been done here – and as I said previously more empirical studies will be published soon. And see Carchedi above p18 for a discussion of the role of financial profits.

        Yes, Marx’s theory of crises was incomplete and we are still developing it. Your surmise that Marx eventually thought that his profit from productive labour theory was “insufficient”, in my opinion, has no philology to support it, but I think you said that we should get away from ‘philology’ anyway.
        A crisis theory based on Marx’s law of profitability, in my view, remains the most credible with lots of empirical backing, while alternative theories seem to me to lack rigour and are merely descriptive.

      3. The crux of our differences is your assumption, stated in your latest reply, that profits from exchange are just a redistribution of profits from production. That is just factually and empirically wrong. But you must make that assumption in order to continue to insist that profits from productive labor only is the source of profit rate slow (or is it decline?) down drives all business cycle contractions. I just don’t agree with you on that.

      4. One final addendum: Marx’s ‘theory of crises’ is not a theory of business cycle contractions–whether short ‘normal’ recessions, longer and deeper depressions, or the hybrid form ‘epic’ recessions.

      5. Alan Freeman has an interesting contribution:

        This article investigates the mechanisms and causes of recessions and depressions, and their relation to the more spectacular financial crises which announce them. It demonstrates how the concept of the Monetary Expression of Labour Time (MELT) allows us to understand the most difficult aspect of this relation, namely how money acquires value, and thereby serves, under definite conditions which characterise recessions and depressions, as self-expanding value, so becoming an alternative use of capital to production.”

      6. “Normal recessions are the result of overproduction or other policy errors by government and don’t involve financial instability events;”

        A) overproduction is not a policy error by the government (or capitalist managers). Overproduction is immanent, intrinsic, essential to capital accumulation. Overproduction is at the very core of the wage-labor- capital relationship.

        B) Could Jack please identify a “normal recession” since 1969 that has not involved financial instability? 1969 with the subsequent collapse of the Penn Central and the resulting financial panic? 1974-75? The double dip of the early 1980s with the following international sovereign debt crises? The later 1980s and the S&L crisis? The Asian recession and currency crisis of the later 1990s? 2001 with Enron and…Argentina?

        Exactly when and where do we get a normal recession sans financial instability?

        While Jack criticizes Michael for essentially an OECD/US centric concentration of profits and profitability, I think Jack’s view is strongly informed by such tunnel vision.

        C) Jack argues that profits obtained through exchange are not simply the distribution of profits generated in production, which takes us all the way back to a system that Marx called profit upon alienation; and we have the still to answer the question how are such profits generated simply through exchanges if exchanges are, if not immediately equal, at least proportional in the individual acts, and equal in the sum total of such acts.

  6. Incidentally, it is not clear to me at any rate that a theory must have predictive powers as opposed simply to explanatory ones to count as scientific. What predictive powers does Darwin’s theory of Natural Selection hold? There were many gaps in Darwin’s theory but this does not render it unscientific.

    Still, as with Marx, so with Darwin: ”Darwin’s theory, I believe, is on the verge of collapse…Natural Selection was quietly abandoned even by its most ardent supporters, some years ago” ( Quoted in S.J. Gould, ”Ever Since Darwin” 1977 P.39).

    1. But Gould immediately follows upon the Bethel quote with,

      “News to me, and I, although I wear the Darwinian label with some pride, am not among the most ardent [defender] of natural selection. I recall Mark Twain’s famous response to a premature obituary: “The reports of death are greatly exaggerated.”

      As with Darwin, so with Marx . . .

  7. Hi Michael, Have you had the chance to read Steve Keen’s latest article on Karl Mark. It’s titled Marx at 200. It’s a fairly entertaining read.
    I would be extremely curious to hear your response to Steve Keen’s criticism of Marx’s theory.

  8. ”Speaking of the commodity reminds me of Steve Keen’s supposed refutation of Marx. Keen claims that no matter how far back you go the means of production will always be found to take the form of a commodity. One might have thought that coming from ‘Down Under’ he would have done some on the spot research. As Sahlins ( ”Stone Age Economics” 1974 p xiv ) remarks, ”It is also conceivable that bourgeois economics is doomed, scheduled by history to share the fate of the society that nurtured it……….In the meantime, we cultivate our gardens, waiting to see if the gods will shower rain on us or, like those of certain New Giunea tribes, just urinate upon us.”

    I do wonder what Keen believes Stone Age people used for money to purchase their ‘commodities’.

  9. Adam Smith published his ‘Wealth of Nations’ in 1776. Some miles south west of his hometown of Kirkcaldy the Carron Ironworks had been founded in 1759. Smith died in 1790. By 1815 the Works were the biggest in Europe, employing 2000 workers. The fuel of course
    was coal.

    A few miles nearer to Smith’s birthplace lies the ancient town of Dunfermline, where in 1293 the Lord of Pittencrieff granted to the Abbott and monks of the Abbey the right to dig for coal on his estate ‘for their own use’ and ‘provided they do not presume to sell it.’ That is the coal was a use value and not a commodity. What instruments did the monks and their serfs dig with? Picks and shovels. According to the economic history of a Keen these must have assumed the commodity form. But to the contrary the monks fashioned their own instruments of production. In the Abbott’s House adjacent to the Abbey one can still see the ancient forges where similar iron working was carried on domestically for subsequent centuries. In fact the same instruments were still the basic tools of mining at the beginning of the 19th century when the last semi-servile miners and their families in Britain were finally freed from their state of bound servitude in the village of Townhill, only a few miles to the north. By this time of course the industrial revolution had been in full spring for a century and a half. No doubt the coal owners now advanced their capital to purchase their instruments of production as commodities from factories like the Carron Ironworks with their mass production.

    But why let a little elementary economic history get in the way of an ideology? As a prize fighter for capitalism I am sure that for Keen its gods will turn the urine into gentle showers of gold!

  10. ” the industrial revolution had been in full spring for a century and a half. ” Correction: half a century!

  11. This segment from the Grundrisse p. 776, in the section entitled “Relation between the objective conditions of production. Change in the proportion of the component parts of capital”, helps addressing arguments by those like Keen’s who think of capital and value as trans historical categories as opposed the logically dialectical and historical character of value and capital:


    1. It has become apparent in the course of our presentation that value, which appeared as an abstraction, is possible only as such an abstraction, as soon as money is posited; this circulation of money in turn leads to capital, hence can be fully developed only on the foundation of capital, just as, generally, only on this foundation can circulation seize hold of all moments of production. This development, therefore, not only makes visible the historic character of forms, such as capital, which belong to a specific epoch of history; but also, [in its course] categories such as value, which appear as purely abstract, show the historic foundation from which they are abstracted, and on whose basis alone they can appear, therefore, in this abstraction; and categories which belong more or less to all epochs, such as e.g. money, show the historic modifications which they undergo. The economic concept of value does not occur in antiquity. Value distinguished only juridically from pretium, against fraud etc. The concept of value is entirely peculiar to the most modern economy, since it is the most abstract expression of capital itself and of the production resting on it. In the concept of value, its secret betrayed.

  12. There are three forms of profit in the SNA. The first is direct profits emanating from production itself in the commodity producing “industries” of the economy. The second is indirect profits which are profits transferred to the unproductive industries via intermediate sales or through price discounts in the case of distribution. No problem up to this point as there is no overstatement of profits in the SNA because the profits realised in the unproductive sector appear as costs in the productive sector. The third kind of profits are fictitious emanating from the mere exchange of money in the sphere of speculation. This third form of profit is not nearly as large as it is normally posited.

    For example “other income” in the largest productive corporations amounts to less than 3% of operating income. Furthermore when using the most concrete rate of profit, not s/(c+v) but s/(constant and circulating capital), it turns out that the financial sectors rate of return is not significantly higher than that for industry and commerce. In other words Marx’s equalisation of the rate of profit holds true and has not broken down between the financial sphere and the productive sphere. This should force everyone to re-evaluate their conceptions of the super fictitious profits earned. As I show in the following article Apple’s income in 2015 was double that of the banking bonuses paid to every banker in New York that year, and that was one company, admittedly the most profitable:

    Click to access the-overstatement-of-the-finance-sector-pdf.pdf

  13. Tell me, as a layman, if I’ve missed some key points. But doesn’t Rasmus in his above debate with Roberts conflate “profit” (as the monetary expression of the marginal efficiency of capital) with “surplus value” (as the use/exchange value of an actual product’s embodied surplus labor expended during the working day)?

    The two concepts are opposites: surplus value is the product of a concrete/historical analysis of the exploitation of labor within capital’s antagonistic, alienating mode of production; whereas “profit” is the product of liberalism’s view that “value” is immaculately conceived during virginal exchange between equals within the illusory free market.

    I’ve read all of Rasmus’ long comments on this blog, but I have not read any of his books, which seem far from contemptible. So I’m obviously missing his point here. I think I understand Robert’s rather straight forward position (with which I agree) on the present crisis: the popping of profit bubbles is not the cause of the crisis, but the profane effect of the reappearance of unrealized (quite concrete) surplus value held (symbolically in suspension) on the books while the bubbles were being blown and “profit” made.

    Or am I misunderstanding Roberts too? Or is/are the cause(s) of crises all the other seemingly overdetermined stuff Rasmus comes up with (and could seemingly come up with a lot more)? I don’t think one could ever find one’s way out of those woods… I think he protests too much.

  14. Diminishing returns per capita means global debt will only ever increase until the worthlessness of fiat currencies is realized.
    China holds 3tn of worthless dollars that exist only as a series of microscopic magnetic dots on some computer hard drive somewhere.
    When the credit cards stop working, it will be guns, ammo, tobacco, drugs and alcohol that will the new currencies for those that survive.

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