Archive for the ‘economics’ Category

Abe’s mandate

October 23, 2017

The Japanese stock market rocketed to a 21-year high with a record 15-day winning streak after the result of the Japanese parliamentary election.  Japanese capital was pleased that Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) had won the snap general election and, with its Buddhist-affiliated Komeito, the incumbent coalition had retained the two-thirds majority necessary to pass legislation without recourse to the upper house.

This means that Abe can claim a mandate to change Japan’s constitution from a ‘pacifist’ defensive role for its military to a fully offensive imperialist stance for the first time since the end of the second world war.  Abe claims this is necessary to resist the growing danger of nuclear attack by North Korea and the insurgent presence of China.  In reality, it is an obsession within the ruling clique of the LDP to reassert Japan as an imperialist power and not just a lapdog of the Americans.

However, even with this vote, Abe will have to proceed cautiously because Japanese citizens are still divided on whether any constitutional change is necessary and Abe has had to agree not to move on this until 2020 at the earliest.  But now he has a longer-term mandate to do this.

If you can call it a mandate.  The reality is that Japan’s electorate had little to choose from among the parties.  The opposition was in total disarray.  The Democrat party, which had a brief run in government, offered no alternative policies, whether economic or political.  And when the conservative governor of Tokyo, Yuriko Koike decided to set up her own national party, The Party of Hope, the Democrats immediately split with half joining Koike and the other half forming a new party, the Constitutional Democratic party under Yukio Edano.  Actually, Edano’s party beat the Party of Hope to become the main opposition on a platform of opposing the constitutional change.  The Party of Hope turned out to be a damp squib with Koike not even running and leaving the country during the vote!

Once again, the real winner in Japan’s election was the ‘no vote’ party.  The voter turnout was just over 52%, the second lowest since 1945 and up only 1% on 2014 – a turnout even lower than in the US elections.  The majority of Japan’s working class, seeing no party representing their interests, just did not vote.  Indeed, Abe’s LDP gained less seats than in 2014 (down 6) as did Komeito (down 5).

In 2014, Abe also called a snap election but that time it was to get a mandate for his so-called Abenomics: a set of policies of monetary easing, fiscal tightening and ‘supply-side neoliberal ‘reforms’ designed to get Japanese capitalism out of its stagnation.

How has Japan done since then?  Well, on the main target of getting Japan out of deflation (falling prices), despite the advice of top Keynesians (Paul Krugman) and monetarists (Ben Bernanke) coming to Japan – and massive injection of money by the Bank of Japan – the monetary arrow of Abenomics has miserably failed.

The core inflation rate is still hovering around zero after three years of effort.

But maybe that does not matter – why strive to ‘cause’ inflation, as long as the economy is growing?  And Japan’s real GDP has been rising for six consecutive quarters.  Japan is now achieving modest economic growth after a nasty recession in 2014.

And when you take into account that the population has fallen by over one million since the end of Great Recession as Japanese get older, faster, then real GDP per person has risen even more. However, in dollar terms, Japan’s GDP has really stagnated because the yen has fallen substantially against other currencies.  Indeed, GDP in dollars is still below the level of the early 1990s – so the falling population has only compensated for that.

The second arrow of Abenomics was fiscal spending and no other G7 government is running such a large budget deficit, Keynesian-style.  The annual deficit had reached nearly 10% of GDP in 2012, although thanks to some recovery in real GDP, the deficit has fallen back to around 4%.  But the Japanese government has now run a deficit for over 25 consecutive years, while public sector debt (even when netted off for government assets) is well over 130% of GDP.  All that this Keynesian effort has achieved is a miserable average annual economic growth of under 1% in the last ten years.  And now Abe intends to introduce a huge sales tax increase to reduce the deficit further, at the expense of working-class consumption.  He also hopes to liberalise gaming and allow casinos to suck in more revenue at the expense of the poorest.

The real purpose of Abenomics was the third arrow of ‘supply-side’ reforms, namely to reduce labour costs (ie hold down wages) and boost the profitability of Japanese capital.  And here Abenomics has had some success.  Japanese capital’s rate of profit had been in long-term decline, driven by the classic Marxist law of a rising organic composition of capital as Japan became a leading industrial power after the 1960s.

The Koizumi Thatcherite measures of privatisation and reduction in labour rights did achieve a modest recovery in profitability in the early 2000s, although this was mainly fuelled by the global credit boom.  The Great Recession put an end to that.  But under Abe, real wages per person have been held down and profitability has begun to move up.

So far, Japanese capital has not responded by boosting investment.

Net investment (after covering depreciation) is very low and even gross private investment is crawling along. Japanese companies prefer to employ more labour at low wage rates rather than invest, or take their investment overseas (shades of the UK and the US).

Japan’s economy has picked up a little.  Industrial production growth has accelerated somewhat as exports pick up with a falling yen and as the world economy has an upturn.  Business sentiment has improved; and Japanese capital has become more optimistic about the future.  But it is all still very modest and any economic improvement is not being felt by the bulk of Japanese, with real wages stagnant and available jobs only part-time or poorly paid.

Abe may have won the election easily and the stock market may be hitting new highs.  But this is only hiding the frailties of Japanese capitalism: low investment, productivity growth flat (with levels still below 2007); and profitability still near post-war lows.  Abe will be in office when the next global recession comes.  Abenomics and his imperial ambitions will then be tested.


The global debt mountain: a Minsky moment or Carchedi crunch?

October 20, 2017

During the current Chinese Communist party congress, Zhou Xiaochuan, governor of the People’s Bank of China, commented on the state of the Chinese economy.  “When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified…If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.” 

Here Zhou was referring to the idea of Hyman Minsky, the left Keynesian economist of the 1980s, who once put it: “Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.”  China’s central banker was referring to the huge rise in debt in China, particularly in the corporate sector.  As a follower of Keynesian Minsky, he thinks that too much debt will cause a financial crash and an economic slump.

Now readers of this blog will know that I do not consider a Minsky moment as the ultimate or main cause of crises – and that includes the global financial crash of 2008 that was followed by the Great Recession, which many have argued was a Minsky moment.

Indeed, as G Carchedi has shown in a new paper recently presented to the Capital.150 conference in London, when both financial profits and profits in the productive sector start to fall, an economic slump ensues.  That’s the evidence of post-war slumps in the US.  But a financial crisis on its own (falling financial profits) does not lead to a slump if productive sector profits are still rising.

Nevertheless, a financial sector crash in some form (stock market, banks, or property) is usually the trigger for crises, if not the underlying cause.  So the level of debt and the ability to service it and meet obligations in the circuit of credit does matter.

That brings me to the evidence of the latest IMF report on Global Financial Stability. It makes sober reasoning.

The world economy has showed signs of a mild recovery in the last year, led by an ever-rising value of financial assets, with new stock price highs.  President Trump plans to cut corporate taxes in the US; the Eurozone economies are moving out of slump conditions, Japan is also making a modest upturn and China is still motoring on.  So all seems well, comparatively at least.  The Long Depression may be over.

However, the IMF report discerns some serious frailties in this rose-tinted view of the world economy.  The huge expansion of credit, fuelled by major central banks ‘printing’ money, has led to a financial asset bubble that could burst within the next few years, derailing the global recovery.  As the IMF puts it: “Investors’ concern about debt sustainability could eventually materialize and prompt a reappraisal of risks. In such a downside scenario, a shock to individual credit and financial markets …..could stall and reverse the normalization of monetary policies and put growth at risk.”

What first concerns the IMF economists is that the financial boom has led to even greater concentration of financial assets in just a few ‘systemic banks’.  Just 30 banks hold more than $47 trillion in assets and more than one-third of the total assets and loans of thousands of banks globally. And they comprise 70 percent or more of international credit markets.  The global credit crunch and financial crash was the worst ever because toxic debt was concentrated in just a few top banks.  Now ten years later, the concentration is even greater.

Then there is the huge bubble that central banks have created over the last ten years through their ‘unconventional’ monetary policies (quantitative easing, negative interest rates and huge purchases of financial assets like government and corporate bonds and even corporate shares).  The major central banks increased their holdings of government securities to 37 percent of GDP, up from 10 percent before the global financial crisis.  About $260 billion in portfolio inflows into emerging economies since 2010 can be attributed to the push of unconventional policies by the Federal Reserve alone.  Interest rates have fallen and the banks and other institutions have been desperately looking for higher return on their assets by investing globally in stocks, bonds, property and even bitcoins.

But now the central banks are ending their purchase programmes and trying to raise interest rates. This poses a risk to the world economy, fuelled on cheap credit up to now.  As the IMF puts it: “Too quick an adjustment could cause unwanted turbulence in financial markets and international spillovers … Managing the gradual normalization of monetary policies presents a delicate balancing act. The pace of normalization cannot be too fast or it will remove needed support for sustained recovery”.  The IMF reckons portfolio flows to the emerging economies will fall by $35bn a year and “a rapid increase in investor risk aversion would have a more severe impact on portfolio inflows and prove more challenging, particularly for countries with greater dependence on external financing.”

What worries the IMF is that this this borrowing has been accompanied by an underlying deterioration in debt burdens.  So “Low-income countries would be most at risk if adverse external conditions coincided with spikes in their external refinancing needs.”

But it is what might happen in the advanced capital economies on debt that is more dangerous, in my view.  As the IMF puts it: “Low yields, compressed spreads, abundant financing, and the relatively high cost of equity capital have encouraged a build-up of financial balance sheet leverage as corporations have bought back their equity and raised debt levels.”  Many companies with poor profitability have been able to borrow at cheap rates.  As a result, the estimated default risk for high-yield and emerging market bonds has remained elevated.

The IMF points out that debt in the nonfinancial sector (households, corporations and governments) has increased significantly since 2006 in many G20 economies.  So far from the global credit crunch and financial crash leading to a reduction in debt (or fictitious capital as Marx called it), easy financing conditions have led to even more borrowing by households and companies, while government debt has risen to fund the previous burst bubble.

The IMF comments “Private sector debt service burdens have increased in several major economies as leverage has risen, despite declining borrowing costs. Debt servicing pressure could mount further if leverage continues to grow and could lead to greater credit risk in the financial system.”

Among G20 economies, total nonfinancial sector debt has risen to more than $135 trillion, or about 235 percent of aggregate GDP.

In G20 advanced economies, the debt-to-GDP ratio has grown steadily over the past decade and now amounts to more than 260 percent of GDP. In G20 emerging market economies, leverage growth has accelerated in recent years. This was driven largely by a huge increase in Chinese debt since 2007, though debt-to-GDP levels also increased in other G20 emerging market economies.

Overall, about 80 percent of the $60 trillion increase in G20 nonfinancial sector debt since 2006 has been in the sovereign and nonfinancial corporate sectors. Much of this increase has been in China (largely in nonfinancial companies) and the United States (mostly from the rise in general government debt). Each country accounts for about one-third of the G20’s increase. Average debt-to-GDP ratios across G20 economies have increased in all three parts of the nonfinancial sector.

The IMF comments: “While debt accumulation is not necessarily a problem, one lesson from the global financial crisis is that excessive debt that creates debt servicing problems can lead to financial strains. Another lesson is that gross liabilities matter. In a period of stress, it is unlikely that the whole stock of financial assets can be sold at current market values— and some assets may be unsellable in illiquid conditions.”

And even though there some large corporations that are flush with cash, the IMF warns: “Although cash holdings may be netted from gross debt at an individual company—because that firm has the option to pay back debt from its stock of cash—it could be misleading”.  This is because the distribution of debt and cash holdings differs between companies and those with higher debt also tend to have lower cash holdings and vice versa.

So “if there are adverse shocks, a feedback loop could develop, which would tighten financial conditions and increase the probability of default, as happened during the global financial crisis.”

Although lower interest rates have helped lower sovereign borrowing costs, in most of the G20 economies where companies and households increased leverage, nonfinancial private sector debt service ratios also increased.  And there are now several economies where debt service ratios for the private nonfinancial sectors are higher than average and where debt levels are also high.  Moreover, a build-up in leverage associated with a run-up in house price valuations can develop to a point that they create strains in the nonfinancial sector that, in the event of a sharp fall in asset prices, can spill over into the wider economy.

The IMF sums up the risk.  “A continuing build-up in debt loads and overstretched asset valuations could have global economic repercussions. … a repricing of risks could lead to a rise in credit spreads and a fall in capital market and housing prices, derailing the economic recovery and undermining financial stability.”

Yes, banks are in better shape than in 2007, but they are still at risk.  Yes, central banks are ready to reduce interest rates if necessary, but as they are near zero anyway, there is little “scope for monetary stimulus. Indeed, monetary policy normalization would be stalled in its tracks and reversed in some cases.”

The IMF poses a nasty scenario for the world economy in 2020.  The current ‘boom’ phase can carry on.  Equity and housing prices continue to climb in overheated markets.  This leads to investors to drift beyond their traditional risk limits as the search for yield intensifies despite increases in policy rates by central banks.

Then there is a Minsky moment.  There is a bust, with declines of up to 15 and 9 percent in stock market and house prices, respectively, starting at the beginning of 2020.  Interest rates rise and debt servicing pressures are revealed as high debt-to-income ratios make borrowers more vulnerable to shocks. “Underlying vulnerabilities are exposed and the global recovery is interrupted.”

The IMF estimates that the global economy could have a slump equivalent to about one-third as severe as the global financial crisis of 2008-9 with global output falling by 1.7 percent from 2020 to 2022, relative to trend growth.  Capital flows to emerging economies will plunge by about $65 billion in one year.

Of course, this is not the IMF’s ‘base case’; it is only a risk.  But it is a risk that has increasing validity as stock and bond markets rocket, driven by cheap money and speculation.  If we follow the Carchedi thesis, the driver of the bust would be when profits in the productive sectors of the economy fall.  If they were to turn down along with financial profits, that would make it difficult for many companies to service the burgeoning debts, especially if central banks were pushing up interest rates at the same time.  Any such downturn would hit emerging economies severely as capital flows dry up.  The Carchedi crunch briefly appeared in the US in early 2016, but recovered after.

Zhou is probably wrong about China having a Minsky moment, but the advanced capitalist economies may have a Carchedi crunch in 2020, if the IMF report is on the button.




Puerto Rico: when it rains, it pours

October 17, 2017

When it rains, it pours.  Hurricane Maria hit the island of Puerto Rico off the US mainland leaving the country devastated with no power, no food and water.

Puerto Ricans are US citizens, as the island is officially a ‘US territory’ – in effect,  a colony like the French overseas territories.  But the US mainland authorities did little to help and, when they did, it was inadequate.  Power remains lost; homelessness continues and President Trump visited the most well-off part of the island to hand out paper towels – to mop up no doubt!

But even before the hurricane, Puerto Rico’s 3.5m people were in a parlous state.  It had become a graphic example of what capitalism and colonial rule can do in exploiting resources and people, through distortions of the local economy and corruption of local and foreign institutions.

Puerto Rico was faced with bankruptcy even before the hurricane.  By bankruptcy, I mean that the public sector debt of the island had reached astronomical levels, making it impossible for the island government to service the debt and thus facing default on its bonds owned by local and foreign institutions (mainly hedge funds).

How did this come to pass?  Throughout the modern economic history of Puerto Rico, one of the central drivers of its economic growth has been the US tax code. For over 80 years, the US federal government granted various tax incentives to US corporations operating in Puerto Rico. Most recently, beginning in 1976, section 936 of the tax code granted corporations a tax exemption from income originating from ‘US territories’.  US corporations benefited greatly from locating subsidiaries in Puerto Rico – a ‘rich port’ indeed. Income generated by these subsidiaries could be paid to US parents as dividends, which were not subject to corporate income tax.

Puerto Rico thus became a large tax scam for multi-nationals.  The main ‘exporters’ to Puerto Rico were pharma and chemical companies in Ireland, Singapore and Switzerland.  Thus Puerto Rico imported pharmaceutical ingredients from low-tax jurisdictions like Ireland and then exported finished pharmaceuticals to high-tax jurisdictions in Europe and the US.

As top economist Paul Krugman recently noted: “Specifically, PR runs, on paper, a huge trade surplus in pharmaceuticals – $30 billion a year, almost half the island’s GNP. But the pharma surplus is basically a phantom, driven by transfer pricing: pharma subsidiaries in Ireland charge themselves low prices on inputs they buy from their overseas subsidiaries, package them, then charge themselves high prices on the medicine they sell to, yes, their overseas subsidiaries. The result is that measured profits pop up in Puerto Rico – profits that are then paid out in investment income to non-PR residents. So this trade surplus does nothing for PR jobs or income.”

This booming economy raised little tax revenue.  So Puerto Rican governments borrowed to provide public services rather than tax multi-nationals.  Due to these extensive tax credits and exemptions, Puerto Rico lost out on $250-500 million a year in revenue. It did this for four decades, encouraged by financial consultants.  Soon it entered the realm of Ponzi-financing, namely, issuing debt to repay older debt, as well as refinancing older debt possessing low interest rates with debt possessing higher interest rates.

Then disaster happened.  In the US, section 936 became increasingly unpopular throughout the early 1990s, as many correctly saw it as a way for large corporations to avoid taxes. Ultimately, in 1996, President Clinton signed legislation that phased out section 936 over a ten-year period, leaving it to be fully repealed at the beginning of 2006.

Without section 936, Puerto Rican subsidiaries of US businesses were subject to the same worldwide corporate income tax as other foreign subsidiaries.  They fled the island.  Between 1996 and 2006, the US Congress eliminated the tax credits, contributing to the loss of 80,000 jobs on the island and causing its population to shrink and its economy to contract in all but one year since the Great Recession.

At first, the Puerto Rican government tried to make up for the shortfall by issuing bonds. The government was able to issue an unusually large number of bonds, due to dubious underwriting from financial institutions such as Spain’s Santander BankUBS  and Citigroup.  According to a report from Hedge Clippers, Santander issued almost $61 billion in bonds from the Puerto Rican government through subsidiaries that served as municipal debt underwriters, obtaining $1.1 billion in fees in the process.

Santander officials were also officials of the Puerto Rico’s Government Development Bank.  Thus Santander officials in the Development Bank decided whether to issue debt for Puerto Rico and then arranged that Santander should pocket the fees for organising the bond issues!  They also decided that sales tax revenue that should have gone to the government should be siphoned off to service COFINA (PR Sales Tax Financing Corporation) bonds.  They even assigned government employees’ pension contributions to pay for bond issues.

Not coincidentally, 2006 also marked the beginning of a deep recession for Puerto Rico, which has lasted until today.  Between 2000 and 2015, Puerto Rico’s debt rose from 63.2% of GNP to 100.2% of GNP.  Eventually the debt burden became so great that the island was unable to pay interest on the bonds it had issued.  Puerto Rico’s $123 billion liabilities from debt ($74 billion) and unfunded pension obligations ($49 billion) are much larger than the $18 billion Detroit bankruptcy,

The tax regime remains paralysed.  The Department of Treasury of Puerto Rico is incapable of collecting 44% of the Puerto Rico Sales and Use Tax (or about $900 million).  Public spending is also distorted.  A public teacher’s base salary starts at $24,000 while a legislative advisor starts at $74,000. The government has also been unable to set up a system based on meritocracy, with many employees, particularly executives and administrators, earning large salaries while health workers struggle.

The Puerto Rico Electric Power Authority  (PREPA) provides free electricity to local governments.  The utility had improperly given away $420 million of electricity and that the island’s governments were $300 million delinquent in payments.  As a result, PREPA had no funds to invest in new technology and built up a debt of $9 billion.  In 2012, the Puerto Rico Ports Authority was forced to sell the Luis Muñoz Marín International Airport to private buyers after PREPA threatened to cut off power over unpaid bills.  Last July, PREPA filed for bankruptcy.

The island’s unemployment rate is now 14.8% with a poverty rate of 45%.  But the Puerto Rican authorities have been under pressure from the US government to apply vicious austerity measures. More than 60% of Puerto Rico’s population receives Medicare or Medicaid services but the US has a cap on Medicaid funding for US territories. This has led to a situation where Puerto Rico might typically receive $373 million in federal funding a year, while, for instance, Mississippi receives $3.6 billion.

The austerity programmes imposed on the Puerto Rican governments have meant taxes and fees went up on nearly everything and everyone. Personal income taxes, corporate taxes, sales taxes, sin taxes, and taxes on insurance premiums were hiked or newly imposed. The retirement age for teachers was raised.

As the debt mounted, the US government removed the power of managing and monitoring that debt out of the hands of the Puerto Ricans and put into a new monitoring body, PROMESA (The Financial Oversight and Management Board for Puerto Rico) – a bit like how the EU governments took control of Greek finances and provided bailouts with ‘conditionalities’ through the EFSF and ESM.  There is only one Puerto Rican on the PROMESA board. PROMESA’s main aim is to service the debt, not restore the economy.

What is to be done?  Since it was installed, PROMESA has begun outlining and implementing deep government spending cuts.  There is talk that the government should pay back its bonds before providing essential services to its citizens. Though repayment is still on hold, different classes of bondholders are now locked in a legal dispute about which of them is entitled to the revenue from the island’s sales tax, currently set at 11.5%.

PROMESA wants the Puerto Rican government to maintain a balanced budget for four consecutive years and carry out significant privatisations of state assets. For Puerto Ricans, that could mean austerity measures for the foreseeable future imposed by an unelected body based outside Puerto Rico.

As economist Joseph Stiglitz recently put it: “The PROMESA Board was supposed to chart a path to recovery; its plan makes a recovery a virtual impossibility. If the Board’s plan is adopted, Puerto Rico’s people will experience untold suffering. And to what end? The crisis will not be resolved. On the contrary, the debt position will become even more unsustainable.”

And yet the foreign bond holders do not think this is enough and condemn PROMESA for being too weak.  A group of 34 hedge funds that specialize in distressed debt —sometimes referred to as vulture funds—hired economists with an IMF background. Their report icalled for increased tax collection and a reduction of public spending and wanted public private partnerships and the ‘monetization’ (privatisation) of government-owned buildings and ports.

Another group goes even further. They called on the US Congress to “consider a tax credit for U.S. multinationals” and the “militarization of the island to provide short to medium [term] security.” They want PROMESA closed down and to be replaced by an “administrator who has broad authority to execute contracts, coordinate with federal agencies and oversee reconstruction.”  The bondholders want more police and the US army to enforce austerity.  “The U.S. military needs to supplement the 15,000 Puerto Rican police officers to maintain law and order”, while at the same introducing tax allowances at 100% of capital expenditures “required to rebuild after Maria or build new factories within a 2-3 year window.”

Another idea is for all the outstanding debt to be incorporated into a ‘super bond’ that would get interest directly from the tax revenues of the Puerto Rican government  This plan would have a designated third party administer an account holding some of the island’s tax collections and those funds would be used to pay holders of the superbond. The existing Puerto Rican bondholders would take a haircut on the value of their current bond holdings.  This is almost an exact replica of the private sector involvement (PSI) deal that was imposed on the Greek government in 2012 that led to a bailout of private bondholders and the shifting of the bulk of debt onto the government books.

Is there any way out for the Puerto Rican people or do they face permanent austerity and misery?  One solution coming from the left is for the US Federal Reserve Bank to buy up all the Puerto Rican bonds at current market value and then not impose any interest payment burden on the island.  This is both useless and utopian at the same time.  Even if it were applied, the debt would remain on the books and its servicing subject to the whim of the Federal Reserve Board (and who knows who the Fed Chair would be next year?).  Moreover, if the Fed offers to pick up the bill, the price of the bonds would rocket, enabling the ‘vulture funds’ to make a killing at the US taxpayers expense.  And it still does nothing to solve the economic problem for the island that created this debt in the first place.  And, second, it is utopian because it ain’t going to happen: the Fed will do nothing.

Clearly, the most effective immediate answer is to cancel the debt.  But that poses its own problems.  First, 40% of the debt is locally held, often by local banks and pension funds that could be bankrupted – so they would have to be brought under the public umbrella.  Second, cancellation would mean immediate confrontation with the US authorities and the hedge funds – which could lead to the closure of PROMESA and the imposition of a US administrator to take over the government.  In other words, cancellation would mean a major political struggle on the island.

And what sort of Puerto Rican economy is needed anyway? The model of a tax haven that encourages multi-nationals to engage in transfer pricing scams has failed to deliver incomes and jobs for those Puerto Ricans who have not left the island.

Puerto Rico was an important hub, in particular, for big pharmaceutical firms like Pfizer, which have kept many of their investments on the island even after ‘936’ was gradually ended.  But Puerto Rico is no longer competitive in areas where 75-80% of expenses come from payroll costs.  Puerto Rico needs to move up into higher-value manufacturing and services.  It has a large number of educated bilingual workers.  There is potential to turn the economy into a modern hi-tech service sector.  But that would require government investment and state-run firms democratically controlled by Puerto Ricans.  It’s the Chinese model, if you like.

Puerto Rico is a small island that was exploited by the US and foreign multi-nationals with citizens’ tax bills siphoned off to pay interest on ever increasing debt, while reducing social welfare – all at the encouragement of foreign investment banks making huge fees for doing so.  Now Puerto Ricans are being asked to keep on paying for the foreseeable future after a decade of recession and cuts in living standards to meet obligations to vulture funds and US institutions.  And the troops will be sent into ensure that!   When it rains, it pours.

The monetary dilemma

October 13, 2017

According to the minutes of the last meeting of the monetary policy committee of the US Federal Reserve Bank, the most powerful monetary authority in the world, the committee members are split and unclear on what to do.  “Some participants who counselled patience expressed “concern about the recent decline in inflation” and said the Fed “could afford to be patient under current circumstances.” They “argued against additional adjustments” until the central bank was sure that inflation was on track. On the other side, more hawkish members “worried about risks arising from a labour market that had already reached full employment and was projected to tighten further…..backing off from a steady diet of rate hikes could cause the Fed to overshoot its employment target and cause financial instability”, they said.

The problem is that the Fed’s economic models were failing to provide guidance on what to do.  The current mainstream model has two strands.  The first is the Wicksellian idea that there is a ‘natural rate of interest’ that brings a capitalist economy into harmonious equilibrium where economic growth and full employment and stable and low inflation are combined.  The Fed calls this R*.  The second is the Keynesian view that there is a trade-off between unemployment and inflation, so that as an economy heads towards ‘full employment’, this drives up ‘effective demand’ beyond any ‘slack’ in supply in the economy and so wages and price inflation ensues.  This is enshrined empirically in the so-called Phillips curve, named after a British economist of the 1960s.

The trouble with this mish-mash of a central bank model is that it is not working.   The trouble with the Wicksellian bit is that it is nonsense – there is no equilibrium rate.  Even worse, the Fed’s economists have no idea what it should be anyway.  The Fed’s central estimates of the real neutral interest rate has declined by nearly two-thirds in five years, from 2 per cent to 0.75 per cent. On that basis, the Fed has already exceeded the ‘natural rate’ and is in danger of causing a downturn in the economy.

But the figures are again little more than guesswork. As Ms Yellen said, “[the neutral rate’s] value at any point in time cannot be estimated or projected with much precision”.

The second half of the model is equally faulty.  The Phillips curve, measuring inflation against growth and full employment, was proven faulty in the 1970s when inflation rocketed but economies had rising unemployment and falling growth – ‘stagflation’. Indeed, the inadequacy of this Keynesian model led to a counter-revolution in mainstream economics, as economists and politicians swung over to monetarist policies like the quantity theory of money proposed by Milton Friedman and adopted by his epigone, former Fed chief Ben Bernanke.

This was eventually taken to its extreme in quantitative easing (QE).  This was the ultimate policy – if an economy is in a depression, it’s because of a lack of money.  So just keep pumping it out until things get better.Well, things have supposedly got better, so QE has been dumped and the old Keynesian Phillips curve has been restored as guidance to the Fed.  Unfortunately, just as in the 1970s, the model is not working.  Unemployment rates are near lows – at least in this current business cycle of 8-10 years – but higher inflation in prices and wages has not returned.

Indeed, it has been a quarter of a century since the Fed’s favoured measure of inflation — personal consumption expenditures excluding food and energy — last punched up above the still relatively sedate level of 3 per cent. It was just 1.4 per cent in the year to July. Wage growth, meanwhile, remains well below its pre-crisis pace at just 2.5 per cent.

Janet Yellen, chair of the US Federal commented: “Our framework for understanding inflation dynamics could be ‘misspecified’ in some fundamental way.” Mario Draghi, president of the European Central Bank, observed, “the ongoing economic expansion . . . has yet to translate sufficiently into stronger inflation dynamics”.  He’s still hoping.  And of course, Ben Bernanke, the monetarist extraordinaire, continues to believe that the Fed’s policy models will work, as he argued in a new paper presented to the Peterson Institute and the IMF this week.

But the evidence is not there.  Monetary policy has failed to ‘manage’ the capitalist economy.  Monetary policy did not avoid the global credit crunch or save capitalist economies from going into the Great Recession – even if non-stop zero interest credit saved the banking system from complete meltdown (and even that conclusion is open to doubt).

And QE did not revive the ‘real’ economy, the productive sectors, afterwards and instead only inspired a humongous new speculative boom in property, stocks and bonds that continues today (boosting the incomes and wealth of the top 1% everywhere).

In this Long Depression, jobs may have appeared in some economies, but only at low wage rates, only temporary, part-time or self-employed.  Real GDP growth has been strangled at no more than 2% a year in the US and even lower in other advanced economies.  Business investment has crawled along and, as a result, productivity growth, essential to a long-term revival in capitalist economies, is sluggish and even non-existent.

So what to do?  The Keynesians, still believing that the Phillips curve model works, conclude that ‘effective demand’ is still too low and the major economies are stuck in ‘secular stagnation’, not seen since the immediate post-war period (an idea developed by Keynesian Alvin Hansen and proved wrong by the revival of economies form 1947 onwards).  In their latest contribution, former IMF chief economist Olivier Blanchard and top Keynesian Larry Summers tell us in another Peterson Institute presentation that what is needed is a combination of monetary easing and fiscal spending:

“What we specifically suggest is the following: The combined use of macro policy tools to reduce risks and react more aggressively to adverse shocks. A more aggressive monetary policy, creating the room needed to handle another large adverse shock—and while we did not develop that theme at length, providing generous liquidity if and when needed. A heavier use of fiscal policy as a stabilization tool, and a more relaxed attitude vis-a-vis debt consolidation. And more active financial regulation, with the realization that no financial regulation or macroprudential policy will eliminate financial risks. It may not sound as extreme as some more dramatic proposals, from helicopter money, to the nationalization of the financial system. But it would represent a major change from the pre-crisis consensus, a change we believe to be essential.”

Actually, what the two gurus advocate is not “a major change”, but really just more of the same that has failed so far to revive the economy.

They had little to say about the Fed’s plan to sell off its huge stock of bonds that it built up under its QE policy of purchases.  The Fed wants to do this because it reckons the economy is sufficiently recovered to cope with a reversal of QE and a tightening of credit.  Well, you could argue that, as QE had little effect on boosting the ‘real’ economy, reversing QE will have little effect in dampening it.

Maybe so, but what also worries the Fed is that a near-decade of easy money Bernanke-style has so boosted levels of debt in the household and corporate sectors that any rise in interest rates and tightening of credit would drive up debt servicing costs and tip the economy into recession.  On the other hand, the Fed does not want to go on pumping yet more credit to make the situation worse.  As Janet Yellen put it: “Persistently easy monetary policy might also eventually lead to increased leverage and other developments, with adverse implications for financial stability.”.

This fear has been promoted by the Bank for International Settlements, the central bankers’ bank, which in true Austrian school of economics style, reckons that increased costs of debt servicing from rising interest rates driven by the Fed’s ‘normalisation’ policy could tip things over.

And the IMF in its latest Global Financial Stability report out this week, is also worried that the very size of global debt could eventually lead to serious defaults and retrenchment that would push the global economy back into recession.

The IMF comments that “a shock to individual credit and financial markets well within historical norms could decompress risk premiums and reverberate worldwide, as explored later in this chapter. This could stall and reverse the normalization of monetary policies and put growth at risk.”  So if the Fed and other central banks now decide to reverse QE and opt for ‘normalisation’ of their balance sheets, this could be damaging. Too quick an adjustment could cause unwanted turbulence in financial markets and international spillovers.”  On the other hand, “the expected process of normalization is likely to be gradual, with continued easy monetary conditions and low volatility that could foster a further buildup of financial excesses and medium-term vulnerabilities.”.  So heads you lose and tails you lose.

The IMF sets the dilemma: “Managing the gradual normalization of monetary policies presents a delicate balancing act. The pace of normalization cannot be too fast or it will remove needed support for sustained recovery and desired increases in core inflation across major economies …On the other hand, the likely prolonged period of low interest rates could further deepen financial stability risks as investors take on more risk in their search for yield.”

The IMF reckons such a debt disaster could hit global growth by up to 1.7% pts a year through 2022 – in effect, cutting current growth by more than half and taking it to levels not seen since the Great Recession.  The ensuing recession would “about one-third as severe as the global financial crisis”.

The Fed’s dilemma reveals that monetary policy has failed.  It failed to save the world economy from the Great Recession and it failed to get it out of the ensuing Long Depression.  Central bank models of the economy, based on a combination of monetarist neo-classical and Keynesian economics, appear to offer no guidance on what stage the major economies are now in and therefore what to do.  Should central banks hold back on hiking rates and reversing QE in case economies are still too weak; or should they act now to avoid a huge debt crisis down the road?  They don’t know.

Beware the ECB bearing gifts for Greeks

October 11, 2017

The announcement by the European Central Bank that it has so far made €7.8bn in profits from its holdings in Greek government debt reveals the true nature of the so-called bailouts of Greek government finances that the EU leaders organised in return for massive austerity measures from 2012 onwards.

Back in March 2012, five years ago, a so-called private sector involvement (PSI) deal was agreed under which French, German and Greek banks who held the bulk of Greek government bonds agreed to take a ‘haircut’ on the value of their bond holdings.  Under the PSI, they received in return new Greek government bonds with 30-year lives, paying about 3-4% a year in interest and guaranteed by the Eurozone financing operation, the EFSF.  And they also got some cash upfront for turning in their old bonds.  The Euro leaders and the IMF provided around €130bn in new money plus €34bn left over from the previous Greek package to fund the interest to be paid on the new Greek government bonds, repayments to the IMF, money to recapitalise the Greek banks and money for the cash on the PSI deal.

As part of the PSI, the ECB bought up some of these bonds, for which they were guaranteed repayment as they matured by the Greek government, as part of the bailout packages that ensued.  In total, the ECB and national central banks bought €56.2 billion of Greek debt, according to analysis by a University of Munich academic. Of this, €29 billion has been repaid, with €27 billion still outstanding.  The ECB bought bonds to be repaid up until 2028.

Well, not only have these bond purchases been repaid over the ensuing years as the Greek people took the pain of wage and pension cuts, a collapse in public services and the privatisation of public assets, but the ECB has made nearly €8bn in profits. The ECB said holdings of Greek sovereign bonds acquired under its Securities and Markets bond-buying programme (SMP) had resulted in €7.8bn of net income interest between 2012-2016. These profits are not being returned to the Greeks but distributed among the 19-country central banks in the eurozone.

Another cruel irony is that, having purchased these bonds from the French and German banks so the banks’ losses were minimised, the ECB has since refused to buy Greek government bonds as part of its quantitative easing programme to help the Greeks.  Why? Because the Greek government debt is not sustainable!

And that is certainly true.  When imposing the PSI on Greece, the Troika (ECB, EU, and IMF) aimed for Greece to get its public debt burden down from 166% of GDP before the debt default to 120% of GDP by the end of the decade through the austerity measures.  But it would not do this by writing off any Greek debt but only by squeezing the Greek people dry to pay back the ECB and the IMF for their ‘bailout’ loans.  Of the total €164bn funding in 2012, only €23bn went towards financing the Greek government’s budget.

So one hand gaveth and the other took it away.

Because the Greek economy imploded, Greek government debt, far from falling under the three bailout programmes, just rocketed further up to a peak of 180% of GDP.  Austerity did not work and still is not working to reduce the debt and stop the unending interest payments to private bondholders as well as the ECB.

It’s probable that the IMF and the ECB have made more profits from the ‘bailout’ loans.  An analysis from the Jubilee Debt Campaign in 2015 estimated the IMF had made €2.5bn in profits from its loans by then.  And the IMF and the ECB will make even more profits from the ‘bailout’ loans.  The JDC reckons that, based on the difference between the average effective interest rate the ECB has received on the debt of around 10%, the maturity of the debt, and the normal negligible cost of borrowing from the ECB, the accrued profit could be €22 billion in 2022, ten years since the PSI.

The IMF reckons that, without debt relief, Greece’s public sector debt to GDP ratio will not fall even with further austerity. Indeed, it would rise from around 180% now to nearly 300% by 2060 – in a ‘snowball’ effect where debt is repaid with more debt and interest payments keep rising on top.

And there is no sign of any such ‘relief’.

Sunny periods followed by showers

October 9, 2017

Today, the IMF and the World Bank meet in Washington for their semi-annual conference to discuss the world economy.  In the course of the proceedings, the great and the good in the world of economics, central banking and finance get together to understand the trends and consider the policy and strategy for capital.  That includes the IMF and the World Bank issuing many reports and studies for consideration.

The current view of the world economy was spelt out over the weekend by Christine Lagarde, the IMF managing director and former French finance minister under the right-wing presidency of Nicholas Sarkozy.  Lagarde’s line was that the global economy was showing significant signs of improvement and this was an opportunity to ‘fix the roof while the sun shines’ – in other words, get on with difficult and controversial ‘reforms’ while things were improving, both to sustain any recovery and reduce the social impact of any measures.  “Pleasant as it may be to bask in the warmth of recovery… the time to repair the roof is when the sun is shining.”

Lagarde, in her speech to Harvard University, a bastion of the elite, started by pointing out that “the long-awaited global recovery is taking root. In July, the IMF projected 3.5 percent global growth for 2017 and 3.6 percent for 2018. Next week we will release an updated forecast ahead of our Annual Meetings — and it will likely be even more optimistic.  Measured by GDP, nearly 75 percent of the world is experiencing an upswing; the broadest-based acceleration since the start of the decade. This means more jobs and improving standards of living in many places all over the world…. the likelihood for this year and the next is that growth will be above trend.”

This optimistic view has been previewed by many others.  Gavyn Davies, former chief economist at Goldman Sachs, now runs Fulcrum Forecasting which tries to measure global economic activity.  In their latest survey, Fulcrum says that “global economic activity has embarked on the strongest and most synchronised period of expansion since 2010. Global growth is running well above the long term trend, especially in the advanced economies.”

Similarly, the Brookings Institution think-tank and the Financial Times Tiger index of global activity reckons that the global economy is experiencing its broadest and strongest upturn for more than five years. The index, which covers all significant advanced and developing economies, is at or close to five-year highs on measures of the real economy, confidence and financial conditions. “A cyclical pickup in investment and trade in the advanced economies — especially in Europe and Japan — has led to better-than-expected growth.”   And a special G20 reports reckons that: “The G-20 has come a long way towards its goal of strong, sustainable, and balanced growth.” 

This is all sounds good.  At last the world capitalist economies are entering a period of sustained and faster growth.  The Long Depression, as I have characterised it, is over.  Yet for all the optimistic talk, these commentators from Lagarde to the World Bank, to the new G20 report, and to Gavyn Davies, also offer a dark side of doubt.

As Gavyn Davies put it: “Is this just another false dawn?”  He comments that “there are few signs of recovery on the supply side and some indications of excess risk taking in asset markets (ie rocketing stock markets).  Some economists are therefore suggesting that the global economy may be “bipolar”, with rising risks that the current period of firm growth in activity could be punctured by a sudden surge in risk aversion in asset markets.  So “a relatively minor risk shock, for example from geopolitics, could result in a large correction in asset prices, and that might stop the global economic recovery in its tracks”.

Davies cites a new model published by Ricardo Caballero and Alp Simsek at MIT which concludes that the global economy could be “bipolar”, with its encouraging recent behaviour being unusually vulnerable to risk shocks in asset markets.  These economists suggest three main dangers, either a technical market correction (ie a financial crash); or a straightforward economic recession; or a geopolitical event (eg America attacks North Korea and war breaks out). They dismiss the first two as unlikely right now.  However, “if we were to see a volatility spike that pushes the economy into a recession, the latter in itself would raise volatility endogenously.”

And this is the risk that the Bank for International Settlements recently flagged as a possibility or even probability, as I pointed out in a recent post: The BIS said: leverage conditions in the United States are the highest since the beginning of the millennium and similar to those of the early 1990s, when corporate debt ratios reflected the legacy of the leveraged buyout boom of the late 1980s.  Taken together, this suggests that, in the event of a slowdown or an upward adjustment in interest rates, high debt service payments and default risk could pose challenges to corporates, and thereby create headwinds for GDP growth.”

The FT Tiger index authors were also cautious.  Yes there was a “synchronised” but “sluggish recovery”.  It’s sluggish because a proper sustained end to the Long Depression is being held back by weak productivity growth.  “The combination of weak productivity and investment growth does not portend well for an increase in growth or even for the sustainability of the current low growth.”

Lagarde too pointed out the other side of the story: “the recovery is not complete.  Some countries are growing too slowly, and last year 47 countries experienced negative GDP growth per capita. And far too many people — across all types of economies — are still not feeling the benefits of the recovery.”  In the largest economies, overall productivity growth — a measure of how efficient we are — has dropped to 0.3 percent, down from a pre-crisis average of about 1 percent. This means that, despite technological advances, wages in many places are only inching up.

In an accompanying report, the IMF economists point out that productivity growth has slowed sharply across the world following the global financial crisis.  They attribute this to “the fading impact of the information and communication technology boom, weaker labor and product market reform efforts, skills shortages and mismatches, and demographic factors such as aging populations. In addition, the lingering effects of the global crisis continue to be felt—weak corporate balance sheets, tight credit conditions in some countries, soft investment, weak demand, and policy uncertainty.”

And they refer to the global trade slowdown as another long-term drag on productivity.  “Trade since 2012 has barely kept pace with global GDP. This could point to lower productivity gains in the future—even without taking into account the possibility of trade restrictions.” What worries Lagarde and the IMF is that this cyclical recovery could peter out without any long-term solution to this “productivity puzzle”.

All these things mentioned by the IMF are undoubtedly factors in the Long Depression, but the IMF studiously leaves out the key underlying cause: productivity growth still depends on capital investment being large enough.  And that depends on the profitability of investment.  Under capitalism, until profitability is restored sufficiently and debt reduced (and both work together), the productivity benefits of the new ‘disruptive technologies’ (as the jargon goes) of robots, AI, ‘big data’ 3D printing etc will not deliver a sustained revival in productivity growth and thus real GDP.

Also, there is no sign of any reversal in the continuing rise in inequality in incomes and wealth around the world, which threatens social cohesion and the steady rule of capital over labour:“if we look at inequality within specific countries, especially some advanced economies, we see widening gaps and an increased concentration of wealth among the top earners.” (Lagarde).  The IMF economists find that “In advanced economies, the incomes of the top 1 percent have grown three times faster than those of the rest of the population.”

More jobs for youth and women and more training and education for skills is the IMF answer.  A redistribution of income and wealth through ‘progressive taxation’ is hinted at (“These are all ideas worth exploring”), but public ownership and control of the big monopolies and banks is, of course, not mentioned.

Indeed, the IMF’s employment policies are the old neoliberal ones of ‘flexible labour markets’.  The IMF points out that if women participated in the labor force in the same numbers as men, GDP could increase by as much as 5 percent in the US, 27 percent in India, and 34 percent in Egypt, to name just three examples.   But it has little to say on the chronic sore (in what Marx called the reserve army of labour) which modern capital has used to exploit the global workforce: namely, the massive level of youth unemployment globally.

A recent speech by Mario Draghi, head of the ECB, exposed the failure of capitalism to provide jobs at decent pay and with a future for millions of young people.  Draghi pointed out that youth unemployment is not a recent phenomenon. It started with the end of the golden age of capitalism in the early 1970s when unemployment increased from 4.6% to 11.1% by the end of the decade.  In 2007, when total unemployment in the euro area declined to 7.5%, its lowest level since the early 1980s, the unemployment rate for young people was already very high at around 15%.

And then as a result of the Great Recession, it reached 24% and is still about 4 percentage points higher than at the beginning of the crisis in 2007.  The number of young adults participating in the EU labour market, at 41.5%, is very low. That means a large majority is currently in training, studying, or not looking for work.  If we compare youth unemployment with unemployment among people 25 years and older, we discover it is 250% higher. This has hardly changed in the past few years – even in the EU’s largest nations. In the case of young adults the modest increase in employment consisted almost exclusively of temporary jobs. In Spain and Poland more than 70% of young adults have temporary jobs.  This is a permanent unskilled reserve army of labour for capital.

The other reason that the world economy will not sustain this ‘cyclical recovery’ is the still high level of private sector debt.  In its latest Global Financial Stability report, the IMF economists focus on rising household debt.  The IMF starts: “Debt greases the wheels of the economy. It allows individuals to make big investments today–like buying a house or going to college – by pledging some of their future earnings. That’s all fine in theory. But as the global financial crisis showed, rapid growth in household debt – especially mortgages – can be dangerous.”

The report finds: “In the short term, an increase in the ratio of household debt is likely to boost economic growth and employment, our study finds. But in three to five years, those effects are reversed; growth is slower than it would have been otherwise, and the odds of a financial crisis increase. These effects are stronger at the higher levels of debt typical of advanced economies, and weaker at lower levels prevailing in emerging markets.”

More specifically, “our study found that a 5 percentage-point increase in the ratio of household debt to GDP over a three-year period forecasts a 1.25 percentage-point decline in inflation-adjusted growth three years in the future. Higher debt is associated with significantly higher unemployment up to four years ahead. And a 1 percentage point increase in debt raises the odds of a future banking crisis by about 1 percentage point. That’s a significant increase, when you consider that the probability of a crisis is 3.5 percent, even without any increase in debt”.

“What’s the reason for the tradeoff? At first, households take on more debt to buy things like new homes and cars. That gives the economy a short-term boost as automakers and home builders hire more workers. But later, highly indebted households may need to cut back on spending to repay their loans. That’s a drag on growth. And as the 2008 crisis demonstrated, a sudden economic shock – such as a decline in home prices–can trigger a spiral of credit defaults that shakes the foundations of the financial system.”

So the IMF is concerned that the house of cards that is private sector debt will bring down any economic recovery.  In this blog, I have highlighted, not household debt, but corporate debt and the greater risk there.  Corporate debt is very high and rising, while the number of ‘zombie’ companies (those hardly able to meet their debt payments) are at record levels (16% in the US).  At $8.6 trillion, US corporate debt levels are 30% higher today than at their prior peak in September 2008.  At 45.3%, the ratio of corporate debt to GDP is at historic highs, having recently surpassed levels preceding the last two recessions.  That suggests that increased costs of debt servicing from rising interest rates driven by the Fed’s ‘normalisation’ policy could tip things over, unless profitability recovers for the wider corporate sector.

A key word in Lagarde’s address to the great and good at Harvard University was “cycles”.  Lagarde started: “Of course, there are seasonal cycles — like the one we are enjoying right now. Then there are economic cycles. A key challenge in economic cycles is trying to gain perspective on what comes next while you are in the midst of it.”

Yes, what sort of cycle is the world economy in?  Is it the start of a long cycle of boom after depression, at last? Or is a just a short and unsustainable pick-up?  In my book, The Long Depression, in a chapter on cycles, I try to delineate between longer-term cycles of profitability and finance (Marx) and innovation (Kondratiev) and short-term cycles of investment and construction (Kuznets) and capacity utilisation (Kitchin).  The latter cycle of using up spare capacity and working capital generally has a length of just four years, unlike the investment cycle of 8-10 years or the longer profitability cycle (32 years, I claim).

I think we are in an upswing of a new Kitchin cycle, but still within the down phase of the profitability cycle.  The troughs and peaks of the Kitchin cycle, as measured by the changes in the utilisation of capacity (the graph shows US industry), can be defined on a 4-6 year basis: 1982, 1986, 1991, 1996, 2002, 2008, 2012 and 2016.  If this is right, the Kitchin cycle will peak in 2018 and then slip down to a new trough by 2020.

That does not quite fit in with my old thesis of a new slump by 2018.  But that is built round the profitability cycle.  More on this in the future. In the meantime, enjoy the sunshine before the winter.

Economic crises: look to science or the rain gods?

October 3, 2017

Recently, mainstream economists have been debating yet again why ‘economics’ was unable to see the global financial crash coming and/or provide effective policies to end what I have described as the Long Depression that has endured since the end of the Great Recession in 2009.

Mainstream economists John Quiggin and Henry Farrell summed up the debate in a paper: “some blame non-academic economists. Others blame prominent academics. Others still say that economic advice doesn’t really matter, because politicians will pay attention only to the advice that they wanted to hear anyway.”

But Quiggin and Farrell reckon the real reason that mainstream economics failed to be of any use was the lack of agreement among economists on what to do.  Economists could not agree on whether austerity was good or bad for the economy; or on whether economists had any influence over politicians.  And the reason for this lack of agreement was not due to differences on theory but to “sociology”.  By this they mean that mainstream economists are not pure objective ‘economists’ but are “deeply bound up with the political systems that they live within”

As I also pointed out in my book, The Long Depression, Quiggin and Farrell explain that, “prominent academic economists, far more than other social scientists, are likely to go back and forth between universities and roles in the Treasury Department, Federal Reserve, International Monetary Fund and World Bank. This means that economics has far more political clout than other social sciences, but it also has reshaped the profession, turning external policy influence into an important form of internal disciplinary prestige.” 

In other words, economists with jobs in government and the central bank go with the flow (from the forces of capital): “So the world of economic politics and the world of economic thought are deeply intertwined. Channels of influence rarely flow only in one direction, as some economists have discovered to their dismay.”

This conclusion seemed to surprise as well as upset Quiggin and Farrell.  Yet, if they had read Marx, they would have expected nothing else.  As Marx pointed out 150 years ago, in a footnote to the chapter on Commodities and Money in Capital, while making the distinction between classical economics and vulgar economics: “Once for all I may here state, that by classical political economy, I understand that economy which, since the time of W. Petty, has investigated the real relations of production in bourgeois society, in contradistinction to vulgar economy, which deals with appearances only, ruminates without ceasing on the materials long since provided by scientific economy, and there seeks plausible explanations of the most obtrusive phenomena, for bourgeois daily use, but for the rest, confines itself to systematizing in a pedantic way, and proclaiming for everlasting truths, the trite ideas held by the self-complacent bourgeoisie with regard to their own world, to them the best of all possible worlds (p. 174 – 175).

Even earlier, Frederick Engels had anticipated the trend of economics in his Outlines Of A Critique Of Political Economy in 1843:The nearer to our time the economists whom we have to judge, the more severe must our judgment become. For while Smith and Malthus found only scattered fragments, the modern economists had the whole system complete before them: the consequences had all been drawn; the contradictions came clearly enough to light, yet they did not come to examine the premises and still accepted the responsibility for the whole system. The nearer the economists come to the present time, the further they depart from honesty”.

And in Theories of Surplus Value, Marx described “the vulgar economists—by no means to be confused with the economic investigators we have been criticising—translate the concepts, motives, etc., of the representatives of the capitalist mode of production who are held in thrall to this system of production and in whose consciousness only its superficial appearance is reflected.  They translate them into a doctrinaire language, but they do so from the standpoint of the ruling section, i.e., the capitalists, and their treatment is therefore not naïve and objective, but apologetic.”

In other words, all the obstruse theory presented by modern mainstream economics is presented as purely neutral, unbiased and logical, but in reality it is not “naïve and objective” but merely an apologia for the capitalist mode of production.  “It was henceforth,” Marx wrote, “no longer a question whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. Pure, selfless research gave way to battles between hired scribblers, and genuine scientific research was replaced by the bad conscience and the evil intent of apologetic”. Capital, vol. 1, p. 97

Recently, two mainstream economists (Identification in Macroeconomics Emi Nakamura and Jon Steinsson ´ ∗ Columbia University September 30, 2017) started their paper: “Any scientific enterprise needs to be grounded in solid empirical knowledge about the phenomenon in question. Milton Friedman put this well in his Nobel lecture in 1976: “In order to recommend a course of action to achieve an objective, we must first know whether that course of action will in fact promote the objective. Positive scientific knowledge that enables us to predict the consequences of a possible course of action is clearly a prerequisite for the normative judgment whether that course of action is desirable.” 

Sounds good, but unfortunately, “Many of the main empirical questions in macroeconomics are the same as they were 80 years ago when macroeconomics came into being as a separate sub-discipline of economics in the wake of the Great Depression. These are questions such as: What are the sources of business cycle fluctuations? How does monetary policy affect the economy? How does fiscal policy affect the economy? Why do some countries grow faster than others? Those new to our field or viewing it from afar may be tempted to ask: How can it be that after all this time we don’t know the answers to these questions?”  Indeed!

However, the authors remain optimistic.  For them, the problem is not that economists are locked into an apologia for the capitalist system, but that it is difficult to ‘identify’ the right variables in any causal analysis.  In other words, economics is a positivist science like physics but it is just  behind in its understanding of ‘the economy’ compared to physics because of the extra difficulty in empirical work.

Economics could progress in the same way that ‘natural science’ has.  Macroeconomics and meteorology are similar in certain ways. First, both fields deal with highly complex general equilibrium systems. Second, both field have trouble making long-term predictions. For this reason, considering the evolution of meteorology is helpful for understanding the potential upside of our research in macroeconomics. In the olden days, before the advent of modern science, people spent a lot of time praying to the rain gods and doing other crazy things meant to improve the weather. But as our scientific understanding of the weather has improved, people have spent a lot less time praying to the rain gods and a lot more time watching the weather channel. “

Unfortunately for the authors, such progress towards the truth will not take place in economics. To think so is just naïve.  To quote Milton Friedman as the epitomy of unbiased, objective positivist scientific analysis demonstrates that naivety.  Friedman was the peer example of an ideologist for capital, including his job as an advisor for General Pinochet after his coup against the democratically elected government of Chile in the 1970s (see my book, The Great Recession for more on Friedman).

Yes, economics is a science, in my view.  More accurately, as Marx says, it is political economy, the study of the social relations of the capitalist mode of production.  Yes, we need to test economic theories against the facts by identifying the causal variables.  Indeed, we should make predictions to test our theories.

But do not expect the body of mainstream economics to do so in any systematic way.  It has been hopelessly distorted by the need to preserve and defend the capitalist system.  As the authors say: “Policy discussions about macroeconomics today are, unfortunately, highly influenced by ideology. Politicians, policy makers and even some academics have held strong views about how macroeconomic policy works that are not based on evidence but rather on faith.”

They remain confident, however, that: “The only reason why this sorry state of affairs persists is that our evidence regarding the consequences of different macroeconomic policies is still highly imperfect and open to serious criticism. Despite this, we are hopeful regarding the future of our field. We see that solid empirical knowledge about how the economy works at the macroeconomic level is being uncovered at an increasingly rapid rate. Over time, as we amass a better understanding of how the economy works, there will be less and less scope for belief in “rain gods” in macroeconomics and more and more reliance on solid scientific facts.”

Unfortunately, as the global financial crash and the Great Recession showed, mainstream economics has not progressed as much as meteorologists in predicting storms and hurricanes.  Economists still look to the raingods because it’s a matter of faith not reason.

Trump’s tax reform

September 28, 2017

President Trump’s announcement of ‘tax reform’ plans that he intends to get the US Congress to pass can only mean less tax on the richest segment of income earners and less tax on the profits of large multi-national corporations.  But it won’t boost investment or growth.

Let’s take the planned cuts in corporation tax first.  Trump claims that US corporations have the highest tax rate in the world and this needs to be cut to boost investment and growth.  This is nonsense.  The official US federal tax rate on corporate profits is 35% and when you add in state taxes, the top rate rises to 39%.  Even on that measure, the US is actually third highest out of 188, behind the United Arab Emirates and Puerto Rico.  Trump wants to cut the federal rate of 20%. But the official rate is an illusion.  Once various exemptions and allowances are taken into account, plus the provision to pass on losses in one year to deduct against profits in another year, the effective tax burden on US corporation averages out at about 27%, which puts the US rate near the global average.

Moreover, the burden of corporate tax on US companies has steadily been reduced over the last 50 years, from providing from 32% of federal tax revenue in 1952 to 10% in 2013. Indeed, total revenues from corporation tax are just 1.6% of US GDP, well below the OECD average of 2.8%.  In other words, the contribution that the top US corporations make to government spending on services etc is tiny.  Some smaller US companies avoid corporation tax altogether and instead pay ‘income tax’ as owners.  Trump is one of these:  his companies pay no corporation tax but just tax on whatever he takes as ‘income’ from his companies.  That is taxed at a top rate of 39.6%.  Trump wants to cut this to a 15% rate.

In the recession years of 2008-12, many large companies paid no corporation tax at all. General Electric, Boeing, Verizon and 23 other profitable Fortune 500 firms paid no federal income taxesfrom 2008 to 2012. General Electric, one of the most notorious corporate tax dodgers, got $3.1 billion in refunds on $27.5 billion in profits from 2008 to 2012. The company paid less in federal income taxes in five years than a single American family pays in one year. These companies were, in effect, being bailed out by the taxpayer – that’s us, who instead saw a sharp rise in taxes on income, cuts in government services and rises in sales taxes to pay for these bailouts.

The other trick to avoid tax was to shift profits on company accounts to foreign subsidiaries.  U.S. corporations dodge $90 billion a year in income taxes by shifting profits to subsidiaries — often no more than post office boxes — in tax havens. Now US corporations officially hold roughly $2.6trn offshore, a figure cited by Congress’s Joint Committee on Taxation. The top five in order of overseas cash holdings as of Sept. 30, are Apple ($216 billion), Microsoft ($111 Billion), Cisco ($60 billion), Oracle Corp. ($51 billion) and Alphabet Inc. ($48 billion).— much of it in tax havens — that have not yet been taxed here. Trump plans to offer these companies a reduced tax rate of 10% to repatriate these profits.

The planned income tax reforms (cuts) will also help the rich the most. The individual tax rates would be 12%, 25% and 35% – and the plan recommends a surcharge for the very wealthy. But it does not set the income levels at which the rates would apply, so it is unclear just how much of a tax cut would go to a typical family. There will be a cut in taxes on capital gains, 70 percent of which flow to the top 1 percent.  The  estate tax will be eliminated. This applies to a tiny number of people, couples that have estates bigger than $10.8 million.   Trump himself would make a big windfall from this. Trump’s estate would save $564m, the review found, based on his estimated net worth of $3bn; Trump’s commerce secretary, Wilbur Ross, roughly $545m and potentially result in more than $900m in savings for Richard DeVos, the father-in-law of Betsy DeVos, Trump’s education secretary.

The nonpartisan Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, found “high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income… Three-quarters of the tax cuts would benefit the top 1 percent of taxpayers,” if the plan were put into effect this year, it said. The highest-income households — the top 0.1 percent — would get “an average tax cut of about $1.3 million, 16.9 percent of after-tax income.” Those in the middle fifth of incomes would get a tax cut of almost $260, or 0.5 percent, while the poorest would get about $50. That split would worsen down the road, the Tax Policy Center says: “In 2025 the top 1 percent of households would receive nearly 100 percent of the total tax reduction.”  Even the conservative-leaning Tax Foundation concluded that those in the top 1 percent of the income scale would save at least 10 times as much, or 5.3 percent. That’s nearly $40,000 extra for those at the top, compared to $67 for those smack dab in the middle of the income scale.

Overall, the tax cuts would reducing tax revenue to the federal government by $160bn, or 0.8% of GDP.  In other words, that would halve the corporate tax contribution to the government, which would seek to make the rest of us pay for the gap.  Mainstream economist Marin Feldstein from Harvard University claims that “A lower corporate tax rate and the shift to a territorial system would increase the flow of capital to investment in US corporations from abroad and from capital investments in owner-occupied housing and in agriculture. This would raise productivity and GDP, leading to increases in tax revenue that would partly offset the direct effect of the corporate rate reduction.”  JP Morgan economists beg to differ: they see a boost, if any, to US economic growth at no more than 0.4% over two years, at most.

And there is no empirical relationship between cutting corporate tax rates and job growth, according to a recent study by the Center for Effective Government. Twenty-two of the 30 profitable Fortune 500 companies that paid the highest tax rates (30% or more) from 2008 to 2010 created almost 200,000 jobs between 2008 and 2012. The 30 profitable corporations that paid little or no taxes over the three years collectively shed 51,289 jobs between 2008 and 2012.

What these corporations did with the extra profit from less tax was to buy back their own shares to boost the stock price or issue bonds at very low rates to enable them to take over other companies.  Thus the tax shortfall merely led to a boom in fictitious capital (debt and shares) not real investment.

It’s also highly unlikely that companies with factories overseas will shift meaningful production to the US. After all, labour remains significantly cheaper in nations like China. Hourly compensation costs were $36.49 per employee in the US in 2013, according to The Conference Board. The comparable cost in China was just $4.12 that year (the most recent figure), even after having increased more than six-fold over the preceding ten years.

The Trump tax ‘reform’ is yet another attempt to kick-start an economy by providing handouts to corporations and the rich (like Trump) at the expense of the rest of us, in the vain hope that the capitalist sector will invest more.  But it’s a vain hope.  Business investment is falling in the US.

Capital.150: part 3 – struggle!

September 27, 2017

In the third and final part of my review of last week’s Capital.150 London symposium on the modern relevance of Marx’s Capital Volume One 150 years after it was published, I want to cover some of the presentations not mentioned so far.  This is going to be a quick compendium that won’t do justice to the presenters’ papers or to the debates on them.  But at least you can follow up by reading the papers that I shall refer to.

In the session on imperialism, the some old debates among Marxists were revived. As far as I understood the argument presented by Marcelo Dias Carcanholo from the Federal University Fluminense in Rio de Janeiro Brazil (Carcanholo PP) , Marcelo reckoned the ‘dependency’ was deepening, driven by ‘unequal exchange’ in trade with imperialism and significant ‘super-exploitation’ of labour in the peripheral economies.  This makes it increasingly difficult for national capitalist forces to engage the working class in the peripheral economies in class collaboration.  Both ‘dependency’ (of ‘colonial’ economies on imperialist ones) and ‘super-exploitation’ of labour (in the south by the north) as the main generator of profit, are controversial issues and the debate continues on the nature of modern imperialist exploitation and its implications for class struggle.  Raquel Varela from Lisbon New University argued that Marx’s theory of primitive accumulation as expounded in Volume One had new angles to take on modern capitalism – existing still in the poorest areas of so-called emerging economies like India, but Marx’s theory of exploitation of labour by capital was now dominant globally.

Tony Norfield, author of the best-selling book, The City, on London’s role in imperialism spoke on Das Kapital, finance, and imperialism. Tony seemed to be arguing that Marx’s law of value had “evolved” in the modern world of imperialism and finance capital and now “financial markets show more directly what the capitalist world economy allows” and so “equity markets, bond yields and FX markets are now the key market levers”, not the profitability of capital in the non-financial sectors.  That’s because the large tech corporations are really financial companies and use their financial power to appropriate more surplus value than they generate from production.  But that also means there is less profit available for productive investment.

In my view, Tony’s thesis suggests that capitalism has changed to the point that it is no longer the capitalism of Volume One.  This seems to me to destroy the relevance of Marx’s value theory in understanding the laws of motion of capitalism.  For me, stock and bond market prices reflect the vicissitudes of fictitious capital (speculative capital), but because this capital is fictitious, it will collapse when the productive sectors collapse with insufficient profits- and that is Marx’s point (and also the point of Carchedi’s paper – see my part one post,

So, far from stock prices being the best measure of capitalist health, surely they usually reflect speculative bubbles in assets that are eventually revealed to have no or less value?  For example, currently stock market prices are daily registering new highs and yet economic growth remains low and investment in productive capital flat.  It is not that Marx’s law of value should give way to stock prices, but that fictitious capital will eventually give way to value.  Maybe Tony meant that Marxists should take into the account the huge increase in fictitious capital and its impact of profitability.  If so, then some authors, including myself, have done so by either adding in financial assets to productive assets as part of the net worth of corporations (Debt matters) or by deducting fictitious profits from total profits.

The final sessions of the symposium covered the future of capital and the future of labour in 21st century capitalism.  Alex Callinicos author of Deciphering Capital: Marx’s Capital and Its Destiny reminded us that the current debate over the relevance of Marx’s law of the tendency of the rate of profit to fall started among Marxists just as soon as the publication of Volume 3 of Capital.  For example, there was a debate over its relevance between Benedetto Croce and Antonio Gramsci, with the latter defending the law. Hannah Holleman in her contribution brought to our attention the big new contradiction in capitalist accumulation that Marx had only noted in Capital: the destruction and pollution of the planet by the rapacious drive for profit, which has now culminated in global warming and climate change, possibly irreversibly.

Eduardo Motta Albuquerque of the Federal University of Minas Gerais, Belo Horizonte Brazil showed that Marx in Volume One also paid close attention to technological developments in 19th century capitalism as a guide to new waves of development (Albuquerque Marx Technology Divide).  Machines in England led to the destruction of Indian industry; with industries at the centre of imperialism and agriculture at the periphery.  The expansion of rail transport was accompanied by the global expansion of capital and the tentacles of imperialism.  “In sum: each technological revolution can reshape the international division of labour”. So what will be those new “starting points” in the 21st century?

And Fred Moseley, a longstanding Marxist economist and author of the recent book Money and Totality, updated his view of the relevance of the rate of profit for the future of US capitalism.  Fred argued that a key element for the growth of profitability was the relation between productive and unproductive labour, the latter being that part of labour not generating value or surplus value but only appropriating some of it.  These sectors were finance, government and other non-productive industries, but also supervisory and management workers in productive sectors.

The increasing appropriation of surplus value by these sectors sounds the death knell of economic resurgence by the US economy as it restricts profit for productive investment. Only a destruction of capital in these sectors could release more value for productive investment (Moseley PP).  For more on this, see the excellent new paper by Lefteris Tsoulfidis and Dimitris Paitaridis (MPRA_paper_81542).

The final Wednesday afternoon session at the Capital.150 symposium in London considered what would happen to labour in modern capitalism and how Marx envisaged society and labour would change under communism, Tithi Bhattacharya looked at the nature of modern labour in “Social reproduction theory: conceiving capital as social relation”. This produced a vigorous debate on whether social reproduction theory (SRT), around the issues of the exploitation of women at home and capitalist pressures on working class families, was a useful addition to Marx’s labour power theory in Volume One or not.

Lucia Pradella from King’s College looked at the impact of imperialism and migration on the power of labour and workers’ struggles.  Imperialism has created new disasters on world labour and a massive increase in the migration from the poorer to richer areas.  But just as in the 19th century with the migration of Irish people to work in British cities, that produced dangerous prejudices and divisions, it also opened up positive opportunities for global solidarity – something Marx also strived for in his day between English and Irish immigrant workers. Beverly Silver from John Hopkins University considered Marx’s general law of capital accumulation and the making and remaking of the global reserve army of labour. 

Finally, top Marxist scholar, Michael Heinrich analysed the nature of Communism as expounded in Marx’s Capital and other works.  His was a powerful account of the fundamental basis of a Communist society: ‘from each according to his/her abilities; to each according to their need’.  Can this ever be achieved in the 21st century?  Michael tolds us the story of somebody visiting Marx at his home in his later years.  He asked Marx, in effect, ‘what must we do?’  Marx paused before replying and then said just one word: “Struggle!”.

Germany stutters

September 25, 2017

The general election in Germany produced a sharp swing to the right.  The two main parties of the centre-right and centre-left, the Christian Democrats/Social Union (CDU-CSU) and the Social Democrats (SPD) suffered significant losses in their share of the vote.  The party of Chancellor Angela Merkel lost 8.5% pts from the 2013 election to finish with 33%; and the SPD lost 5.2% pts to finish with 20.5% – both achieving the lowest share of the vote since 1945.  The share of the vote going to the two main parties, which were in a ‘grand coalition’, is hardly above 50% of those voting – and the voter turnout rose to 75% from 71% in 2013.

The big gainer was the anti-immigrant, ultra-nationalist, anti-muslim, Alternative for Germany (AfD) which polled 12.6%, compared with 4.7% in 2013 and entered the German parliament (Bundestag) for the first time.  The other major gainer was the petty-bourgeois, neo-liberal Free Democrats (FDP) which polled 10.7% compared to 4.8% last time and re-entered the Bundestag.  Die Linke (Left) party polled more or less the same as last time with 9.2% and so did the Greens with 8.9%.  Indeed, the left (if you include the Greens in that) polled less than 40% of the total vote, even lower than in 2013.

The SPD says that they will not enter a new grand coalition with the CDU, and that’s not surprising after the hammering they have taken in the election for being part of Merkel’s government.  The SPD particularly lost support in higher unemployment areas of West Germany, revealing that the poorest sections of the working class do not see the SPD as fighting for them any longer.

The big gains by the AfD made it Germany’s third-largest party in the Bundestag.  The phenomena of ‘populist’ right-wing nationalist parties that we have seen in France (National Front), the UK (UKIP), Italy (La Liga) and Greece (Golden Dawn) demonstrate the fragmentation of the political status quo in Europe in this Long Depression.  Some (not all) of the poorest and least organised of the working class, along with small business and self-employed, have turned to nationalism for an answer.  They think that the causes of their demise are immigrants, handouts to other EU countries and big business – in that order.

Germans are used to immigrants.  Germany is the second most popular migration destination in the world, after the US. Over one out of five Germans has at least partial roots outside of the country, or about 18.6m.  But the question of immigration became a huge issue in Germany because of the disaster of the Middle East and the massive and fast influx of refugees, around 2m in the last two years into Germany.  Most of these refugees were placed in the poorest parts of east Germany, already under the pressure of poorer housing, education and social services.

It is an economic issue because of the previous policies of the SPD and CDU in introducing so-called labour ‘reforms’ that created a whole layer of part-time temporary employees for German business on very low wages.  This is what Marx called a ‘reserve army of labour’.  This kept labour costs down for German industry and laid the basis for the sharp rise in the profitability of German capital from the early 2000s up to the global financial crash.

About one quarter of the German workforce now receive a “low income” wage, using a common definition of one that is less than two-thirds of the median, which is a higher proportion than all 17 European countries, except Lithuania.  A recent Institute for Employment Research (IAB) study found wage inequality in Germany has increased since the 1990s, particularly at the bottom end of the income spectrum. The number of temporary workers in Germany has almost trebled over the past 10 years to about 822,000, according to the Federal Employment Agency.

So the reduced share of unemployed in the German workforce was achieved at the expense of the real incomes of those in work.  Fear of low benefits if you became unemployed, along with the threat of moving businesses abroad into the rest of the Eurozone or Eastern Europe, combined to force German workers to accept very low wage increases while German capitalists reaped big profit expansion.  German real wages fell during the Eurozone era and are now below the level of 1999, while German real GDP per capita has risen nearly 30%.

This cheap labour, concentrated in the eastern part was in direct competition with the huge numbers of refugees arriving in the last two years. The irony, as always, is that the AfD vote improved mainly in areas in Eastern Germany where immigration was relatively low – you see, it is the fear rather than the reality that drives such prejudice and reaction.

The other irony is that the co-leader of the AfD is no poor populist of the people, but instead Alice Weidel is a former economist at Goldman Sachs and financial consultant – shades of UKIP leader Nigel Farage, who is a stockbroker. These representatives of capital have no connection with their rank and file voters but attempt to rise to power on prejudice and mendacity.

What the result shows is that even German capitalism, the most successful advanced capitalist economy in the world, cannot escape the divisive forces of the Long Depression.  Germany is the EU’s most populous state and its economic powerhouse, accounting for over 20% of the bloc’s GDP.  Germany has preserved its manufacturing capacity much better than other advanced economies have. Manufacturing still accounts for 23% of the German economy, compared to 12% in the United States and 10% in the United Kingdom. And manufacturing employs 19% of the German workforce, as opposed to 10% in the US and 9% in the UK.

Even so, economic growth since the last general election has been little better than the UK and the US, but that was better than during the euro debt crisis just before the last election in 2013, when there was a short recession.

What has changed economically since the last election in 2013 is yet another fall in the average real wage growth for Germans particularly in this last year before the vote.  The election took place just as many Germans were starting to feel the pinch for the first time since the last election.

The profitability of German capital has risen steadily, on the whole, since the end of the global profitability crisis of the 1970s, which affected all the major economies.  The real take-off in German profitability began with the formation of the Eurozone in 1999, generating two-thirds of all the rise from the early 1980s to 2007.  German capitalism benefited hugely from expanding into the Eurozone with goods exports and capital investment until the Great Recession hit in 2008, while other Euro partners lost ground.  Also, the Hartz labour reforms that opened up a bigger gap between productivity growth and wages in Germany than anywhere else in Europe.

But the fall in profitability during the Great Recession was considerable and profitability since has remained below pre-crisis levels.  That tells us that Germany will struggle to grow much more than it has done over the last few years.

So what happens now?  The formation of a new German government will probably take months to work out.  As the SPD currently refuses to join a new coalition, Mrs Merkel will have to try to form what is called a ‘Jamaica’ coalition (based on the black, yellow and green party colours of the CDU, the FDP and the Greens).  If that is formed, and it remains an ‘if’, it is likely to be much more unstable than the last government. The FDP and the CDU want to carry out even more neo-liberal measures, including large cuts in corporate tax for big business.  And the FDP is opposed to any further integration in Europe or fiscal transfers to the weaker euro area states.  The Greens want a total end to nuclear power and other environmental measures unacceptable to the FDP.

This election shows that, even in Germany, there is growing disillusionment with the ‘success’ of capitalism that has given just a few crumbs for the working class off the table of bounty for German business – less than one in four adult Germans voted for the main party of capital.  So far, that disillusionment has been expressed in a partial switch to nationalism.  If there is a new global recession in the next four years, the so-called ‘stability’ of German politics will crumble further.