Marvin Gandall wrote:
Has the current crisis really caught those on the left - and beyond - by
surprise? There has been much talk for the past several years about the
housing bubble and the danger posed to the global financial system by the
vast new array of arcane and untested derivative products.
Are you expecting a different political outcome than Doug and others - is
that what this thread is about?
It's true that this debate has been in play for several years in its
current version (below, something I wrote for Znet three years ago).
Politically, the implications are not that obvious. The analyst I admire
most, David Harvey, has written positively of a 'new deal' that might be
forged at global level; I think that's myopic (even when it was written,
when it appeared there'd be a president Dean). And in Toronto, I think
Leo and Sam do the most superb base-building socialist work, even though
I don't like the way they conceptualise capitalist power and
vulnerability in their writing.
So it's not *really* about what kind of politics follow from the
analysis; just whether we are keeping ahead of the curve as good critics
of capitalism, particularly in areas I've been exposed to the past few
years, in Third World and emerging markets, where international
financiers deserve some comeupance.
***
*December 03, 2004
Crunch time for US capitalism?
By Patrick Bond
If you are like many aggrieved people I know, the prospect of the US
economic empire stumbling, tripping, and maybe even crashing is welcome
indeed.
So cheer up, it seems like comeuppance season has dawned. Former Federal
Reserve governor Paul Volcker warned earlier this year of a '75% chance
of a financial crisis hitting the US in the next five years, if it does
not change its policies.'
As Volcker told the Financial Times a month ago, 'I think the problem
now is that there isn't a sense of crisis. Sure, you can talk about the
budget deficit in America if you think it is a problem - and I think it
is a big problem - but there is no sense of crisis, so no one wants to
listen.'
That may have just changed. Volcker's successor, Alan Greenspan, scared
the financial markets into a mini-seizure last week by admitting, 'It
seems persuasive that, given the size of the U.S. current account
deficit, a diminished appetite for adding to dollar balances must occur
at some point.'
Former US Labor secretary Robert Reich predicted in September: 'The
mainstream view is that the budget deficit is going to get larger.
Simultaneously, the mainstream view is that there is no reason to
believe that the trade deficit is going to shrink any time soon. In
fact, I see the dollar continuing to decline and I see at some point a
tipping point… because at some point it becomes a lousy investment.'
A week after the election, former Treasury secretary Robert Rubin
accused Bush of 'playing with fire' for allowing the dollar to weaken
alongside continuing federal deficit spending, a combination which would
generate 'serious disruptions in our financial markets.'
Added C. Fred Bergsten, director of the Institute for International
Economics in Washington (a voice of pure orthodoxy), 'Everyone in the
market knows the dollar has to come down a lot. People are starting to
run for the exits.'
That run for the exit could be extremely costly for China, for example,
with former Treasury official Nouriel Roubini telling Reuters that about
8% of its GDP - or half a trillion $US - would be lost in the event the
Chinese currency was allowed to find its real value, and the dollar
crashed a further 20%.
Of course, this isn't about merely tracking the volatility of the
dollar's price against other countries, which will dip and dive and
strengthen for erratic short-term reasons. Deeper, structural analysis
is required.
Yale-based anarchist David Graeber half-jokingly suggests 'a systematic
division of labour in which Marxists critique the political economy, but
stay out of organising, and anarchists handle the day-to-day organising,
but defer to Marxists on questions of abstract theory; i.e., in which
Marxists explain why the economic crash in Argentina occurred and the
anarchists deal with what to do about it.'
Right, then, what do Marxists and other dissident economists have to
say, what with mega-Argentine-scale financial problems looming?
To start with diagnoses of the situation, four critical schools of
thought are worth citing because they have somewhat different - and
often competing - ideas about what ails US and global capitalism:
1) Overly competitive corporations, which drive down the rate of profit;
2) Overconfidence within financial markets, which today act more like a
casino than savings/investment mechanism; 3) Overproduction of
commodities, as a persistent reflection of inadequate consumer buying
power; and 4) Overaccumulation of capital more generally, a problem
which cannot be displaced forever, but which one day must face more
severe devaluation.
In the first case, the best example is UCLA historian Robert Brenner's
2003 book *The Boom and the Bubble* and subsequent analysis in New Left
Review, London Review of Books, Against the Current, and other journals.
In the second, followers of the late US financial economist Hyman Minsky
- like David Felix of Washington University and Steve Keen of University
of Western Sydney - argue that financial markets inexorably move from
accommodating capitalism, to hosting speculative investments, to
becoming a pure gamble, in the spirit of the old 'Ponzi'-style inverted
pyramid schemes.
The third category draws on the legacy of John Maynard Keynes, whose
solutions to 'underconsumption' typically involve loose credit and
generous state subsidies, so as to boost consumer buying power. Many
radical economists in the US have renewed this line of argument, perhaps
because it is politically safer than calling for anti-capitalist
revolution. (Reagan, Bush Sr and Bush Jr could be described as 'military
Keynesians' thanks to their vast budget deficits and Pentagon-hedonism.)
Arguing the fourth case, eloquent classical Marxists like Ellen
Meikskins Wood in her book *Empire of Capital* (2003) and David Harvey
in *The New Imperialism* (2004) have updated important earlier accounts
of overaccumulation by Simon Clarke (*Keynesianism, Monetarism and the
Crisis of the State*, 1988), Harvey in *The Condition of Postmodernity*
(1989), Harry Shutt (*The Trouble with Capitalism*, 1999) and Robert
Biel (*The New Imperialism*, 2000).
Opposed to these is a Marxist position which respects the strength,
resourcefulness and self-healing capacity within capitalism - and
especially reflects upon the weakness of the system's main enemy: the
working class. Those arguing that the system is *not* facing a systemic
overaccumulation crisis include Leo Panitch, Sam Gindin and Chris Rude
in the new *Socialist Register 2005: The Empire Reloaded*, Doug Henwood
in *After the New Economy* (2003) and Giovanni Arrighi (criticizing
Brenner) in *New Left Review* last year.
Some of these latter accounts stress a fifth school of Marxist theory:
class struggle as determinant. And it is true, the world's working class
and nearly all counterhegemonic national struggles have suffered
persistent, debilitating defeats over the past three decades, which
certainly helps explain capital's apparent recovery from 1970s woes.
Yet the internal contradictions continue bubbling up. Globalization has
generated economic stagnation, not dynamism. According to even the World
Bank, the increase in the world's annual GDP per person fell from 3.6%
during the 1960s, to 2.1% during the 1970s, to 1.3% during the 1980s to
1.1% during the 1990s and 1% during the early 2000s.
Moreover, GDP measures are notorious overestimates of social welfare,
especially since environmental degradation became more extreme from the
1970s. We must also factor in the extremely uneven character of
accumulation across the world, with some sites - like Eastern Europe and
Africa - suffering rapidly declining per capita GDP for much of the
globalization epoch.
Or consider a classical symptom of capitalist crisis: the corporate rate
of profit. At first glance, the after-tax US corporate profit rate -
which fell precipitously from the mid-1960s - appeared to recover
beginning in 1984, nearly reaching earlier post-war highs (although it
must be said that tax rates were much lower in the recent period).
On the other hand, corporate interest payments remained at record high
levels throughout the 1980s-90s. Subtracting interest expenses, we get a
better sense of net revenue available to the firm for future investment
and accumulation, which indeed remained far lower from the early 1980s-
present, than during earlier periods, according to French Marxists
Gérard Duménil and Dominique Lévy (http://www.cepremap.ens.fr
<http://www.cepremap.ens.fr/>).
Duménil and Lévy also deconstruct the ways that US corporations
responded to declining manufacturing-sector accumulation. Manufacturing
revenues were responsible for roughly half of total (before-tax)
corporate profits during the quarter-century post-war 'Golden Age', but
fell to below 20% by the early 2000s.
In contrast, profits in the financial sector rose from the 10-20% range
during the 1950s-60s, to above 30% by 2000. Financiers doubled their
asset base in relation to non-financial peers during the 1980s-90s.
What does this mean?
According to Harvey, the contradictions of capitalism were 'displaced'
instead of resolved: they were moved across time and space, especially
via hyperactive financial markets. Time is accounted for in the vast
credit bubble, which lets you pay now, on the basis of debt, and hope to
earn future revenues to cover your loan repayments.
And capitalism's use of 'space' - geographic crisis displacement - is
really what globalization has been about: allowing corporations facing
falling profits to seek relief in sites where raw materials and labor
are cheaper, where regulations are fewer, and where new markets for
products might emerge. Hence corporate profits drawn from global
operations rose from a range of 4 to 8% during the 1950s-60s to above
20% by 2000.
To be sure, some of the problems faced by capitalism have not been
simply stalled and shifted around. Some vicious hits - asset
devaluations - have occurred in different sites over the past 30 years.
These included the Third World debt crisis (early 1980s for commercial
lenders, but still going on for most of the world's states and
societies); energy finance shocks (mid 1980s); crashes of international
stock (1987) and property (1991-93) markets; crises in nearly all the
large emerging market countries (1995-2002); and even huge individual
bankruptcies which had powerful international ripples.
Late-1990s examples of financial-speculative gambles gone very sour in
derivatives, exotic stock market positions, currency trading, and bad
bets on commodity futures and interest rate futures include Long-Term
Capital Management ($3.5 billion)(1998), Sumitomo/London Metal Exchange
(,1.6 billion)(1996), I.G.Metallgessellschaft ($2.2 billion)(1994),
Kashima Oil ($1.57 billion)(1994), Orange County, California ($1.5
billion)(1994), Barings Bank (,900 million)(1995), the Belgian
government ($1 billion)(1997), and Union Bank of Switzerland ($690
million)(1998).
From 2000, subsequent US firm bankruptcies on an even larger scales -
e.g., Enron, Anderson Accounting, World Com, Tyco - had more to do with
corruption, but were also symptoms of financial gambling in immature
markets.
Most importantly, the US stock market was the site of an enormous 'New
Economy' bubble until 2000, perhaps culminating in the Dot Com crash
which wiped $8.5 trillion of paper wealth off the books from peak to
trough (in the US alone) - but on the other hand, seemingly reinflating
in 2003-04 thanks to the return of household investors and mutual fund
flows, and possibly rising further in future years if Bush begins social
security privatisation.
There were crashes not only in New York, but also 1/3 declines during
2002 in Finland, Germany, Greece, Ireland, Netherlands,and Sweden, and
other less severe falls in most other stock markets.
David Harvey provides a further idea to interpret how the system
responds to overaccumulation and financial overhang. Inspired by Rosa
Luxemburg's ruminations a century ago over the relations between
capitalism and non- capitalist spheres of life, he describes new systems
of 'accumulation by dispossession', which means, essentially, the
looting of the commons and use of extra-economic power to gain profits.
The systems of dispossession today also more explicitly attack the
sphere of 'reproduction', where exploitation occurs especially through
unequal gender power relations. This reflects the 'reprivatization' of
life, as York University political scientists Isabella Bakker and
Stephen Gill argue in their 2003 book *Power, Production and Social
Reproduction*.
Together, these concepts allow Marxists to explain why 'capitalist
crisis' doesn't automatically generate the sorts of payments-system
breakdowns and mass core-capitalist unemployment problems witnessed
during the main previous conjuncture of overaccumulation, the Great
Depression.
According to a careful analysis by York University's Greg Albo in last
year's *Socialist Register 2004: The New Imperial Challenge*, 'The
economic slowdown and neoliberalism led to a significant
financialization of the economy from the 1970s onwards.' Today, 'The
deflation of the asset bubble adds another tension between the US and
other zones that complicates any path of adjustment in the world market.'
That's all I seem to have room for in this installment: some teaser
quotes, a dash of Marxist theory, and preliminary evidence. In the next
column, I'll unpack the statistics that indicate a new round of profound
economic vulnerability, not to mention very serious 'tension between the
US and other zones'. And there are, as well, some profound political
lessons to learn, if we're not to be taken for a ride on the
roller-coaster this time, as we were during the late 1990s.
(Patrick - [EMAIL PROTECTED] <mailto:[EMAIL PROTECTED]> - teaches
political economy at the University of KwaZulu-Natal and directs the
Centre for Civil Society - http://www.ukzn.ac.za/ccs)
*
****
*
*
*
December 26, 2004
World Financial Volatility
By Patrick Bond
Addis Ababa - When an Indian-based network of dissident economists - the
International Development Economics Associates
(http://www.networkideas.org) - recruited critical African intellectuals
for two dozen seminar sessions last week, the stability of world
capitalism naturally came up for debate. The Council for the Development
of Social Science Research in Africa and the Ethiopian Economics
Association mainly lamented the structural conditions in world markets
which have left African cash-crop exporters ever poorer and more
vulnerable.
Is a different, inward-oriented strategy appropriate? I think so, but
perhaps a prior question is whether the world financial power center, in
Washington, might weaken sufficiently to make a progressive approach
more politically attractive, technically feasible and economically
rewarding.
To answer affirmatively requires adding more meat to the bones of my
last column, 'Crunch time for U.S. capitalism' (ZNet Commentary,
December 4). I argued that the economic slowdown since the 1970s
generated falling corporate profit rates and speculative investment
bubbles. But the 'displacement' not resolution of these problems meant
they actually get worse: through, for example, volatile financial
markets, ineffectual Third World structural adjustment imposed by the
World Bank and IMF, and more desperate, brutal imperialist looting methods.
It is a good time to think outside the neoliberal box, these economists
agreed, since the Washington Consensus universally failed the masses of
Ethiopians and billions of other Third World people. In addition,
financial volatility has been evident not just in the dollar price, but
in other markets across the world, even after the dust settled in East
Asia following the 1997-98 meltdown. While the Clinton Treasury
Department managed to pass the costs of these problems elsewhere, the
chickens have recently been coming home to roost in the U.S. itself.
The main organizer of our gathering, Jayati Ghosh of Nehru University in
New Delhi, is one of the sharpest critics of bourgeois macroeconomics,
combining robust anti-imperialism with a Keynesian concern for
consumption and equity: 'Financial liberalization that successfully
attracts capital flows increases vulnerability and limits the policy
space of the government. Unfortunately, the dominance of finance
globally has meant that such debilitating flows occur even when
individual developing countries or developing countries as a group have
no need for such flows to finance their balance of payments or augment
their savings.'
Concludes Ghosh, 'The real benefit of such flows is derived by the U.S.
government, which, being the home of the reserve currency, can resort to
large scale deficit financing which it opposes in developing countries.'
This isn't merely a government dilemma. Consumer credit is also
expanding the bubble, as U.S. household debt (as a percentage of
disposable income) ratcheted up from below 70% prior to 1985, to above
100% fifteen years later.
To be sure, on the one hand, financial product innovations and advanced
technology permit a somewhat greater debt load without necessarily
endangering consumer finances. On the other hand, during the same
period, U.S. individual savings rates fell from a range of 7-12% of
income to below 3%.
Moreover, household assets are mainly in real estate, in the wake of the
2000-02 stock market crash. But the property market began inflating out
of proportion to underlying values following the 1998 drop in interest
rates (the Fed's response to the Asian crisis), which spurred a dramatic
increase in mortgage refinancings.
As a result of the huge rise in property prices that followed, the
difference between the real cost of owning and of renting soared to
unprecedented levels, according to the left's guru on this issue, Dean
Baker of the Center for Economic and Policy Research in Washington. With
the housing sector contributing roughly a third of U.S. economic growth
since the late 1990s, this bubble is particularly important. Overpriced
property is also a severe threat in cities in nearly every country.
Yet another speculative investment route has opened up in financial
instruments called 'derivatives' (because they are not direct claims on
underlying property - instead, gambles on price movements). Interest
rate futures and options are especially hot trades, soaring by 41% in
dollar activity last year.
Likewise, energy-related derivatives are a popular Wall Street gamble,
resulting in huge price fluctuations in immature markets such as
electricity, gas and oil. Thanks to U.S. dependence on imported oil,
which has increased in price from $12/barrel in 1999 to more than
$50/barrel a few weeks ago, such speculation-driven price swings have
exacerbated Washington's trade deficit, already vast at 5% of GDP.
The point, as Ghosh reminds us, is that U.S. financiers can place these
sorts of bets in new markets because they receive vast loans from East
Asia, money otherwise unavailable to the rest of the world for
investment. This is especially unfair, given that Washington was the
main beneficiary of the region's currency crash in 1997-98. Massive
capital flows entered the U.S. banking system, and imports from East
Asia were acquired at much lower prices by U.S. consumers, in turn
lowering what might otherwise have been credit-fuelled inflation.
Still, more than $2 billion of overseas money is required by the U.S.
each work day to cover imports and international debt repayments. As a
result, foreign ownership of all outstanding Treasury bills has soared
from 20% to 40% over the course of the past decade. Warns Ghosh, 'The
problem now is that the willingness of private investors and governments
to hold more dollar denominated assets is waning. If that continues, a
crisis at the metropolitan centre of global capitalism is a possibility.'
The U.S. dollar's value is in the midst of a deep plunge, from a peak of
$0.87 to the euro in 2001 to below $1.30/euro. But it may need to fall
to as low as $1.56/euro in the short term before equilibrium is reached,
according to some experts, with 10% annual declines thereafter.
Hence, perhaps aside from China, Japan and Taiwan - whose exporters need
to keep liquidity flowing to U.S. buyers of their goods - it is sensible
for most international investors to ditch the dollar. Not surprisingly,
new international debt securities issued in dollars have been
substantially lower than those denominated in euros since 2001.
The world financial system has been operating in favour of the U.S. and
European players, and to the detriment not only of the poorest
countries, but also roughly two dozen 'emerging markets' (in addition to
Japan) which are suffering from severe capital outflows. These larger,
relatively wealthier Third World countries had received more
international investments than they repaid in profit repatriation and
other outflows until 1999. But from 2000-03, a massive $550 billion
flooded away.
Some countries - China, India and Malaysia - maintained stronger
exchange controls and hence did far better during this period. But given
the outflow, most large Third World economies were hit by extreme stock
market and currency crashes, especially Argentina, Brazil, South Africa
and Turkey. (Their subsequent recoveries have to be put into context of
how far they fell from 1998-2003.)
Other risky countries - Nigeria, Bulgaria, Ecuador, Panama, Peru, Russia
and Venezuela - are today paying extremely high rates of interest to
attract foreign funds and also local finance, while the required returns
are stratospheric in Argentina, Uruguay, the Ivory Coast and the
Dominican Republic.
Worse, because of banking deregulation mainly imposed by the World Bank
and IMF, these countries' own domestic financial markets can be easily
upset. The rating agency Moody's lists the world's dozen most fragile
banking systems: Argentina, Uruguay, Bolivia, Venezuela, Indonesia,
Pakistan, China, Japan, Thailand, the Philippines, South Korea and Ukraine.
Naturally, China's impressive economic growth dominates the data and
complicates matters. In spite of attracting - uniquely in the Third
World - $40-50 billion in new foreign investments each year, the Chinese
banking system is in such bad shape that, like Japan since the early
1990s, enormous amounts of worthless loans must be very gingerly written
off.
Indeed, Central Bank deputy governor Li Ruogu resisted Washington's
pressure to upwardly revalue the Chinese currency a few weeks ago,
arguing that 'What we are trying to do is create the conditions for a
market-based exchange rate… China needs to reform its banking sector
first before it can change its exchange rate policy… How long it will
take to get there, I don't know.'
Adding to all these problems is Third World foreign debt, which rose
from $580 billion in 1980 to more than $2.5 trillion today. Most of it
remains simply unrepayable. Moreover, who can disagree with the activist
network Jubilee South that in many different ways, including the North's
ecological debt to the South, it has already been repaid. In 2002 alone,
the Third World lost a net outflow of $340 billion to service foreign
debt, compared to measly overseas development aid of $37 billion.
Instead of repaying the foreign debt - which in so many cases was
borrowed by odious, undemocratic regimes from corrupt commercial bankers
without any input by (and benefit for) the citizenry - is there a
default option? Here in Addis at a meeting of African presidents a few
months ago, even the orthodox Columbia University economist Jeffrey
Sachs recommended debt repudiation, and redirection of resources to
health and education. The response was a frightened silence.
Tellingly, in three prior epochs of financial globalization - the 1830,
1880s and 1930s - similar conditions of international volatility and
Third World overindebtedness led to defaults by at least a third of all
countries.
The situation today is different mainly because of centralised creditor
power. By rescheduling the debt and writing off a tiny trickle of it,
the World Bank and IMF now make sovereign defaults against individual
lenders or investors more difficult, unlike in the earlier epochs when
the creditors were not so well cartelized, and less able to call on
imperial military power to collect the collateral.
This is the story, in short, of amplified uneven development, reflected
most starkly in these divergent patterns of financial volatility. It is
also crucial to bear in mind the imperialist agenda, which today mainly
links petro-military interests in the White House to those of Wall
Street and its fraternal financial centers, via the Treasury, Fed and
U.S. Trade Representative, with codification by the main multilateral
agencies.
But the situation is not entirely dire. With capitalist vulnerability
comes the potential for countervailing progressive strength, as the
Argentine comrades have shown through sustained pressure against
structural adjustment.
There is also renewed campaigning to urgently limit the power of - and
indeed defund and decommission - the World Bank and IMF. The World Bank
Bonds Boycott continues to be a pain in the neck to outgoing president
James Wolfensohn. If, as rumoured, he is soon replaced by the thoroughly
nasty U.S. Trade Representative, Robert Zoellick, the Bank's legitimacy
will deteriorate yet further.
Indeed, without Wolfensohn's disingenuous charm, ventures like the
Bank/NGO 'Joint Facilitation Committee' - a gimmick heartily condemned
during a debate between activists and the Civicus NGO leadership in
Lusaka at the Africa Social Forum last week - will be harder for even
opportunistic civil society groups to endorse (as discussed by Michael
Dorsey and myself in this space on September 11).
The Bank is trying now to bounce back from attacks by principled
eco-social movements and NGO allies. Its International Finance
Corporation private investment subsidiary was systematically boycotted
in a series of scheduled October-November consultative meetings in Rio,
Washington, Berlin, Manila, Tokyo, Nairobi, Paris and London because
'the whole process is a sham,' as a Friends of the Earth staffer put it.
Yet more encouragingly, last week the Bank was also defeated by an
Indonesian labor-consumer initiative to prevent electricity
privatization. In spite of arm-twisting and an added loan offer by the
Bank's Jakarta representative, the country's supreme court was convinced
by international evidence that the dangers outweighed alleged benefits,
and it struck down Bank-promoted privatization legislation.
These are very good signs, but moving from defensive to offensive
measures will be crucial in coming years. Meantime, you readers will be
encouraged about the feisty tone of the Africa Social Forum, in
preparation for next month's Porto Alegre gathering. More on that, next
time.