[OPE] estimating the severity and duration of a capitalist economic crisis

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Thu Mar 20 2008 - 15:55:37 EDT

What I am looking at now is signs of market confidence or the lack of it, if you want to know (at the moment it is trending down, in the Triad).  The subprimes problem touched off a panic, because it uncovered a whole seamy world of dubious lending practices, which, as The Economist emphasizes, is essentially based on trust - trust that the value of your assets will continue to grow. 

Effectively the world (or at least the Triad) placed its faith in intelligent gamblers, to claim tomorrow's wealth today. You win some and you lose some, but if you mainly win, then the wins cancel out the losses and you're ahead. But if you lose more than you win, everybody loses faith in your ability, and they start looking for more conservative advisors who, although they didn't offer the same high returns, nevertheless have a track record of steady gains. 

Nobody really knows what the effect of the total outfall will be, all they have is the statistical apparatus of all the wellknown economic indicators, plus the historical experience of this kind of crisis. Every crisis has common elements and unique elements. Anyway, it leads to the strange situation where we could be in a recession already, but we cannot prove it yet, because the indicators takes months to process.  The OECD emphasizes very correctly that "the real economy is NOT sheltered from financial turmoil" yet also "the effects on demand are likely to be significant but are hard to gauge". 

As far as pundrity goes, I think a recession in the technical sense of the word will probably occur, but it will not be a really deep one. It will become a deep one, only if there is a massive revolt against the financial system by investors who object to a whole "style of financial behaviour". But that is a bit unlikely, insofar as they depend on the money men, they can't do without them. In general, as far as that goes, in the financial world, they might tell you "there is no money" but if push comes to shove, all of a sudden there is a lot of money, and they act so fast that things you didn't believe possible are suddenly possible. In the end, it's just a question of power, of political clout, and the principle operates "if we don't act together, we'll hang together". 

I started to work on an article on it but I am ill, and I don't think it is very good yet so I haven't posted it. But I can give you the "guts" of it in simple terms, without all the implications.  What do workers need to know? Well, as far as I am concerned, they can find out a lot themselves by surfing, the news and thinking for themselves. All I would emphasize myself (not being a qualified economist) at this stage would be two issues: 1) what is the root problem in all this? and 2) what are the conditions for a real economic crisis?

As regards 1), the root problem is really that modern-day capitalists get rich from debt. That sounds a bit whacky, how can you get rich from being in debt, how does that work? The way Ernest Mandel simply explained it to me once in the 1980s is like this: "if you borrow money at a rate of interest of (say) 5 per cent while the rate of inflation is 10 per cent and the industrial rate of profit on investment is 20 per cent, then paradoxically the more money you owe, the richer you become, because the more income you will get. You get rich, from taking on more debt, and that is in fact the main reason behind the enormous expansion of the credit system. But if price inflation increases, the rate of interest doubles, and industrial rate of profit is halved, then you become poor." It sounds a bit banale, but that is it. If you can use one million dollars to borrow (say) 100 million dollars at low interest, which you invest in an asset which increases in value just a few percent, then you have already doubled your own money. There is simply nothing that can beat that kind of accumulation, in terms of returns. This may be a simplistic example, but as The Economist notes, Goldman Sachs for example nowadays has about $40 billion of equity as the foundation for $1.1 trillion of assets, i.e. they use 27.5 x the amount of capital they own. Merrill Lynch for another example has about $30 billion of equity, enabling the use of $1 trillion of assets, 33.3 x what they own. If in addition you can insure your investment in various ways, then you have practically risk-free investment with high returns, which is exactly how investors like to have it.

As regards 2), this is merely the corrollary of 1). A serious economic crisis means that three main factors would combine: a falling average industrial rate of profit; rising price inflation; and, ultimately therefore, the inexorable pressure to raise interest rates, to control price inflation and thus retain price stability. The Fed plays poker and lowers interest rates, making available some extra cheap money which they hope will generate market confidence and buoyancy, tiding things over, and they look very carefully at the quantitative relationships between a whole range of variables. But if there is a strong rise in price inflation and a serious fall in the average rate of industrial profits, they are ****** (I am not supposed to used rude language). To maintain price stability, then at some point, they are forced to raise interest rates. If that happens, productive investment declines and unemployment increases, you go into a downward spiral. So all they really try to do, is try to forestall that possibility with a whole bag of tricks - maybe they cannot prevent the trend altogether, but they can mitigate it, dampen it sufficiently to offset a really serious problem. But a lot depends on market confidence here, and in fact they more or less say, that if you don't have any confidence in us anymore, we'll all go down the tubes. 

I can expand the analysis a lot further, but that is the essence of it. The FT did this article where they claimed that socialists think that a recession would be a good thing, but I as a worker get no benefit from a recession, and I don't think it is a good thing or "healthy" or something like that. In my life I have to have a very clear concept of health, and not deviate from that, every error I make is to my peril. I can take some risks, but if I start to gamble with my health, what are ya? The Dutch Socialist Party does not argue in favour of a recession, what do they think we are? We distinguish very carefully between sessions and recessions, and we don't think at all that they are the same thing. Our job is to explain why getting rich from debt means shortterm gain for longtem pain, and that solid, sensible financial policies are required. Call us Dutch if you like, but we don't like financial nonsense. You can in the first instance admire, of course, the skill and courage of financial experts who are willing to take great risks for their clients, but when it turns out that the losses by far exceed the gains, you are forced to question the very meaning of what they do, especially if they bail themselves ut and leave others hanging with the losses. 

The Economist has an interesting quote in this respect:

Goldman Sachs's latest calculations, which suppose that American house prices will eventually fall by 25% from their peak, suggest that total losses will reach just over $1.1 trillion representing about 8% of GDP . This includes losses held by foreigners, and "non-leveraged institutions" such as insurers. Goldman expects eventual after-tax losses for American financial firms to be around $300 billion, just over 2% of GDP, or about 20% of their equity capital. http://www.economist.com/opinion/displaystory.cfm?story_id=10880718

So you have losses of $1.1 trillion while the "after tax" losses to "American financial firms" are $300 billion. Question is, who forks out for the other $800 billion then? Do they really know what $800 billion is? Assume the modal worker earns $40,000. Then you are talking about a sum equivalent to the annual salary of 20 million workers, if I am not much mistaken. That's 20 million lives. Now, workers may not have the supreme calculating intelligence of financial experts, but there's more of us than there's of you. We create the outputs which you use for your gambling game, like it or not. In the end, we will take all, so that people can live a life sufficiently predictable that they and their children have no worries about the future, and can embrace the future with confidence, knowing that whatever mistakes are made, there WILL be an answer. Why? Because capitalism ultimately has no real answers to the real problems of human existence we're concerned with. "It just depends on what you mean", you say. Yeah, right. Our meanings are established through long years of hard, painstaking labour. Your meanings change from day to day, whatever makes money. All that just means, that "a session is not the same as a recession".


I was afraid
I was petrified
Kept thinking I could never live
without you by my side
But I spent so many nights
thinking how you did me wrong
I grew strong
I learned how to carry on
and so you're back
from outer space
I just walked in to find you here
with that sad look upon your face
I should have changed my stupid lock
I should have made you leave your key
If I had known for just one second
you'd be back to bother me

Go on now go walk out the door
just turn around now
'cause you're not welcome anymore
weren't you the one who tried to hurt me with goodbye
you think I'd crumble
you think I'd lay down and die
Oh no, not I
I will survive
as long as i know how to love
I know I will stay alive
I've got all my life to live
I've got all my love to give
and I'll survive
I will survive

It took all the strength I had
not to fall apart
kept trying hard to mend
the pieces of my broken heart
and I spent oh so many nights
just feeling sorry for myself
I used to cry
Now I hold my head up high
and you see me
somebody new
I'm not that chained up little person
still in love with you
and so you felt like dropping in
and just expect me to be free
now I'm saving all my loving
for someone who's loving me

- Gloria Gaynor, " will survive""


ope mailing list

This archive was generated by hypermail 2.1.5 : Mon Mar 31 2008 - 00:00:15 EDT