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

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Fri Mar 21 2008 - 07:10:54 EDT


Quick comment. What I mean by "this kind of crisis" is essentially that an enormous amount of capital value rapidly vanishes (the devaluation of capital). I am not sure yet that it makes sense to talk about "stagflation" in the US at this stage. Question now is how far they can really go in the US with lowering interest rates and how far the dollar can be allowed to fall, how much the euro can rise, but that is difficult for me as an layman to judge. The bankers have a quantitative argument about it, cast within a certain time-frame - in banking, everything depends on what and how much you can do within a given time, and advice is only as good as the timeframe to which it refers. I don't know sufficiently about the Japanese economy, but monetary policy doesn't solve any problem as regards economic fundamentals.

What came to my mind in recent weeks is "Black Monday" (October 19, 1987). At that time I lived in New Zealand, where the stock crash was the worst in the whole world, i.e. the index dropped by 60% or so. Worldwide, something like a trillion dollars worth of financial claims was wiped out in a matter of days. The interesting thing, however, as I remember, was that globally final consumption demand did not decline very significantly as a result, though the banks took years to recover. 

Black Monday took everyone by surprise. Today things are different - everybody has known for years that the enormous, uncontrolled expansion of credit money ultimately cannot continue, and therefore that there must be a crash at some point. It is just that it was very difficult to gauge when that might happen, i.e. at what point the extension of credit will exceed the capacity to repay, and what the magnitude of the problems would be, where the problem would first appear. Ultimately, what drives the whole thing is fiduciary, i.e. "faith in the market". That interpretation is not a prejudice of mine, you can read for yourself what people like Greenspan said, and they say that almost literally. Now, a certain loss of faith is occurring, although the evangelicals are booming. One religion gives way to another. What we have now is a slow hemorraghing into recession where a somber outlook prevails even before a strong decline in output and employment has actually occurred, and, indeed, the somber outlook (or panics as the case might be) contribute to the future result. What is different this time around, is the enormous growth of "fictitious capital" that has occurred thru 20 years, and the fact that the world economy is financially vastly more integrated than it was before, i.e. very large financial claims are traded worldwide, meaning that the devaluation of capital in one place quickly has repercussions elsewhere on the planet.

But from my point of view, what is really most important is that, this time around, it is impossible to blame economic crisis on the workers and peasants, on excessive wage demands etc. Not only because real wages have stagnated in most places or even declined, or because, as a matter of fact, wage rises of a few percent would not make a lot of difference to the aggregate level of economic activity; the causes of economic crisis very clearly do NOT originate with the direct producers. The Washington Post comments for example in this regard that: 

"Inflation is not occurring because labor markets are tight or because the U.S. economy has been overstimulated; if that were the case, wages would be driving inflation up, leaving ordinary households in decent shape and doing more damage to those who lent money at fixed interest rates. Instead, this inflation is driven by global commodity markets. http://www.washingtonpost.com/wp-dyn/content/article/2008/03/20/AR2008032003517.html?hpid=topnews&sid=ST2008032003800cont
If the dollar's value declines, in other words, all import prices rise. Well, as you will see happening in future, when final demand drops, firms will try to respond by raising prices; in large part, rising commodity prices are a direct result of financial intermediation and the direct producers of those commodities internationally often do not obtain much extra net income from the price rises. The economic commentariat, still used to the paradigms of neo-Keynesianism and monetarism, is left grappling with the problem of how, then, modern rentier capitalism really works. What is the relationship between the real economy and the financial economy?  For example, John Kay writes (FT, March 18 2008):

"Today we have capitalism without capital. Most large companies do not make things, they provide services. Few businesses own the premises in which they operate. Returns to shareholders are no longer payments for the use of their plant but rewards for risk and shares in economic rents. The capital that investors put into the stock market does not now finance productive investment but buys a share of established earnings streams." http://www.ft.com/cms/s/0/899ed662-f502-11dc-a21b-000077b07658.html?nclick_check=1

That's actually not a bad description of aspects of modern rentier capitalism, but obviously it isn't true that you can have capitalism without capital - it is just that the dominant pattern of accumulation has changed, more and more separating (1) those who directly produce something, from (2) those who control/manage that production, (3) those who claim capital income on the basis of that production, and (4) those who finally own the business. Hence the notion of "stakeholders" replacing the notion of "owners". The fact that you own an asset, just provides nil control over its value, hence the burgeoning demand for insurance against falls in asset values.. And many of the "services" produced are in reality goods or commodities, indeed services industries increasingly refer to their outputs as "products".  Interestingly, in the United States, out of a 2005 net stock of privately owned fixed assets estimated at $29.3 trillion (US Census), the real estate, rental & leasing industry held $16.8 trillion or about 57.3% - if we added the $1 trillion of fixed assets for the banking & insurance industry, the percentage is about 60%. 

The concentration of ownership is enormous. Multinationals in the US however employ only about 8 million people; half of the US workforce "is employed" in "establishments" of less than 100 people, but they're being bought up more and more. Unfortunately, it is difficult to construct meaningful and comprehensive statistics on "who owns whom" since companies own other companies which in turn own a "stake" in other companies - a cluster of relatively small establishments may be owned by a holding company which is in turn owned or partly owned by another company, and the companies themselves have all kinds of structures ranging from shelf or letterbox companies to trusts, corporate entities and the like. This creates a seemingly inpenetrable "maze" of property rights and mutual financial obligations - it is not just that "financial products" are not "transparent", but that it is not obvious how the costs and benefits of economic activity as a whole will be distributed, and consequently, how the causal chains will run, if a chunk of capital is suddenly devalued or disappears. It erodes a sense of economic responsibility and people just hope for the best.

In reality, the existence and growth of a stock of physical assets and employed labour forms the basis for a stock of financial assets, which are claims to a share of the present and future income generated by physical assets and labour. That means on the one side a larger and larger proportion of the total stock of capital consists of financial assets rather than physical assets which remain the final collateral, and other other side that a larger and larger proportion of the income from capital investments consists of interest, rents and capital gains (gains which may be disguised, because you do not even own the asset involved and merely use it as a financial instrument, or because they are not realised in the same accounting period). "Physical" production does increase, it has to, but it increases far less than it would, if more capital resources were directly invested in production, and in fact this brakes employment growth. The employment growth which does occur, more and more reflects the needs of those who receive the bulk of the additional income, and can spend it on additional goods and services.

On the other side, the current situation reveals an internal conflict within the wealthy classes. Simply put, one group of capitalists gets fleeced by another group of capitalists. This creates political disunity as well, making it even more difficult to mobilize everyone around a recovery strategy, and it combines with a low level of political participation overall. In total, it's a very complex array of constantly shifting alliances and interdependencies that is often difficult to oversee. So, necessarily, public political debate is often more about style and personalities than about substance. Fierce fights occur behind the scenes, but often you cannot even discuss that in public, because of the effects ("destabilizing influences") it might have. 

The total picture emerging is one which is really more favourable to the Left than it has been for twenty years, but the drawback is that the new generation has no experience of any viable socialist movement, and that the old Left for the most part does not respond usefully to the experience of the new generation (with some exceptions). They have this ideological baggage which they hope will "sell" in the new situation, but that is not really how it works. You can organize only on the basis of clear, credible ideas that provide real orientation, but because the theoretical development is often so bad, it is likely that the new radicalism becomes much more pragmatic, and develops directly in response to critical events and personal experience, rather than taking its inspiration from great ideas, in the first instance. 

Question for workers is, whether you follow the economy, or whether you let the economy follow you :-)


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