Your wage or salary is the sum of money necessary to reproduce your ability to work.
Your pension is nothing else than wages or salaries deferred until you retire. Concerns over the effect of increasing life expectancy – sometimes described as a "burden" – are only smoke screens. We need to be clear – lowering pension levels and raising the retirement age are in effect real pay cuts.
Pensions are a transfer payment from the profits of the capitalist class – which ultimately come from what workers as a whole produce. That there is at present a "problem" once more proves that the market economy is incapable of going beyond the limits of the wages system. It cannot adequately provide for the needs of the class that produces and distributes all the wealth in the first place.
Advances gained from the increased productivity of our labour – including an increased life span – are being clawed back by capital to its advantage, pushing the burden from the capitalists onto the workers.
The capitalist class encourages us to see their interests and problems as ours. As a result we find our lives opened up to the chaos and uncontrollable insanity of the market. The market system cannot provide any security for us in the long run, which is why we need to turn the current struggle over wages, salaries, and pensions into a politically organised movement for a society based upon the direct satisfaction of human needs.
It is encouraging to see the fight back. The gains made by wage and salary workers on pay, pensions and other related issues have not, after all, been granted by benevolent governments or employers – they had to be fought for. If those gains are to be defended, democratic and unified action by workers is necessary. If governments and employers win on pensions and wages they will try it again with something else.
Nevertheless, important as activity of this sort is today it still does not get to the crux of the question.
The Socialist Party urges all workers to consider their position. Workers have to strike because they are slaves to the capitalist class who buy our lives by the week or by the month. So, besides making the greatest possible use of trade unions, we ask for recognition that even at their best such action cannot bring permanent security or end
poverty. No strike can stop a government determined to have its way. In the end the logic of capitalism will always win out.
While trade union activity, including strike action, is necessary as long as capitalism lasts it can't work miracles. There can be no lasting solution to the problems the market economy creates within the market system itself. Austerity and insecurity, in a world of potential plenty, is always the lot of the working class. In addition to trade
union action socialist political action is needed on the basis of a clear understanding and awareness of our class interests.
Unions cannot make revolutions – only the working class themselves can do that, through clear, democratic, determined political action.
Our interests are opposed at every point to those of the capitalist class. Our cause can only be the cause of revolution for the abolishing of classes based on a real understanding of our position as workers. Without that understanding, militancy can mean little.
The Socialist Party does not ask for blind support. We do not put ourselves forward as potential leaders. What we seek is understanding. Over the past century we have seen movements rise and fall, we have heard slogans fade into distant echoes, we have encountered scores of "solutions" loudly acclaimed only to be discarded.
The single, simple fact we urge working people to recognise is that capitalism generates problems it is incapable of solving. Workers are so busy taking care of the business of capitalists, we don't have the time and the resources to take care of ourselves. The remedy – the only remedy – is to consciously end the property system that divides and oppresses us.
Wednesday, November 30, 2011
Sunday, November 27, 2011
S-C-A-ISM minus O-I-L
No one is disputing that in any consideration of existing social problems, the question of energy supply is of prime importance.
But the vital question is about the reasons why the existing world capitalist system cannot take up the technical possibilities which now exist for the setting up of a safe and adequate world energy system. This question also takes us out of the sphere of applied science and technology and inevitably into the sphere of world economics and politics. From a practical point of view, society has available a wide range of technical options and there are large reserves of skill, labour and materials, yet at the same time we suffer from a chronic inability to take these up in a free and consciously regulated manner. In the field of energy supply, as in every other field, such resources, skills and production methods which are taken up will be determined by the economic imperatives of the market system or consistent with the existing national economic or military strategies. Socialism would not be bound by the economics of market competition to use methods which embodied the least amounts of labour in their production. Global energy policy is not being driven by concerns about the environment. It’s about ownership and control of key resources, who has them, and who’s got the weaponry to seize them.
There is no single alternative to oil, so a suite of alternatives will have to be employed. The main problem with renewables is that the oil-addicted capitalist economy has starved them of funds, because set-up costs are prohibitive and returns long-term. This is true of geothermal heating systems, wind and tidal systems, ocean thermal electricity, biowaste to oil reconversion plants, solar technology. Capitalism is not, of course,really interested in saving energy. Energy companies could offer customer discounts to those who were frugal, but in fact that's not the way to make money. Thermal Conversion Process can take any type of carbon waste including animal remains, car tyres, old computers and human sewage and within half an hour turn it into useful fertilizer minerals, carbon charcoal and oil. What’s the catch? Lack of profit. Paul Horsnell, Head of Energy Research at investment bank Barclays Capital: “To transport and process all the waste, pay the energy costs, provide for the capital costs and still make a profit does look difficult at first sight. By comparison, fossil fuel oil is actually pretty cheap.”
Under capitalism renewable sources will only be adopted on a wide scale when the price becomes right.
We live in a social system predicated on endless expansion and it is the blind, unplanned drive to accumulate is the hallmark of capitalist production – the profit motive – that has created the environmental problem, not individuals. There can be no such thing as sustainable or environmentally friendly capitalism. It is completely impossible under capitalism for humanity to use the earth's resources for the benefit of all people, and it is equally impossible for it to deploy the accumulated knowledge, the skills and the techniques of production which now exist in a direct relationship with human needs on a basis of world-wide co-operation.
If capitalism uses up the obtainable oil in its customary spendthrift way, then socialism is going to have to employ solutions, both in means of supply and modes of consumption.
What is, for a socialist, strange is nobody ever suggests that we just take drop in energy consumption and live with it. How can we continue to live the life of the motorway-commuter without petrol? Oh no, we can't possibly give that up, we'll have to use hydrogen or electric cars. How do we continue to have all our cities' department stores lit up every night so people can window-shop at 4 am? Dread the thought that consumers should have their nocturnal browsing habits constrained.
Humanity may have no choice but to adapt to a low energy way of life. Yet studies abound that demonstrate that traditional intensive farming methods can out-perform industrial agricultural methods. People may desire this change but the economic framework of capitalism won’t allow it.
Fusion power is the Holy Grail but that infinite energy would be uncomfortable to capitalist markets. It could never be allowed to get out. If fusion ever came about , we can be sure about one thing - our electricity bills won't go down. New technology tends to deliver wealth upwards, to the rich who own and control it, not downwards to the rest of us.
But the vital question is about the reasons why the existing world capitalist system cannot take up the technical possibilities which now exist for the setting up of a safe and adequate world energy system. This question also takes us out of the sphere of applied science and technology and inevitably into the sphere of world economics and politics. From a practical point of view, society has available a wide range of technical options and there are large reserves of skill, labour and materials, yet at the same time we suffer from a chronic inability to take these up in a free and consciously regulated manner. In the field of energy supply, as in every other field, such resources, skills and production methods which are taken up will be determined by the economic imperatives of the market system or consistent with the existing national economic or military strategies. Socialism would not be bound by the economics of market competition to use methods which embodied the least amounts of labour in their production. Global energy policy is not being driven by concerns about the environment. It’s about ownership and control of key resources, who has them, and who’s got the weaponry to seize them.
There is no single alternative to oil, so a suite of alternatives will have to be employed. The main problem with renewables is that the oil-addicted capitalist economy has starved them of funds, because set-up costs are prohibitive and returns long-term. This is true of geothermal heating systems, wind and tidal systems, ocean thermal electricity, biowaste to oil reconversion plants, solar technology. Capitalism is not, of course,really interested in saving energy. Energy companies could offer customer discounts to those who were frugal, but in fact that's not the way to make money. Thermal Conversion Process can take any type of carbon waste including animal remains, car tyres, old computers and human sewage and within half an hour turn it into useful fertilizer minerals, carbon charcoal and oil. What’s the catch? Lack of profit. Paul Horsnell, Head of Energy Research at investment bank Barclays Capital: “To transport and process all the waste, pay the energy costs, provide for the capital costs and still make a profit does look difficult at first sight. By comparison, fossil fuel oil is actually pretty cheap.”
Under capitalism renewable sources will only be adopted on a wide scale when the price becomes right.
We live in a social system predicated on endless expansion and it is the blind, unplanned drive to accumulate is the hallmark of capitalist production – the profit motive – that has created the environmental problem, not individuals. There can be no such thing as sustainable or environmentally friendly capitalism. It is completely impossible under capitalism for humanity to use the earth's resources for the benefit of all people, and it is equally impossible for it to deploy the accumulated knowledge, the skills and the techniques of production which now exist in a direct relationship with human needs on a basis of world-wide co-operation.
If capitalism uses up the obtainable oil in its customary spendthrift way, then socialism is going to have to employ solutions, both in means of supply and modes of consumption.
What is, for a socialist, strange is nobody ever suggests that we just take drop in energy consumption and live with it. How can we continue to live the life of the motorway-commuter without petrol? Oh no, we can't possibly give that up, we'll have to use hydrogen or electric cars. How do we continue to have all our cities' department stores lit up every night so people can window-shop at 4 am? Dread the thought that consumers should have their nocturnal browsing habits constrained.
Humanity may have no choice but to adapt to a low energy way of life. Yet studies abound that demonstrate that traditional intensive farming methods can out-perform industrial agricultural methods. People may desire this change but the economic framework of capitalism won’t allow it.
Fusion power is the Holy Grail but that infinite energy would be uncomfortable to capitalist markets. It could never be allowed to get out. If fusion ever came about , we can be sure about one thing - our electricity bills won't go down. New technology tends to deliver wealth upwards, to the rich who own and control it, not downwards to the rest of us.
Friday, November 25, 2011
divide and rule
Religion is not simply a jumble of confused ideas. It is a powerful weapon in the hands of the capitalist class. It divides us and blinds us to the class action that is required to overcome the menace of capitalism. Religion is the ideological expression of a long-gone world and its ancient social conditions, a world of superstition, slavery and little education. Far from providing an answer to today’s problems, it tells us to put our faith in the supernatural hopes of a past age. Instead of uniting us as a class we are to become meek and mild, and to submit to the whims of an ancient god. From the dawn of civilisation religion has been a weapon of political domination. The working class though not as yet hostile to religion, are nevertheless becoming increasingly indifferent to it. Religion is dying but not yet dead. None of us is born Christian or Muslim or anything else. We’re born with no knowledge or beliefs in any god. In fact we’re all born into a state of atheism. Wherever the accident of birth sees each child born, each individual is born totally dependent and without language or religion. A child develops speaking the language of its home. A child raised in a religion-free zone will not acquire religious knowledge. For this to occur it would need to be exposed habitually to ideas, concepts and beliefs by those around it. How many people make a conscious choice of religion and how many simply continue with what they were born into as part of their traditional culture, religious or not?
Belief in religion – any religion – hampers the ability to think objectively, particularly about social and political issues. The disappearance of all religious beliefs should be seen as an essential part of our struggle for socialism and not just as a fringe irrelevance. It isn’t simply a question of religion being false, or brutal or divisive; it is a weapon of the ruling class, a bulwark in the way of the emancipation of the working class, a hurdle to be overcome in the progress to socialism nor could it be overcome while the conditions that nourished it continued to exist. Thus, the socialist sees religion as an integral part of the class struggle.
Despite occasional public pronouncements that the West had no quarrel with mainstream Islam, there is no doubt whatever that, with help from the media and repeated insinuations from various officials, the widespread impression has been created that opposition to, hatred of and terrorism against the West is essentially “a Muslim thing” and that the Islamic faith itself carries the seeds of violence and terrorism. Thus we see that a difference in religion has offered the opportunity for capitalism to denigrate as scapegoats the Islamic world: and to drive a wedge of suspicion and distrust between western workers and their eastern counterparts – a good present-day example of the old imperial dodge of “divide and rule”.
Belief in religion – any religion – hampers the ability to think objectively, particularly about social and political issues. The disappearance of all religious beliefs should be seen as an essential part of our struggle for socialism and not just as a fringe irrelevance. It isn’t simply a question of religion being false, or brutal or divisive; it is a weapon of the ruling class, a bulwark in the way of the emancipation of the working class, a hurdle to be overcome in the progress to socialism nor could it be overcome while the conditions that nourished it continued to exist. Thus, the socialist sees religion as an integral part of the class struggle.
Despite occasional public pronouncements that the West had no quarrel with mainstream Islam, there is no doubt whatever that, with help from the media and repeated insinuations from various officials, the widespread impression has been created that opposition to, hatred of and terrorism against the West is essentially “a Muslim thing” and that the Islamic faith itself carries the seeds of violence and terrorism. Thus we see that a difference in religion has offered the opportunity for capitalism to denigrate as scapegoats the Islamic world: and to drive a wedge of suspicion and distrust between western workers and their eastern counterparts – a good present-day example of the old imperial dodge of “divide and rule”.
Saturday, November 12, 2011
Banking yet again
Surely, the current banking crisis has exploded the myth about banks being able to create credit, i.e. money to lend out at interest, by a mere stroke of the pen but apparently not. Financial crises always spark interest in critics of the system. They see the problems of capitalism—like its vulnerability to crises—as primarily financial in origin. The whole point of production under capitalism is not the satisfaction of needs, but the accumulation of money. In other words, it’s impossible to separate the economic world into a good productive side and a bad financial side; the two are inseparable. The monetary surpluses generated in production—the profits of capitalist businesses—accumulate over time and demand some sort of outlet: bank deposits, bonds, stocks, whatever. It’s going to be that way until we replace capitalism with something radically different. What we need to ask is why people today tend to blame banks rather than capitalism as a whole.
No bank can lend more than it has, either as deposits or what it has itself borrowed. The idea that money is created through fractional reserve banking is more of a metaphor. Let's take a simple case.
I start a bank with a 10% fractional reserve. Alice deposits $1000 with my bank. I can then lend $900 to Bob, who wants to start a small business and pays the $900 to Charlie for equipment. Charlie deposits this money in my bank. I can now lend $810 to Debbie ...
Let's stop it there and see who has what. Alice "has" $1000 (which she doesn't), which is "in" my bank (though most of it isn't). Charlie has $900, which is also "in" my bank. And Debbie is holding $810 of actual money. (You might ask: what about the $190 reserve in my bank? But we've already counted that once, it belongs to Alice and Charlie.) So it looks almost as though I've turned Alice's original $1000 into $2710 just by moving it about and signing things. In that sense, whoopee, I've "created" money.
But note that there's still the same amount of actual cash. Debbie has $810 of it and I have $190 of it.
Furthermore, let's look at my balance sheet. I am holding $190. Bob owes me $900. Debbie owes me $810. I have assets of $1900.
But on the other hand, I owe Alice $1000 and I owe Charlie $900. I have liabilities of $1900.
Unless I charge interest, which I will, I'm not up on the deal. (Some argue that the only way that interest can be paid is by issuing more new loans. Presumably businesses borrow from banks to invest and expand. Higher profits from those expanded activities should more than cover the interest.)
Let's do one more sum. Alice has assets of $1000. Charlie has assets of $900. Debbie has assets of $810. I have assets of $1900. Total assets in the system: $4610. Whereas on the other side of the balance sheet, I have liabilities of $1900, Bob has liabilities of $900, and Debbie has liabilities of $810. Total liabilities in the system: $3610. Total assets minus total liabilities = $1000, which is what Alice started off with. So I'm only "creating" money by creating debt at the same time. Debt being, as it were, negative money.
Now, if this all still sounds suspicious to you, do the same math where Alice has $1000, she lends $900 directly to Bob who pays Charlie, Charlie lends $810 directly to Debbie, and everyone keeps their money under their mattresses.
The "creation" of money works out the same. Alice has $100 under her mattress and an IOU worth $900. Charlie has $90 under his mattress and an IOU worth $810. And Debbie has $810 in cash. Which makes $2710 --- again. It's the existence of lending and borrowing that "creates" the money: my bank has no special power to do so. What my bank did was to arrange the loans and act as a rather more secure substitute for the mattress. There's nothing particularly unreasonable (or profitable) about a bank doing this rather than people doing it for themselves.
Let's continue my story about Alice and Bob and the rest of the gang.
Suppose Alice, Charlie, and Debbie all decide to use their money to buy derivatives from Edward. Alice and Bob both write him checks, and Debbie pays cash.
And now between them they own $2710 worth of derivatives, even though the system of transactions is based on only $1000 of actual cash. And at this point I, the banker, still have net assets of $0 and hold only $190 in actual cash.
(Moreover, when Edward pays the checks he got from Alice and Bob and the cash he got from Debbie into his account at my bank, then I'll have $1000 in cash and liabilities (to Edward) of $2710, and can start looking around for someone who wants to borrow $729 ... quite possibly to buy some more derivatives.)
The money still isn't coming out of nowhere, it's coming from the obligation of people who borrow money to pay it back. And again, the bank as such is not "creating" the money, it's the fact that people are lending and borrowing that does that. The bank is just the middleman. What is never emphasised is that money is used and re-used and re-used again to create new and more deposits. One of the key features of capitalism is that money circulates. The banking system has not created any money out of nothing. It is still dependent on individual banks only being able to lend out what has been deposited with them or what they themselves have borrowed. The same coins and notes can be used for many different transactions including more than one bank deposit. These will have been generated by the mainly productive activities in which the series of loans can be assumed, in the real world. The banking system has created more “money” only if you regard “bank deposits” as money. If you don’t, all that has been shown is that currency has circulated in that the whole process depends on the initial deposit or injection of cash being recycled as further deposits by depositors (as opposed to by banks creating a credit line). So, neither an individual bank nor the whole banking system can lend more than has been deposited with it. All this assumes an expanding economy, since where is the money to repay the loans and the interest on them to come from without being assured of which the banks would not lend the money in the first place? So the banking system does not create money to lend out of thin air but can only lend out money deposited with it and then only when economic conditions permit it.
In 1931 the MacMillan Committee Report into Finance and Industry was written in large part by John Maynard Keynes and gave credence to the myth but you may be interested to know that a significant minority of the Committee at the time opposed the view promoted by Keynes and several of those who went along with it did not understand or realise the implications of what they had signed up to. Keynes in The General Theory of Employment, Interest and Money (1936) effectively abandoned the view he had promoted on the MacMillan Committee just a few years previously. What the simplistic model used in the Report had assumed was that banks kept a certain 'cash ratio' back for customers to access as a proportion of whatever is deposited with the bank (10 percent was assumed at the time though these days this would be far less). They then assumed that the whole of a new deposit by a customer could be held in cash to underpin the creation of credit nine times its value (i.e. operating with a 10 percent cash reserve an initial $1,000 deposit would enable the creation of $9,000 worth of credit). It also then assumed that this cash was never called upon in practice. In other words, for the model to hold, they correctly assumed that banks kept cash in reserve for customer use, but then assumed that nobody ever withdrew any of it. Samuelson and others reject the approach used by the MacMillan Committee in favour of a multi-bank model. However, this model does not demonstrate anything more than that currency circulates around the banking system and can be used more than once in the process of customers' creating bank deposits - as opposed to banks somehow creating multiples of credit from these deposits.
Everybody accepts that hard cash - currency - is money. The first point to be clear on is the definition of "money". Up to WW2 there was more or less agreement that money was "currency" (notes and coins). Since then "bank loans" have been regarded as money. This is okay as long as the same definition is kept to throughout the analysis. But it should be noted that, even today, conventional economics has felt the need to distinguish between M0 (mostly currency) and M1 (which is M0 + bank loans) (M2, M3 and M4 are M1 plus various other types of loan). people say "banks create money" this is true (by definition) if money is defined as M1. But it wouldn't mean that banks create all money, as M0 is created by governments and/or central banks. Having said this, it is true that only 3% of M1 is currency and 97% bank loans. The case against regarding both bank loans and currency as money is that they come into being and behave differently. Currency circulates. Bank loans don't. In fact, although M0 is only only about 3% of M1 it can be used to make payments, etc (including bank deposits and bank loans) of many times its face value.
Some might be prepared to include cash deposited in banks as well. Others though widen the definition to just deposits by people of the money they already possess but any account for which the holder has a cheque card (transactional accounts hence no or little interest or in fact a users fee imposed), i.e. including credit lines granted to those who banks have lent money to “debt money”. “Money creation” is now about “bank deposit” creation"! Fractional reserve banking leads to the creation of more “money” in the sense of more bank deposits for banks have learned that when cash has been deposited with them they only need to keep a part (a “fraction”) of it as cash as a “reserve” to deal with likely cash withdrawals; the rest they can lend out.
If $10,000 is deposited in the banking system, initially say in one bank, that bank can make loans (create credit line bank deposits) of $9000. When it is spent this $9000 will be re-deposited in other banks which can then lend out 90 percent of this, or $8100; which in turn will be re-deposited in banks, allowing a further $7290 to be lent out, and so on, until in the end and over the period, a total of $90,000 new loans will have been made. This shows how the Fed can practise “fractional reserve banking” to control the amount of “money” (currency plus bank deposits) in the economy. The Fed, through its trading desk at the Federal Reserve Bank of New York, buys $10,000 of Treasury bills from a dealer in US government securities. In today’s world of computerized financial transactions, the Fed pays for the securities with an ‘electronic’ cheque drawn on itself. The Fed has added $10,000 of securities to its assets, which it has paid for, in effect, by creating a liability on itself in the form of bank reserve balances.The bank from which the Treasury bills were purchased now has reserves above the 10 percent limit and so can turn the $10,000 into loans, which starts the process described above rolling, leading to an extra $90,000 bank lending. The one bank that can create money out of thin air and that is the government-owned or controlled central bank. It does so by mere decision, by creating more "fiat" ("let it be") money and introduces it into circulation by using it to buy government bonds off commercial banks ("quantitative easing" is a variety of this)
Banks don’t just borrow from individual depositors, or “retail”. They also borrow “wholesale” from the money market. It is in fact the difficulties they have experienced here with the inter-bank lending that has revealed that they cannot create credit out of nothing. Banks are reluctant to lend on the money market for fear that the borrowing bank might turn out to be insolvent. Which meant that one source of money for the banks to re-lend to their customers had shrunk. So, deprived of this source of money, the banks had less to lend out themselves. Which, of course, wouldn’t have been a problem if they really did have the power to create money to lend out of nothing.
The on-going banking crisis problems arose because they wished to lend out more than had been deposited with them and to do this they had to borrow 'short' on the money markets to finance their long-term loans and mortgages. The game was up - and no-one could just tell them to go away and create some more multiples of credit from their deposits! There is no easy way out of this crisis for banks by attracting some more extra deposits and then creating vast multiples of credit from them to magically cover their losses.
It seems to be rather that because money so dominates people's lives and that they associate money with banks that people's resentment at their money problems is aimed at banks. Of course no banking or monetary reform is going to stop money dominating people's lives.
"I think that people have learned that money is not made in banks. It is made by real people working hard at real jobs. Actually, deep down we knew that all along. We just have to learn it again." Asbjorn Jonsson, an Icelandic fisherman, in a week when Iceland was effectively a bankrupt state. Its banks owed the world an astonishing £35billion - 12 times the size of Iceland’s gross domestic product and £116,000 for every man, woman and child.
No bank can lend more than it has, either as deposits or what it has itself borrowed. The idea that money is created through fractional reserve banking is more of a metaphor. Let's take a simple case.
I start a bank with a 10% fractional reserve. Alice deposits $1000 with my bank. I can then lend $900 to Bob, who wants to start a small business and pays the $900 to Charlie for equipment. Charlie deposits this money in my bank. I can now lend $810 to Debbie ...
Let's stop it there and see who has what. Alice "has" $1000 (which she doesn't), which is "in" my bank (though most of it isn't). Charlie has $900, which is also "in" my bank. And Debbie is holding $810 of actual money. (You might ask: what about the $190 reserve in my bank? But we've already counted that once, it belongs to Alice and Charlie.) So it looks almost as though I've turned Alice's original $1000 into $2710 just by moving it about and signing things. In that sense, whoopee, I've "created" money.
But note that there's still the same amount of actual cash. Debbie has $810 of it and I have $190 of it.
Furthermore, let's look at my balance sheet. I am holding $190. Bob owes me $900. Debbie owes me $810. I have assets of $1900.
But on the other hand, I owe Alice $1000 and I owe Charlie $900. I have liabilities of $1900.
Unless I charge interest, which I will, I'm not up on the deal. (Some argue that the only way that interest can be paid is by issuing more new loans. Presumably businesses borrow from banks to invest and expand. Higher profits from those expanded activities should more than cover the interest.)
Let's do one more sum. Alice has assets of $1000. Charlie has assets of $900. Debbie has assets of $810. I have assets of $1900. Total assets in the system: $4610. Whereas on the other side of the balance sheet, I have liabilities of $1900, Bob has liabilities of $900, and Debbie has liabilities of $810. Total liabilities in the system: $3610. Total assets minus total liabilities = $1000, which is what Alice started off with. So I'm only "creating" money by creating debt at the same time. Debt being, as it were, negative money.
Now, if this all still sounds suspicious to you, do the same math where Alice has $1000, she lends $900 directly to Bob who pays Charlie, Charlie lends $810 directly to Debbie, and everyone keeps their money under their mattresses.
The "creation" of money works out the same. Alice has $100 under her mattress and an IOU worth $900. Charlie has $90 under his mattress and an IOU worth $810. And Debbie has $810 in cash. Which makes $2710 --- again. It's the existence of lending and borrowing that "creates" the money: my bank has no special power to do so. What my bank did was to arrange the loans and act as a rather more secure substitute for the mattress. There's nothing particularly unreasonable (or profitable) about a bank doing this rather than people doing it for themselves.
Let's continue my story about Alice and Bob and the rest of the gang.
Suppose Alice, Charlie, and Debbie all decide to use their money to buy derivatives from Edward. Alice and Bob both write him checks, and Debbie pays cash.
And now between them they own $2710 worth of derivatives, even though the system of transactions is based on only $1000 of actual cash. And at this point I, the banker, still have net assets of $0 and hold only $190 in actual cash.
(Moreover, when Edward pays the checks he got from Alice and Bob and the cash he got from Debbie into his account at my bank, then I'll have $1000 in cash and liabilities (to Edward) of $2710, and can start looking around for someone who wants to borrow $729 ... quite possibly to buy some more derivatives.)
The money still isn't coming out of nowhere, it's coming from the obligation of people who borrow money to pay it back. And again, the bank as such is not "creating" the money, it's the fact that people are lending and borrowing that does that. The bank is just the middleman. What is never emphasised is that money is used and re-used and re-used again to create new and more deposits. One of the key features of capitalism is that money circulates. The banking system has not created any money out of nothing. It is still dependent on individual banks only being able to lend out what has been deposited with them or what they themselves have borrowed. The same coins and notes can be used for many different transactions including more than one bank deposit. These will have been generated by the mainly productive activities in which the series of loans can be assumed, in the real world. The banking system has created more “money” only if you regard “bank deposits” as money. If you don’t, all that has been shown is that currency has circulated in that the whole process depends on the initial deposit or injection of cash being recycled as further deposits by depositors (as opposed to by banks creating a credit line). So, neither an individual bank nor the whole banking system can lend more than has been deposited with it. All this assumes an expanding economy, since where is the money to repay the loans and the interest on them to come from without being assured of which the banks would not lend the money in the first place? So the banking system does not create money to lend out of thin air but can only lend out money deposited with it and then only when economic conditions permit it.
In 1931 the MacMillan Committee Report into Finance and Industry was written in large part by John Maynard Keynes and gave credence to the myth but you may be interested to know that a significant minority of the Committee at the time opposed the view promoted by Keynes and several of those who went along with it did not understand or realise the implications of what they had signed up to. Keynes in The General Theory of Employment, Interest and Money (1936) effectively abandoned the view he had promoted on the MacMillan Committee just a few years previously. What the simplistic model used in the Report had assumed was that banks kept a certain 'cash ratio' back for customers to access as a proportion of whatever is deposited with the bank (10 percent was assumed at the time though these days this would be far less). They then assumed that the whole of a new deposit by a customer could be held in cash to underpin the creation of credit nine times its value (i.e. operating with a 10 percent cash reserve an initial $1,000 deposit would enable the creation of $9,000 worth of credit). It also then assumed that this cash was never called upon in practice. In other words, for the model to hold, they correctly assumed that banks kept cash in reserve for customer use, but then assumed that nobody ever withdrew any of it. Samuelson and others reject the approach used by the MacMillan Committee in favour of a multi-bank model. However, this model does not demonstrate anything more than that currency circulates around the banking system and can be used more than once in the process of customers' creating bank deposits - as opposed to banks somehow creating multiples of credit from these deposits.
Everybody accepts that hard cash - currency - is money. The first point to be clear on is the definition of "money". Up to WW2 there was more or less agreement that money was "currency" (notes and coins). Since then "bank loans" have been regarded as money. This is okay as long as the same definition is kept to throughout the analysis. But it should be noted that, even today, conventional economics has felt the need to distinguish between M0 (mostly currency) and M1 (which is M0 + bank loans) (M2, M3 and M4 are M1 plus various other types of loan). people say "banks create money" this is true (by definition) if money is defined as M1. But it wouldn't mean that banks create all money, as M0 is created by governments and/or central banks. Having said this, it is true that only 3% of M1 is currency and 97% bank loans. The case against regarding both bank loans and currency as money is that they come into being and behave differently. Currency circulates. Bank loans don't. In fact, although M0 is only only about 3% of M1 it can be used to make payments, etc (including bank deposits and bank loans) of many times its face value.
Some might be prepared to include cash deposited in banks as well. Others though widen the definition to just deposits by people of the money they already possess but any account for which the holder has a cheque card (transactional accounts hence no or little interest or in fact a users fee imposed), i.e. including credit lines granted to those who banks have lent money to “debt money”. “Money creation” is now about “bank deposit” creation"! Fractional reserve banking leads to the creation of more “money” in the sense of more bank deposits for banks have learned that when cash has been deposited with them they only need to keep a part (a “fraction”) of it as cash as a “reserve” to deal with likely cash withdrawals; the rest they can lend out.
If $10,000 is deposited in the banking system, initially say in one bank, that bank can make loans (create credit line bank deposits) of $9000. When it is spent this $9000 will be re-deposited in other banks which can then lend out 90 percent of this, or $8100; which in turn will be re-deposited in banks, allowing a further $7290 to be lent out, and so on, until in the end and over the period, a total of $90,000 new loans will have been made. This shows how the Fed can practise “fractional reserve banking” to control the amount of “money” (currency plus bank deposits) in the economy. The Fed, through its trading desk at the Federal Reserve Bank of New York, buys $10,000 of Treasury bills from a dealer in US government securities. In today’s world of computerized financial transactions, the Fed pays for the securities with an ‘electronic’ cheque drawn on itself. The Fed has added $10,000 of securities to its assets, which it has paid for, in effect, by creating a liability on itself in the form of bank reserve balances.The bank from which the Treasury bills were purchased now has reserves above the 10 percent limit and so can turn the $10,000 into loans, which starts the process described above rolling, leading to an extra $90,000 bank lending. The one bank that can create money out of thin air and that is the government-owned or controlled central bank. It does so by mere decision, by creating more "fiat" ("let it be") money and introduces it into circulation by using it to buy government bonds off commercial banks ("quantitative easing" is a variety of this)
Banks don’t just borrow from individual depositors, or “retail”. They also borrow “wholesale” from the money market. It is in fact the difficulties they have experienced here with the inter-bank lending that has revealed that they cannot create credit out of nothing. Banks are reluctant to lend on the money market for fear that the borrowing bank might turn out to be insolvent. Which meant that one source of money for the banks to re-lend to their customers had shrunk. So, deprived of this source of money, the banks had less to lend out themselves. Which, of course, wouldn’t have been a problem if they really did have the power to create money to lend out of nothing.
The on-going banking crisis problems arose because they wished to lend out more than had been deposited with them and to do this they had to borrow 'short' on the money markets to finance their long-term loans and mortgages. The game was up - and no-one could just tell them to go away and create some more multiples of credit from their deposits! There is no easy way out of this crisis for banks by attracting some more extra deposits and then creating vast multiples of credit from them to magically cover their losses.
It seems to be rather that because money so dominates people's lives and that they associate money with banks that people's resentment at their money problems is aimed at banks. Of course no banking or monetary reform is going to stop money dominating people's lives.
"I think that people have learned that money is not made in banks. It is made by real people working hard at real jobs. Actually, deep down we knew that all along. We just have to learn it again." Asbjorn Jonsson, an Icelandic fisherman, in a week when Iceland was effectively a bankrupt state. Its banks owed the world an astonishing £35billion - 12 times the size of Iceland’s gross domestic product and £116,000 for every man, woman and child.
Remembering
Some ten million lives were lost in World War One. Among these countless casualties is a small group of about three hundred and fifty who are not remembered when the dignitaries lay their wreaths because they didn't die a "heroic" death at the hands of the enemy. They were shot by their own comrades because these unfortunate few had to be made examples of what happens to those who refuse to obey suicidal orders. They knew fear and possessed a sense of self-preservation. The army has a special term for people who respond rationally to this entirely natural emotion: they are known as "cowards".
Trench warfare essentially involved periodically massing thousands of men and then sending them like lemmings towards the enemy lines, resulting in catastrophic casualties, often for a gain of just mere yards of ground, if any. Given that such behaviour, except to the seriously mentally unbalanced or the suicidal, naturally appeared to be utter lunacy, the politicians had to provide some incentive to persuade the potentially sceptical recruits to act like madmen. The principal methods of course were propaganda and flattery. Conscripts were told that it was their duty and privilege to rid the world of the despicable Hun and then having preserved democracy and fair play, and saved Good Old England for all its decent, God-fearing citizens, the troops would then be welcomed home as heroes and be forever intoxicated by the eternal gratitude of their countrymen. Not surprisingly, the top brass in the army realised that this would fool the thoughtful few. And if only a few sceptics concluded that they were being duped, they might well persuade many others to lay down their arms and engage in some No-Mans-Land fraternalisation with the foe and play some friendly football. Therefore, an extra "incentive" was required. Either go over the top and face almost probable death, or refuse and face certain death.
It's difficult to imagine what must have gone through the minds of those conscripts as they huddled in their cold, damp, dirty trenches, waiting for the order to ascend into no-man's-land with only a tin hat and a rifle for protection against a phalanx of machine guns and mortars. It was a different world then, not only in the way wars were fought, but also in the way minds were moulded. It would seem likely that anyone who wishes to avoid almost certain death is in an absolutely sound state of mind but the naive and innocent victims of the firing squads of eighty years ago had the misfortune to be born into a very different stage of capitalism's destructive development, when daily casualties could wipe out entire regiments. The soldiers of the Great War were unfortunate to live in an era when courage, however you defined it, equalled death.
There were claims that the executions of soldiers was a class issue. James Crozier was found guilty of deserting his post and was shot. Two weeks earlier, 2nd Lieutenant Annandale was found guilty of the same but was not sentenced to death due to "technicalities". In the duration of the war, fifteen officers, sentenced to death, received a royal pardon. In the summer of 1916, all officers of the rank of captain and above were given an order that all cases of cowardice should be punished by death and that a medical excuse should not be tolerated. However, this was not the case if officers were found to be suffering from neurasthenia.
Private Thomas Highgate was the first to suffer such military justice. Unable to bear the carnage of 7,800 British troops at the Battle of Mons, he had fled and hidden in a barn. He was undefended at his trial because all his comrades from the Royal West Kents had been killed, injured or captured. Just 35 days into the war, Private Highgate was executed at the age of 17.
16-year-old Herbert Burden, who had lied that he was two years older so he could join the Northumberland Fusiliers. Ten months later, he was court-martialled for fleeing after seeing his friends massacred at the battlefield of Bellwarde Ridge. He faced the firing squad still officially too young to be in his regiment.
The French are thought to have killed about 600 (probably an under-estimate). The Germans, whose troops outnumbered the British by two to one, shot 48 of their own men, and the Belgians 13. In 2001, 23 executed Canadians were executed , and five troops killed by New Zealand's military command. No Australian soldier was executed because the Death Penalty in the Armed Forces was abolished with the 1903 Defence Act, following the execution ( by a British Court Martial ) of "Breaker" Morant and Hancock and the public outcry.
Cathryn Corns, co-author of Blindfold and Alone, which examines 306 courts martial "The number of rogues outnumbered those with mitigating circumstances by about six to one," she said.
The death sentence for desertion in the British forces was abolished in 1929.
Today, Britain has a professional volunteer army, and technical improvements in weaponry mean that modern warfare is a much more scientific affair. Remote-controlled unmanned drones have turned much combat into computer game style
slaughter. Now there are no poorly trained conscripts, and no need for battalions of troops to go "over the top", and so there is no need for summary executions to enforce discipline. To some, war is heroic yet one thing that can be said for definite about wars: they are never fought in the interest of those who die in them.
Trench warfare essentially involved periodically massing thousands of men and then sending them like lemmings towards the enemy lines, resulting in catastrophic casualties, often for a gain of just mere yards of ground, if any. Given that such behaviour, except to the seriously mentally unbalanced or the suicidal, naturally appeared to be utter lunacy, the politicians had to provide some incentive to persuade the potentially sceptical recruits to act like madmen. The principal methods of course were propaganda and flattery. Conscripts were told that it was their duty and privilege to rid the world of the despicable Hun and then having preserved democracy and fair play, and saved Good Old England for all its decent, God-fearing citizens, the troops would then be welcomed home as heroes and be forever intoxicated by the eternal gratitude of their countrymen. Not surprisingly, the top brass in the army realised that this would fool the thoughtful few. And if only a few sceptics concluded that they were being duped, they might well persuade many others to lay down their arms and engage in some No-Mans-Land fraternalisation with the foe and play some friendly football. Therefore, an extra "incentive" was required. Either go over the top and face almost probable death, or refuse and face certain death.
It's difficult to imagine what must have gone through the minds of those conscripts as they huddled in their cold, damp, dirty trenches, waiting for the order to ascend into no-man's-land with only a tin hat and a rifle for protection against a phalanx of machine guns and mortars. It was a different world then, not only in the way wars were fought, but also in the way minds were moulded. It would seem likely that anyone who wishes to avoid almost certain death is in an absolutely sound state of mind but the naive and innocent victims of the firing squads of eighty years ago had the misfortune to be born into a very different stage of capitalism's destructive development, when daily casualties could wipe out entire regiments. The soldiers of the Great War were unfortunate to live in an era when courage, however you defined it, equalled death.
There were claims that the executions of soldiers was a class issue. James Crozier was found guilty of deserting his post and was shot. Two weeks earlier, 2nd Lieutenant Annandale was found guilty of the same but was not sentenced to death due to "technicalities". In the duration of the war, fifteen officers, sentenced to death, received a royal pardon. In the summer of 1916, all officers of the rank of captain and above were given an order that all cases of cowardice should be punished by death and that a medical excuse should not be tolerated. However, this was not the case if officers were found to be suffering from neurasthenia.
Private Thomas Highgate was the first to suffer such military justice. Unable to bear the carnage of 7,800 British troops at the Battle of Mons, he had fled and hidden in a barn. He was undefended at his trial because all his comrades from the Royal West Kents had been killed, injured or captured. Just 35 days into the war, Private Highgate was executed at the age of 17.
16-year-old Herbert Burden, who had lied that he was two years older so he could join the Northumberland Fusiliers. Ten months later, he was court-martialled for fleeing after seeing his friends massacred at the battlefield of Bellwarde Ridge. He faced the firing squad still officially too young to be in his regiment.
The French are thought to have killed about 600 (probably an under-estimate). The Germans, whose troops outnumbered the British by two to one, shot 48 of their own men, and the Belgians 13. In 2001, 23 executed Canadians were executed , and five troops killed by New Zealand's military command. No Australian soldier was executed because the Death Penalty in the Armed Forces was abolished with the 1903 Defence Act, following the execution ( by a British Court Martial ) of "Breaker" Morant and Hancock and the public outcry.
Cathryn Corns, co-author of Blindfold and Alone, which examines 306 courts martial "The number of rogues outnumbered those with mitigating circumstances by about six to one," she said.
The death sentence for desertion in the British forces was abolished in 1929.
Today, Britain has a professional volunteer army, and technical improvements in weaponry mean that modern warfare is a much more scientific affair. Remote-controlled unmanned drones have turned much combat into computer game style
slaughter. Now there are no poorly trained conscripts, and no need for battalions of troops to go "over the top", and so there is no need for summary executions to enforce discipline. To some, war is heroic yet one thing that can be said for definite about wars: they are never fought in the interest of those who die in them.
Friday, November 11, 2011
Talking Capitalism is not talking !
Just before Ecclestone rushed off to fly in his private jet to the F1 grand prix in Abu Dhabi, Bernie Ecclestone was giving evidence in modern Germany's biggest corruption trial. It gave an illuminating insight into one of the richest men in world sport. He was testifying against Gerhard Gribkowsky, a former executive at the state-owned BayernLB bank, who is accused of accepting Ecclestone's $44m (£27.5m) in return for smoothing over the 2005 sale of the bank's $839m stake in F1 to CVC, the private equity group. Ecclestone claims that he paid up only because he was "shaken down" by the German, who, according to Ecclestone, was going to give HM Revenue and Customs "false" information about his financial affairs which could leave him with a tax bill "in excess of £2bn".
Ecclestone's insists that Bambino, the multibillion-pound offshore trust set up in Slavika's name containing the bulk of his assets, is not in fact controlled by him. "I don't control the trust, but if the Revenue had investigated, the burden of proof would have been on me to prove I wasn't," he said. Ecclestone said that Slavika and Bambino's trustees decided to contribute to the "shakedown" payment of their own accord, rather than because he ordered them to do so. He and his ex-wife, Croatian model Slavika, 53, never discussed business or financial affairs. This matters because Ecclestone says he had been advised that the trust's balance would be subject to a 40% tax claim from Revenue and Customs if they believe he has anything to do with it: an allegation Ecclestone has said he thought Gribkowsky was going to make.
He didn't ever discuss a figure with Gribkowsky, he testified – a claim received with incredulity by the judge. "You're seriously saying you were going to transfer all that money without telling him so that he only discovered it when he went to the cash machine and checked his balance?" he asked.
Yes, insisted Ecclestone. "[Gribkowsky] wasn't the sort of person to say 'pay me this or I'll do that' and I'm not the sort of person who says 'I'll pay you this if you don't do that,'" he said.
'let's think about it.' Which in English is a very clear no. People don't always understand that."
http://www.guardian.co.uk/sport/2011/nov/09/bernie-ecclestone-germany-trial-witness
http://www.guardian.co.uk/sport/2011/nov/10/bernie-ecclestone-denies-wedding-bill
Ecclestone's insists that Bambino, the multibillion-pound offshore trust set up in Slavika's name containing the bulk of his assets, is not in fact controlled by him. "I don't control the trust, but if the Revenue had investigated, the burden of proof would have been on me to prove I wasn't," he said. Ecclestone said that Slavika and Bambino's trustees decided to contribute to the "shakedown" payment of their own accord, rather than because he ordered them to do so. He and his ex-wife, Croatian model Slavika, 53, never discussed business or financial affairs. This matters because Ecclestone says he had been advised that the trust's balance would be subject to a 40% tax claim from Revenue and Customs if they believe he has anything to do with it: an allegation Ecclestone has said he thought Gribkowsky was going to make.
He didn't ever discuss a figure with Gribkowsky, he testified – a claim received with incredulity by the judge. "You're seriously saying you were going to transfer all that money without telling him so that he only discovered it when he went to the cash machine and checked his balance?" he asked.
Yes, insisted Ecclestone. "[Gribkowsky] wasn't the sort of person to say 'pay me this or I'll do that' and I'm not the sort of person who says 'I'll pay you this if you don't do that,'" he said.
'let's think about it.' Which in English is a very clear no. People don't always understand that."
http://www.guardian.co.uk/sport/2011/nov/09/bernie-ecclestone-germany-trial-witness
http://www.guardian.co.uk/sport/2011/nov/10/bernie-ecclestone-denies-wedding-bill
Tuesday, November 08, 2011
Selling the Revolution
Entrepreneurs are seeking to profit from the demonstrations with T-shirts and other merchandise. T-shirts began to appear days after the first protest on 17 September, a march through lower Manhattan. Now T-shirts, coffee mugs and other merchandise are being offered on the campsites that have sprung up in cities across the US. The US patent and trademark office has received a spate of applications.Ray Agrinzone, a clothing designer, who launched a website, said: "There's nothing wrong with turning a profit."
Thursday, November 03, 2011
The recession's recovery
"Permanent crises do not exist" Marx wrote
He meant that the slump itself would create the conditions for capital accumulation to resume. For Marx the accumulation of capital, which is the engine of economic growth, proceeded in fits and starts, a series of cycles of moderate activity, boom, crisis, slump, recovery, moderate activity, boom, crisis, etc. Booms eventually created the conditions for the next following slump while slumps created those for recovery.
“This fall in the purely nominal capital,” Marx explained “State bonds, shares etc....amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”
The financial world has been gripped by the recession. Yet one cabal of investors, bankers and lawyers found plenty to toast at London’s opulent Claridge’s hotel last month. One fund manager enthused “There’s a tidal wave of opportunities coming now.”
A German minister once called them “locusts”. Other choice descriptions are “corporate raiders”, “predators”, “vultures” and “asset strippers”. Socialists apply some of these descriptions to all capitalists, but what have these particular kind of capitalists done to earn such epithets even from non-socialists?
This is the sector which seeks to take advantage of stressed and dislocated financial markets. It typically comprises hedge funds or private equity firms that acquire at a discount fundamentally sound or defaulted loans, bonds or entire portfolios of debt from banks and other investors under duress, and attempt to squeeze out a profit. Alternatively, they may try to seize control of struggling companies by buying their loans and bonds, and converting this debt into equity ownership – a strategy known as “loan to own”.
European companies have to repay more than $4,000bn of loans and bonds in the next four years, according to credit rating agency Standard & Poor’s – a formidable sum at a time when the continent faces unprecedented pressure. Most are expected to manage to repay or roll over these debts, but some are expected to founder and could be taken over by distressed debt investors. Europe’s banks, normally a ready source of funding for many of these companies, are themselves struggling. Banks in France, the UK, Ireland, Germany and Spain have unveiled plans to slash a total of €775bn ($1,065bn) of assets, according to data collected by Bloomberg. Leon Black of Apollo Global Management, a leading investor in distressed debt, recently estimated this sum could increase to €1,500bn in coming years. It will provide investors with opportunities to cherry-pick assets, financiers say. Many are eyeing Ireland, where loans and property worth a nominal €72bn have been taken over by the National Asset Management Agency, a state-run “bad bank”, and will gradually be sold off.
Most investment banks are rebuilding or beefing up distressed debt desks, expecting the sector to provide a rich vein of lucrative business in the coming years. “We’re just in the first innings,” says the European head of a major US firm. “We have already bought quite a bit already, and the market is going to be huge over the next few years.”
From capitalism’s point of view, they are not doing anything wrong. In fact, they are only doing what comes naturally to capitalists: trying to make the biggest profit they can. The parvenus are buying up failed and failing business at bargain prices. As well as laughing all the way to the bank they can justify their unpopular activity as performing a necessary function in capitalism’s business cycle. As indeed they are.
What shape will the recovery turn out to have. The optimists are hoping that it will be V-shaped (i.e. a fairly rapid return to pre-recession levels). Others see it as being more like a tick (i.e. a slower recovery). The pessimists see it like a W (i.e. a double dip, a initial small recovery followed by second fall).
The only solution to the problems of a depression is the depression itself. If capitalism is to return to profitability, unprofitable concerns must be closed, workers laid off, wages suppressed, and capital devalued. This restores profitability and lays the basis for a new round of capitalist prosperity.Unprofitable firms must be eliminated, their capital destroyed or devalued, and real wages must fall, so as to restore the rate of profit. That means more company failures and more unemployment. In short, more misery. This tells us nothing about how long this might take. Could the present slump really last for a decade or more? The truth is we don’t know and can’t know. The future course of capitalism is largely unpredictable.Economic forecasting is no more reliable than an astrological horoscope. All we can say with certainty is that it is an irrational system.
A number of quite distinct and separate things need to happen before a slump can run its course. Firstly, capital has to be wiped out if excess productive capacity is to be tackled with devalued capital being bought cheaply by those enterprises in the best position to survive the slump. Secondly, de-stocking needs to take place, with overproduced commodities bought up cheaply or written off entirely. Investment will not resume if overproduction still exists. Thirdly, after this has occurred there needs to be an increase in the rate of industrial profit helped both by real wage cuts and falling interest rates (which tail off naturally as the demand for more money capital eases off in the slump). This will help renew investment and increase accumulation. Also, if recovery is to be sustained, a large proportion of the debt built up during the boom years will need to be liquidated, if it is not to act as a drag on future accumulation. Through these mechanisms a slump helps build the conditions for future growth, ridding capitalism of inefficient units of production. When these processes have run their course, accumulation and growth can begin once more with capitalism again creating a boom situation, which will be inevitably followed by a crisis and slump. This has been the history of capitalism ever since it first developed. Far from being an aberration, this cycle of misery is the natural cycle of capitalism.
Workers cannot be indifferent to a crisis, no matter how much we are disgusted by the predictable pendulum swing between “boom” and “bust” , because our lives can be directly influenced by today’s financial turbulence. But at the same time, we have no interest whatsoever in thinking up ways to put capitalism “back on track” or make it “healthy” again. Even when the system is in tip-top shape it works directly counter to the interests of workers. The crisis will not miraculously or mechanically turn every worker into a socialist, as some hope, but it does at least create a situation where socialists may find workers more willing to consider an alternative to capitalism. It is up to us, as socialists, to present that alternative in a convincing way based on our understanding of the essential nature and limitations of the capitalist system.
He meant that the slump itself would create the conditions for capital accumulation to resume. For Marx the accumulation of capital, which is the engine of economic growth, proceeded in fits and starts, a series of cycles of moderate activity, boom, crisis, slump, recovery, moderate activity, boom, crisis, etc. Booms eventually created the conditions for the next following slump while slumps created those for recovery.
“This fall in the purely nominal capital,” Marx explained “State bonds, shares etc....amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”
The financial world has been gripped by the recession. Yet one cabal of investors, bankers and lawyers found plenty to toast at London’s opulent Claridge’s hotel last month. One fund manager enthused “There’s a tidal wave of opportunities coming now.”
A German minister once called them “locusts”. Other choice descriptions are “corporate raiders”, “predators”, “vultures” and “asset strippers”. Socialists apply some of these descriptions to all capitalists, but what have these particular kind of capitalists done to earn such epithets even from non-socialists?
This is the sector which seeks to take advantage of stressed and dislocated financial markets. It typically comprises hedge funds or private equity firms that acquire at a discount fundamentally sound or defaulted loans, bonds or entire portfolios of debt from banks and other investors under duress, and attempt to squeeze out a profit. Alternatively, they may try to seize control of struggling companies by buying their loans and bonds, and converting this debt into equity ownership – a strategy known as “loan to own”.
European companies have to repay more than $4,000bn of loans and bonds in the next four years, according to credit rating agency Standard & Poor’s – a formidable sum at a time when the continent faces unprecedented pressure. Most are expected to manage to repay or roll over these debts, but some are expected to founder and could be taken over by distressed debt investors. Europe’s banks, normally a ready source of funding for many of these companies, are themselves struggling. Banks in France, the UK, Ireland, Germany and Spain have unveiled plans to slash a total of €775bn ($1,065bn) of assets, according to data collected by Bloomberg. Leon Black of Apollo Global Management, a leading investor in distressed debt, recently estimated this sum could increase to €1,500bn in coming years. It will provide investors with opportunities to cherry-pick assets, financiers say. Many are eyeing Ireland, where loans and property worth a nominal €72bn have been taken over by the National Asset Management Agency, a state-run “bad bank”, and will gradually be sold off.
Most investment banks are rebuilding or beefing up distressed debt desks, expecting the sector to provide a rich vein of lucrative business in the coming years. “We’re just in the first innings,” says the European head of a major US firm. “We have already bought quite a bit already, and the market is going to be huge over the next few years.”
From capitalism’s point of view, they are not doing anything wrong. In fact, they are only doing what comes naturally to capitalists: trying to make the biggest profit they can. The parvenus are buying up failed and failing business at bargain prices. As well as laughing all the way to the bank they can justify their unpopular activity as performing a necessary function in capitalism’s business cycle. As indeed they are.
What shape will the recovery turn out to have. The optimists are hoping that it will be V-shaped (i.e. a fairly rapid return to pre-recession levels). Others see it as being more like a tick (i.e. a slower recovery). The pessimists see it like a W (i.e. a double dip, a initial small recovery followed by second fall).
The only solution to the problems of a depression is the depression itself. If capitalism is to return to profitability, unprofitable concerns must be closed, workers laid off, wages suppressed, and capital devalued. This restores profitability and lays the basis for a new round of capitalist prosperity.Unprofitable firms must be eliminated, their capital destroyed or devalued, and real wages must fall, so as to restore the rate of profit. That means more company failures and more unemployment. In short, more misery. This tells us nothing about how long this might take. Could the present slump really last for a decade or more? The truth is we don’t know and can’t know. The future course of capitalism is largely unpredictable.Economic forecasting is no more reliable than an astrological horoscope. All we can say with certainty is that it is an irrational system.
A number of quite distinct and separate things need to happen before a slump can run its course. Firstly, capital has to be wiped out if excess productive capacity is to be tackled with devalued capital being bought cheaply by those enterprises in the best position to survive the slump. Secondly, de-stocking needs to take place, with overproduced commodities bought up cheaply or written off entirely. Investment will not resume if overproduction still exists. Thirdly, after this has occurred there needs to be an increase in the rate of industrial profit helped both by real wage cuts and falling interest rates (which tail off naturally as the demand for more money capital eases off in the slump). This will help renew investment and increase accumulation. Also, if recovery is to be sustained, a large proportion of the debt built up during the boom years will need to be liquidated, if it is not to act as a drag on future accumulation. Through these mechanisms a slump helps build the conditions for future growth, ridding capitalism of inefficient units of production. When these processes have run their course, accumulation and growth can begin once more with capitalism again creating a boom situation, which will be inevitably followed by a crisis and slump. This has been the history of capitalism ever since it first developed. Far from being an aberration, this cycle of misery is the natural cycle of capitalism.
Workers cannot be indifferent to a crisis, no matter how much we are disgusted by the predictable pendulum swing between “boom” and “bust” , because our lives can be directly influenced by today’s financial turbulence. But at the same time, we have no interest whatsoever in thinking up ways to put capitalism “back on track” or make it “healthy” again. Even when the system is in tip-top shape it works directly counter to the interests of workers. The crisis will not miraculously or mechanically turn every worker into a socialist, as some hope, but it does at least create a situation where socialists may find workers more willing to consider an alternative to capitalism. It is up to us, as socialists, to present that alternative in a convincing way based on our understanding of the essential nature and limitations of the capitalist system.
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