14 July, 2020

Blog

Money-Supply, Debt & A Recession-Depression Of Finance-Capital: Political Economy Of Finance-Capital

By Kumar David

Prof. Kumar David

The hypothesis of this essay is that the current global recession, and the depression which will follow in the middle of the 2020s, arise from the nature of actually existing capitalism in the US and the West; COVID-19 was merely a catalyst. This capitalism, called hegemonic global finance-capital, is not the textbook capitalism of Smith, Ricardo, John Stuart Mill or the amended versions of Keynes and 20-th Century economists. All that is called classical economics. Marx’s critique in Kapital-I also relates to the classical version. In the writings of all great economic thinkers and particularly Marx you will find signposts pointing to finance-capital but not a full-blown theory. 

The difference is simple and visible all around. One way to illustrate it is to name institutional actors, another is to say “Look at the variance between what the Chinese economy does and what America does”. The mega actors in the US economy are banks, investment houses, institutions which buy and sell assets (stocks, bonds, mutual funds, financers of commodity trade in oil, food and metals), real estate dealers, currency traders and dealers in funny things called hedges and derivatives. These are the giants; their universal tool the dollar. Ford, General Motors, manufacturers, Standard Oil and Mobil, they are not champs anymore. The big shift in power is from production to finance. Power resides in Wall Street, not Detroit or the Appalachian coal fields.

The other way of making the point is to consider the differences between the economic activities of the US and China. The latter is all about production of goods – commodities as they were once called. Its banks and financial institutions are primitive compared to their American counterparts. China still cannot collate, finance and place a mega-billion-dollar transaction in global markets. The biggest investments were negotiated and signed-off, till recently, in Hong Kong (Shanghai and Shenzhen are getting a small slice now). But China is the supreme workshop of the world.

All this is empirical, not a definition of structure. Classical production-led capitalism is well understood. A few keywords will do: Borrow when necessary > invest in plant > procure materials > employ wage labour > MAKE > sell > appropriate a surplus (profit) > compete > do it all again (reproduction). In a healthy economy the cycle grows ever bigger, profits, plants and the economy expand and population swells. England was the great progenitor; then China in four recent decades drew 400 million people from the countryside into an industrial economy – in the process it all but banished poverty. The nitty-gritty of financing, banking, facilitating distribution, transport, insurance and marketing needs an activity structure. Classical capitalism is the totality of the interacting parts of this activity structure; it keeps the production and distribution processes alive. 

Of course, from the beginning those who dealt in money only, had a place. Borrow money when necessary I said! But from whom? Investors would be syndicated by banks which managed and underwrote deals. Deposit the profit, accumulate and reinvest, I implied. Financial conglomerates and banks to the fore. Insure, issue letters of credit and so on. Well the East India Company started life as a body of investors did you know?  

Finance-capital came into its own when the money part of the economy become dominant; when handlers of money grew more powerful than manufacturers, when bankers conquered industrialists. The theory goes back to Rudolf Hilferding’s Finance Capital published in Vienna in 1910 – he had been propagating it from earlier. The key concepts: a) A huge aggregation of capital had taken place over the decades and capitalism’s structure was no longer the same, b) capital had become monopolist and was no longer competitive, and (c) movements of capital to colonies was opening new vistas (tea plantations say). This last aspect attracted the word imperialism. I am not sure how valid Hilferding’s second point about monopoly is today (Apple vs. Samsung vs. Huawei vs. Sony?). And today the word imperialism is more about military than investment hegemony. His focus on amassed capital and its functioning as the force dominating the economy, however, remain central and cardinal.

The structure and complexity of modern finance-capital is deeper than any analyst before WW2 had foreseen. The nature of recent crisis, particularly the 2008-9 Great Recession and 2020 recession are unlike previous crises which were linked to overproduction, supply-demand imbalance and the ups and downs of the business-cycle. Nor are they similar to the supply-side shock and stagflation conundrum that followed oil price hikes. Instead, recent crises are located in the domain of finance and arise from instabilities in that system itself. In 2009 it started with mortgages, subprime loans and the unravelling of financial derivatives which in turn threatened the very existence of some of the biggest banks in the US and Europe. The world of finance, the structure of financial systems, started coming apart. This was the first ever major collapse of a financial system per se.

 If a financial crisis does not originate in supply-demand imbalance, overproduction, loss of markets due to defeat in war, or supply-chain disruption, then what dynamic causes it? It arises from malfunctions of the financial sector itself. Say banks are overstretched by pursuit of excessive lending since as financial institutions they make money only by expanding their balance sheets (recall subprime mortgages); say hedge and investment funds are overstretched as creatures that live in a world of financial speculation and risk taking; say government runs deficit upon deficit and borrows  into trillion-dollar indebtedness; say student and credit card debtors are defaulting; say inequity of wealth and income are so large that living standards of most people is falling. Then what? 

Hyman Minsky’s answer was this. There will be a god-almighty psychological collapse (the Minsky Moment) because the very inmates of the financial universe will panic and lose confidence due to accumulation of risk. They will dump what they can making things worse. The central bank will panic and burn the midnight oil running its printing presses (they call it Quantitative Easing QE). It doesn’t get better after a few ups and downs; eventually recession turns into depression. The Great Depression of the 1930s devasted manufacturing, agriculture and mining but it too, psychologically, was sparked off by events in the financial sector – a wrong turn on interest rates in that case.   

Nissan Motor Co may close down in USA; the biggest car rental Hertz has filed for bankruptcy – it also owns Thrifty and Dollar. The biggest Trucking company Comcar which has 4000 trucks has filed for bankruptcy so has America’s oldest retailer JC Penny. The Biggest investor in the world Warren Buffet lost $50 billion in the last 2 months and the biggest investment company in the world Blackrock which manages $7 trillion is signalling disaster. The biggest mall, Mall of America, has stopped making mortgage payments. Emirates is laying off 30% of its workforce.

It is estimated by website www.zerohedge.com which I cannot vouch for that 12,000 to 15,000 businesses will close. These well-known retailers have announced closure: J. Crew, Gap, Victoria’s Secret, Bath & Body Works, Forever-21, Walgreens, Sears (can’t be!), Nordstrom, Macy’s (what!), Bose, Kmart and more. I find all this hard to believe but that’s what the web says. And to rub salt into these wounds, massive mortgage loan defaults, credit card defaults and auto loan defaults are expected. Unemployment claims reached an all-time high of 40 million out of a 160 million working population. When people are broke consumer demand falls and the economy goes into a conventional production-cycle type recession, then a depression. GDP will decline by 5.2% world-wide in 2020; US GDP will fall by over 6%. I don’t see much sign of an upturn in early 2021. There will be a see-saw in 2021-Q3/Q4, maybe into 2022/23, but the die is cast. There is no logic or reason why a money printing, money speculating system of finance-capital can recover health or hegemony.

The economic universes of the 1930s and the 2020s are vastly different from each other; their trajectories will diverge but I am reproducing graphs of 1930s economy in America to make a few points. The huge rise in unemployment and the collapse of the stock market (DOW) first in 1930-32 and then in 1937 is what is called the two W-shaped recessions which straddled the Great Depression. Unemployment in the US right now is not much below 20% and this is not far from the worst in late 1933. However, while in the 1930s stock prices were depressed right now all stock indices are going through the roof reaching record highs – asset price inflation. How different! This is a specific feature of how the Fed is responding differently to crises in the era of finance-capital; it is ‘going monetary’ like crazy. Collapse in the era of finance-capital invokes mad money printing and zero interest rates since central banks have no other tools to respond with.

However, the crucial difference between the Great Depression and the current crises of finance-capital is not economic contraction but debt. Yes, the economy contracted -8% (1930), -6% (1931) and a whopping -14% in 1932. The expected contraction in 2020 will be -6% to 6.5% and most likely 2021 will also be a bad year but the really significant difference is that from as early as 1932 debt declined from as high at 260% of GDP to below half this ratio by 1940. Conversely debt (US and global) is going through the roof now. Capitalism know how to address crises in the era of finance-capital only by gigantic financialisaton. In rough numbers US National (government) debt will stand at $24 trillion at the end of 2020 and the corresponding figures for Household (personal) debt is $16 trillion. Corporate debt is hard to pin down as it depends on what you include; it could be anything between $35 trillion and $70 trillion. Using $50 trillion as a compromise for Corporate debt, the total indebtedness of all sectors combined in the US is about 400% of GDP!

It is reasonable to keep an open mind about how the global economic pendulum will swing; inflation or deflation, inflationary or deflationary stagflation, and international spread or containment thanks, hopefully, to China’s economy holding firm. We are in uncharted waters and the responses of central banks is unpredictable and utterly unconventional because bank overlords themselves are muddled and jinxed. We also need to bear in mind that the world economy in this century is intricately interconnected – globalisation, global supply chains and finance. The worst of the Great Depression was confined to the Americas and Europe, the rest of the world was sheltered. Not so this time; it will hit the poor with the force of a Richter Scale 9.9 earthquake. 

Print Friendly, PDF & Email

Latest comments

  • 3
    0

    Prof Kumar David

    “We also need to bear in mind that the world economy in this century is intricately interconnected – globalisation, global supply chains and finance.”

    Thank you for letting us know about globally linked economies.

    “………. the rest of the world was sheltered.”

    However the weeping widow and her merry men made the people to pay for it, long queues, …stagflation, …. … still there is a lot of confusion between self sufficiency and import substitution, …. and people ended up with JR (with 5/6 majority and several decades of conflict, war, terrorism, …) .

    Could you not tell the self proclaimed strongman that he should avoid mimicking weeping widow’s Economic Policies?

    • 1
      0

      Native,
      I think the Prof is advocating a sort of Chinese style economy. Not a closed one a la Mrs.B. But that depends on the productivity of the people. Productivity is a religion to the East Asians like the Chinese.Some South Asians try hard, like Parsis , Chetties, or Marwaris. But Sinhalese???
      I think that answers your query about Google.

      • 2
        0

        old codger

        I always wondered how companies are able to achieve good economic results with small labour force countries such as Sri Lanka finds it difficult to achieve with relatively endless supply of labour.

        Then of course these companies are run by Non Sinhala/Buddhist CEOs.

        • 0
          0

          Native,
          Our labour force is unlimited only in theory. Certainly not cheap. That’s why foreigners are building Colombo high-rises.

  • 3
    0

    Prof Kumar David

    Sri Lanka Employed Number of Persons in 2019 – 8,181,442
    Sri Lanka GDP 2019 $91 billion

    Google Employed Number of Persons in 2019 – 103,549
    Google Turnover in 2019 $160.74 Billion

    I cannot explain as to why the Sri Lanka workforce couldn’t perform as well as Google employees.
    Google was established on 4 September 1998.
    Sri Lanka has been in existence many millenia freed on 4 Feb 1948.

    Could you explain as to why Google is doing well up there and Sri Lanka is struggling for years.

  • 2
    0

    Kumar, you end with the most significant observation. The Great Depression was confined to Europe and North America.
    .
    This time the whole world will be hit. How to get over that in our country? Get the Sinhalese to sublimate that into a War on the Minorities.

    • 3
      0

      S.M,
      What Prof.KD wrote is that MOST of the Great Depression was confined to America and Europe. It did have consequences even here, with collapsing prices of export commodities. War on minorities? You have a point there, because what eventually ended the Depression was World War 2. War is a great stimulus for production and employment.
      I don’t want to be gloomy, but we are in for probably the worst times in 80 years.

      • 4
        0

        old codger

        War is also thought to be good for technological innovation and spin offs, etc, clarifies market shares, ….

        Did the 30 year war within this island stimulate economy and increase employment, bring about any technological innovations? War economy did stimulate a few family’s economy, created new rich, provided employment for 300,000 unemployables, and many crooks became patriots,…. .

        • 2
          0

          Native,
          “Did the 30 year war within this island stimulate economy and increase employment, bring about any technological innovation?”
          What are you talking Native? Didn’t 300,000 patriots get pensionable jobs with fancy uniforms? Didn’t Northern youngsters get an AK and free rubber slippers? Didn’t some of them fabricate Jonny battas and submarines ?

          • 2
            0

            old codger

            True, True, …..

            “Didn’t Northern youngsters get an AK and free rubber slippers?”

            Were they the ones who held 40,000 of those patriots who were entitled pensionable jobs and fancy uniform hostage in the Northern front until Hindian Navy initially prepared itself to rescue them in April/May 2000 and drop them in the South.

            Wasn’t it during this adventure the mass killer Karuna claimed to have killed 2000 – 3000 patriots and was ready to run over North?

            After bloody good bollocking from Hindians somehow Thesathin Kural (Voice of the Nation) Balasingam put some sense into VP’s head, stopping Karuna from wholesale slaughter of the 40,000 patriots waiting on the other side like lambs at slaughterhouse. Then all weather friend Pakistan and China stepped in with their army surpluses. Rest is history.

            Submarines?
            VP got his welders built them for his Children.
            It is just like life size lego set.

      • 0
        0

        OC
        A further advantage of WW2 to the US was that it was ‘neutral’ and not drawn into the war until December 1941 when Japan reacted to US provocation by way of economic sanctions.

    • 1
      0

      Dear oc,
      .
      You are very sharp! Yes, Kumar had stated the “Americas” (includes, therefore, South America), and Europe. My comment was brief because I was tired, but I consciously turned that into “North America”. I used my imagination. Something both dangerous and dishonest!
      .
      None of us three obviously has personal memory of all this, only what we read as History. However, I feel that Prof. Kumar and you both “know” more that I do.
      .
      Yes, I was conscious of reading how the beginning of the Arms Race in the mid-thirties began to end the Depression, and how the War brought “prosperity” for those who survived.
      .
      Our common gloom is because we don’t desire that as a solution. It could become really vicious. The swaggering young exult in their consumerism. So, they could take it out on the most vulnerable sections of society. I don’t know if the Minorities will be able to survive it this time round. Few of us are willing to face upto the fact that the real History of Humanity has been far more cruel than we grant it to be.

      • 2
        0

        Dear Sinhala Man,
        .
        Hope everything goes well for you. I am fallen in depressions all these days and bit scared of my life. There had been few of clear signs of unknown guys ( very likely hired people on contract basis/that Iraj Weeraratne Rajaakshe man would do anything to block us on the web) were searching for me and my whereabouts. May be I wont be able to add my posts to the CT to the same degree as has been so far. My life can be in danger. It is no worth to sacrifice a lot for no reason. I am so fed up of srilanken issues right these days, but my heart is melting looking at the striking poverty levels in rural corners of the country, even if Rajapakshes permamently waste state funds for keeping their luxurous life akin to that of a tribal leader in black africa.

        Never be like naive, our lives are in danger.
        God bless you and all the right thinking ones in my home country !.
        LM

        • 0
          0

          https://www.youtube.com/watch?v=QiEmCf6pHVk&list=RDCMUC2ZBeHEeKSYqUcglefERvDA&start_radio=1&t=0

          Avantgarde handlings were truly sainyg illegal, but the man who is on bail today – mislead the nation with the MEDIATION of incumbent PRESIDENT of this country.
          :
          How ashamed we should be as a nation ?
          .
          Patta pal horu become WEERAPURAN APPUs. The society is made silent. There are hidden forces that work under the command of Rajakashe Junta rule.

  • 3
    0

    So sad sorry shitty made by the rajapuka’s Sri Lanka better known as Ceylon normally a Kota Uda isle is now thanks to her godfather China’s extravagant expansive gift of coronavirus19 is now termed as to being in recession.?
    =
    As the whole planet is down in the dumps no self-respecting nation will ever be able to lend any more grants or loans.
    =
    Therefore the poor suffering masses will have to bear the pleasure of being food-less, no jobs no education as no schools will be reopened and the costs of living will be sitting on the surface of the moon.
    =
    The only way that the poor folks can redeem themselves is by voting wholesale for the UNP, SBJ, TNA, JVP SLMC and the other parties.
    =
    This, when done, will give the might less corrupt criminal rajapuka clown crooked jokers the thrashing of their sordid disgusting better be eliminated lives and their fellow hora boru actors/actresses.
    =
    Then lots of freedom-loving democratic salubrious nations in the world will come to the aid of Sri Lanka with tons of acid, cash advances and many a Monetary organization will welcome Sri Lanka with open arms..

    • 0
      0

      rj1952,
      .
      Please try to understand the gloom that other commenters are voicing. You seem to realise the truth of what we are saying. Haven’t all of us succeeded in conveying our sadness and concern?
      .
      You seem to delight at the prospect of misery and starvation for the poor.
      .
      We all had ancestors who were poor and illiterate – nothing to be so ashamed of. Since you are safe in Australia, either leave us alone, or try to help us by constructive in what you write.
      .
      The immediate need is to vote intelligently to limit the Rajapaksa landslide that we expect. Counting will be at District Level. Work it out. The “wholesale” voting has to be for one Party (at most two) in each District.
      .
      Study the system of voting, for God’s sake!

      • 1
        0

        Sm
        The one who relishes in throwing stones at me ?
        Why I ask.?
        As one who is helping the needy in Ceylon and a few other countries monthly I know the suffering of folk before now during the cursed and what will happen after the successful elimination of it one fine day.
        If I have done anything wrong to you please let me know so that I can make the necessary amends?
        If not refrain from being an impotent stone thrower.?.

    • 1
      0

      1952
      The gift of COVID-19 to most countries is from Europe.
      The US was rewarded by its President’s men.
      The countries that received COVID-19 from China acted fast by taking China’s revelations seriously.
      This country has not fared badly, despite the cock-up of control thrice.
      *
      Can you explain how bulk voting for parties lacking in vision will get the poor folks out of the mess. Did they not do something like that five years ago?
      Can you also tell us what one does when your ‘Famous Five’ contest each other?

Leave A Comment

Comments should not exceed 200 words. Embedding external links and writing in capital letters are discouraged. Commenting is automatically disabled after 7 days and approval may take up to 24 hours. Please read our Comments Policy for further details. Your email address will not be published.