15 October, 2018

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The 1% The 99% And Global Debt

By Kumar David

Prof. Kumar David

Finance Capital is miring the world in debt: The 1% the 99% and Global Debt

Keynes is best known for his advocacy of government intervention in the economy at times of protracted decline in output and enduring unemployment. He held that during major recessions or a depression, which is a chronic and prolonged recession, the government should intervene as capitalism is incapable of pulling itself out of the rut. Government should spend on public works infrastructure and expand credit to industry, agriculture and services to initiate a forced march. Print money if you must, but once the economy takes-off the state must withdraw. Keynes was a classicist, no populist. He was confident and events proved him right that properly managed intervention would spur growth and not be inflationary.

Keynesianism ruled from the 1930s to the late 1970s then collapsed because of ‘stagflation’ – stagnation and inflation at the same time, impossible in classical or Keynesian theory. It gave way to Milton Friedman’s monetarism and Chicago School economics, Friedrich Hayek and IMF neoliberal ideology and Pinochet-CIA football fields of corpses. Friedman was shallow and the Chicago School were ideologues of Chilean capitalism’s raids on public property. In Yeltsin’s Russia, idiot savants from MIT’s economics department crafted a theory to aid apparatchiks to loot (privatise) and abetted in laundering over $100 billion into Western banks.

Friedman got himself a Nobel Prize for instrumental contributions. Inflation he proclaimed was because too much money was in circulation (pseudo anti-Keynesianism, pseudo because he never digested Keynes). Cut welfare, slash wages, break up unions (Thatcher and Hayek), shoot workers and leftists (Pinochet, IMF and Chicago School) and impose austerity. Kick the state out of the economy, end deficit budgets and hey presto money supply can be brought under control, inflation tamed, capitalism will plough the fallow fields and growth will resume. This did happen under Regan, Thatcher, JR and their neoliberal ilk for a while. If class opposition is crushed it drives down the share of income accruing to the lower orders; if an open-door policy is enforced on weaker nations in the name of free-markets, metropolitan economies prosper. The Soviets then went belly up and kept US and European toast buttered. 

Then something unexpected happened in the late 1980s coming into full view in the 1990s. Western, mainly American industries shifted abroad on a big scale, mainly to China. Globalisation spun round and mauled its trainer. Second, the power hub of capitalism shifted from production (industry, agriculture and services like transportation) to finance (banks, investment banks, mortgage funds, monopolies, real-estate and aggregators of bonds and equities). The dominance of finance capital over production capital, the heartland of classical analysts Smith, Ricardo, Malthus, Mill, Marx and Marshal, was established. And with this inequity became a norm; never in modern history has wealth been so polarised. 

A third thing that happened is even odder and buried Friedman, monetarism and the Chicago School. This is best seen after the 2008 crash. A truly gigantic amount of money (a cumulative $4.4 trillion to date in the US and not much less in Europe – ECB and Bank of England) has been pumped into finance; for a decade interest rates have been held to near zero and at times real rates even pushed negative. But where’s the inflation!? Oft times the big economise have experienced de facto deflation! And simultaneously global debt (government, corporate and household) has ballooned to well above a staggering $150 trillion – reliable estimates are unavailable. What the hell is going on?

In a nutshell

Last week I closed my column with a one-paragraph summary of the astounding scale and provenance of the global debt crisis. Here it is:

“The (debt) crisis is global; governments, enterprises and households all over the world are in the same trap. The post-2008 global economy has been restructured, intentionally or otherwise, to transfer wealth created in the productive economy to finance capital as bonds and funds, or through asset-price inflation (real-estate, bonds and equities) and a surge in unpayable compound-interest. More indebtedness of institutions and individuals is the same thing on the other side of the coin. I often use the rhetoric of 1% and 99%; but the truth is easier to remember. The richest 8.6% owns 86% of global wealth. It’s time to invert this pyramid and enforce global debt cancellation”.

I will spell out how finance capital, inequity and debt have come to define early twenty-first century capitalism. Rentiers or ‘rent collectors’ is a term I use following Michael Hudson, Steve Keen and the Modern Monetary Theory school at University of Missouri, Kansas City – see their blogs and books. Ever compounding interest, real-estate rental, foreclosing on property and assets of defaulters and most important since 2008, transfer of part of the surplus generated in the productive economy to finance capital, are the ways of rentiers. A significant source of wealth transfer is through what is called asset price inflation – bonds proliferate (the corporate bond market is huge), property prices (mainly commercial property) soar and stock-markets have hit the roof. This is asset-price inflation.

The asset-price inflation story solves two riddles. First, why despite billions (say TARP) spent bailing out banks, insurance houses and mortgage lenders (deemed too big to fail) and trillions in QE injections, is there no consumer price inflation? Why, because nothing went to the everyday economy or was spent on plant, wages and state infrastructure. No that would be Keynesian; this time money was released to purchase bonds from banks and investors. Therefore bail-out and quantitative easing (QE) money went to those who used it to enhance the activities of finance capital such as leveraging purchase of stocks, real estate and bond market activities. “Too much money was not chasing too few goods”; no, money was chasing financial instruments. Ten million households facing foreclosure were allowed to go to the wall by the Obama Administration. Consumer prices did not inflate but prices of finance capital’s assets like stocks, bonds and commercial property rose; the rich became richer, the 99% remained marooned and the production side of the economy stayed in the dumps. 

A simple picture looks like this. A Central Bank offers $250 billion of QE. Big banks put up bits of paper called bonds to borrow at knockdown interest rates. The CB hopes that producers will borrow from banks and spend on economic activities, but in a gloomy scenario few come forward. Instead an investment bank syndicates (combines) financiers to relend large sums to broke states like Greece and Lanka at high interest rates since they are “taking a risk”. The broke party cannot service instalment or interest so borrows more (debt is leveraged) and sinks deeper. Not only broke ones but governments and corporations in big countries are in the same boat. QE has bloated finance capital.

How does asset-price inflation transfer wealth created in the productive economy, the social surplus, into the clutches of finance capital? It’s easy to explain with a simple but artificial example. Forget workers, the middle-classes, the government and foreign trade for simplicity. Let’s postulate a world in which only the owners of the means of production (Adam Smith and Karl Marx’s capitalists) and the modern breed of finance capitalists (rentiers) exist. Say in a year the ordinary capitalists make a profit of $1 trillion (surplus value) globally, but in the same year the Fed, ECB, BoJ and BoE release $1 trillion into the financial economy. Money is money, once printed (electronically these days) the two $1 trillions are indistinguishable. The real surplus, net of “inflation”, of the owner of production capital is only half what it would have been in the absence of this game. Asset-price inflation, crucial post-2008, supplements the explosion in compound-interest leveraged ‘rent’, and profiteering from monopoly privileges. It consolidates the dominance of finance capital in modern capitalism. 

I need to say a word about monopolies. One thinks of private monopolies as mines and public goods (the spectrum, services like electricity, water, railways, highways and waterways). However, gigantic communication, social-media and software industries are also near-monopolies with limited competition exploiting public spaces like spectrum, roads and networks. A further point is that they are not simply service providers but participants in the financial industry because their huge stock valuations (Apple is now a trillion-dollar company) and their hefty balances are used by banks for direct (hard-core) financial transactions. 

Finally, one must not underestimate the importance of direct interest collection in aiding the coffers of finance capital. Governments, not just Sri Lanka but mighty America too are irredeemably in hoc. Unable to pay interest or pay down debt most governments are sinking deeper. There is no way out (except debt cancellation) and America’s Congressional Budget Office only debates whether the US National Debt (government debt) will reach 150% of GDP in 15 years or 20 years. The Central Bank of Sri Lanka is politely and blissfully utopian. There is no possibility of a sustained amelioration of Lanka’s foreign debt and every possibility that it will swell. Last week I discussed the terrorism of compound-interest; ISIS, LTTE and Boko Haram cannot match its monumental destructive power.

Investment does not equal Savings 

In a first course in macroeconomics (fortunately I was not miseducated) some guru will instruct you that I = S. This is not an equation in the common sense of two different things tending to equality but an identity – the same thing by two different names like rainfall and precipitation. Forget government tax and expenditure, forget foreign trade and inflows, then:

National income = disposal income + savings (S)

National income = consumption + investment (I).

Since disposable income is the same thing as consumption, we end up with the identity S = I. 

This is why China, and South Korea at one time, that had high savings were much praised. They saved a lot (tightened their belts), invested in development, flourished and pulled millions out of poverty. But now in the realm of finance capital the meaning of investment has gone crazy. 

We have to forget the ordinary (intelligent) meaning of the word investment as a reward for frugality and all that whisky not drunk. No more is the abstinence story true. All of I is not invested; it has to be replaced by the sum I(1) and I(2). In symbols S = I(1) + I(2), where I(1) is investment in production as commonly understood, while I(2) is the part sucked into the domain of finance capital as I have been at pains to explain. A part of the surplus passes from owners of means of production to finance capital. The naive view that society’s savings are all invested in the ordinary sense of the term is no longer true (it was always so in a smaller way). The part peeled off by finance capital reinforces the bounty it receives from asset-price inflation. The uninvested surpluses of software, social-media, on-line retail, search-engine and pharmaceutical giants all belong to category I(2). It’s all a new ball game and they don’t want to teach you about in Econimics-101. 

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  • 0
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    Thanks.
    Financial institutions began to lay their hands on the savings of the middle class and lower middle class in the 1980s in a big way. Where people did not use their savings to buy shares, the banks (and building societies in the UK) did it on their behalf.
    Ethical values upheld by organizations like the Co-Op and Building Societies in the UK flew out of the window before the end of the last century as Building Societies bribed their shareholders (the public) to accept their transformation into banks.
    *
    Finance capital dominates capitalism, but in the process it has outgrown itself to the point where it has little control over the way the global capitalist economy moves.
    Capitalism merely goes from crisis to bigger crisis to even bigger crisis.
    What it means politically is what we see as the human tragedies of war, famine etc., the failure of democracy, and the rise of fascism in varied forms

    • 1
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      Kumar, thanks dead on!
      Trump’s America 1st policy is clear now: Its all about rent-seeking by manipulating the dollar. Trump has used USD to crash South Asian currencies and is now shopping around in South Asia to buy strategic assets like land cheap: to loot what remaining of the national wealth and resources of countries to benefit global 1 percent – after our currencies were crashed by Washington.

      Thus, On Oct 05, 2018 Colombo: Executive Vice President of the Overseas Private Investment Corporation (OPIC) David Bohigian and other U.S. government officials visited Sri Lanka The trip promoted U.S. investment in the region and strengthened cooperation with regional allies to drive economic growth and stability, the U.S. Embassy in Colombo said.
      The delegation met with Minister of Finance and Mass Media Mangala Samaraweera from the Government of Sri Lanka as well as representatives of American businesses active in the Sri Lankan market.
      Meanswhile US Economic Hit men are drafting Bondscam Ranil’s economic policies including Vision 2025 to benefit America First and the Global 1 percent. Bondscam Ranil, Mangala the Hairdresser and Avant Guard crook Tilak Marapaona all dance to IMF-WB, ADB and Millennium Challenge Corp. MCC i.e. Washington’s tunes.
      The right wing US govt, Millennium Challenge Corporation and its fake experts got RW to set up the Economic Subcommittee to destroy oversight and regulatory processes and institutions and by pass Cabinet oversight of economic policy and projects. They also fund Mangala Yapa’s Agency for Economic Development to promote US-Japan and Singapore FTA agenda of deregulation and financialization and privatization and insurance rackets to asset strip all sectors of the economy and environment.

      • 0
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        KD and DS thanks both! Trump is doing what he accuses China of -currency manipulation to benefit America and global 1 percent. Trump is crashing small economies with a combination of Sanctions and trade wars.
        But Kumar, aside from Debt Cancellation which is certainly needed, there are many other policy measures to stop crash of Lankan rupee.
        Sri Lanka needs an independent foreign and economic policy and should not be following Trump’s sanctions against Iran.

        1. EU has decided to ignore US sanctions and continue to trade with Iran. So too, it is in the best interests of Lanka to continue oil imports and tea exports to Iran. Oil prices going up due to Trump’s sanctions against Iran is one of the big reasons that rupee crashed since Oil is the single biggest item in Lanka’s import bill. Iran is arguably Lanka’s most important trade partner because it sells cheap oil and buys Lankan tea.
        2. Sri Lanka must reduce by half its massive defense budget and cut govt. spending to reduce spending and the debt trap. Trump is militarizing Sri Lanka and Indian ocean with Fake security threats and fake news in his Cold War with China. Defense spending in Lanka as in US which is the biggest budget expense. Lanka again must and say NO TO TRUMP and his strategy of militarizing Indian Ocean. Disaster preparedness is a huge scam these days!
        3. Sri Lanka needs to go for Yuan and Renminibi bonds and reduced its dependence on US Dollar What is needed is a political economic analysis and a foreign policy reorientation to get out of the IMF-WB Debt trap and “Bail Out Business” (that Greece, Argentina and Haiti suffered), and where Lanka is headed .
        In short Lanka need to look east – to Malaysia and China for help to get back funds looted and for sound economic policy advice.

        • 1
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          Asian Development Bank and World Bank hold the most amount of Sri Lanka’s debt, each with over 10 percent.

          Japan owned ADB which has been flooding Lanka with Japanese cars and SUV to benefit its donor Japan’s economy, while building expensive highways with loans to corrupt politicians, rather than doing the environmentally and economically responsible thing and invest in good PUBLIC TRANSPORT in Sri Lanka and thus putting it into a debt trap should now cancel Lanka’s sovereign debt or be sent packing. So too World Bank with its fake |disaster preparedess” and education projects..

          • 0
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            It is US with is Asia proxy, Japan, rather than China that has put Lanka in a Debt trap and the IMF’s “Bail Out Business” in order to control Sri Lanka’s policy space.

            US has been targeting Sri Lanka for “play” (as in CIA playbook) due to Lanka’s strategic location in Indian Ocean, in its cold war against China.
            This is being done primarily with fake news and the ‘debt trap economics’ in partnership with Japan, America’s Asian regional proxy. The Japanese govt. ADB (owned and operated by Japan and US), and World bank, hold much more Sri Lanka Govt. debt than China.
            According to Central Bank statistice China owns less than 10n percent, whereas Japan, ADB (12 percent) and World Bank, EACH own more then 10 percent of Lankan debt

            Thus, In fact it is US-Japan that has put Lanka in a Debt trap and is crashing the rupee today , in order to capture an control Lanka’s policy space in their Cold war with China. The run on the rupee is a result of this, but also a deliberate strategy of the US that was to buy strategic Indian Ocean rim lands and transport infrastruture assets cheap with a strong dollar at this time.
            Trump is using economic instruments to target Sri Lanka, where as previously Obama used Human Rights discourse to keep Lanka in line. Trump is manipulating a currency crisis with Japans Numura Ratings that triggered the slide of the Lankan rupee and crisis based on fake information about the volume of debt.

  • 0
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    What capitalism you are talking about .
    It is mere greed of 1% that destroys lives 99% ..
    Suppose the wealth accumulated by 1% ..
    Take for instance virgin boss.or Bill Gate..
    Can he enjoy all this money in his life ..
    He may 70 years old now ..
    In 30 years he have been gone leaving all his wealth behind .
    does he got a special tomy to eat all his money and wealth ?.
    No?
    Likewise all others do they have external life to enjoy all what they have now ?
    There is nothing devil of greed ..
    It is evil of greed of 1% that hold them back ..not to spend wealth on needy and poor ..
    That is the nature of this world .
    It is a test for rich ..
    It is a test for poor ..
    It is a test to all to see who does good deed.
    Evil of capitalistic greed will destroy this world soon.
    Donald trump is classic example for this greed.
    One day; this world will curse him for his greedy policy .

  • 0
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    An engineer is trying to be an Economist of the glocal or scale, Particularly, a Socialist with Tribalist instincts. wolrd did not start with the Industrial revolution, Western Capittalism etc., Everybody Knows India which has so many old and ancient buildings. India has so much history. Sri lanka is a far smaller country during the King’s time. How did they build those. How did the inflation, exchange ratees and international or IMF/WORLD bank or lehman brothers etc, affected those. Just think the value of an air ticket if the inflation was not there. Just think man made problems destroying the world. How many mostly in the middle east, Africa,Indonesia, vietnam. Sri lanka have died for billionaires to sell arms, stack money in their bank accounts. There is another explanation to every thing you have said. Why do we need inflation ?. I think those days, FORD owner wanted every american to hbe able to buy a car and have a good life etc., So, they had increase salaries (that is my assumption). so the currency value had to be inflated. Otherwise, we write all the bull$hit theories and how they screwed it up. What I always remind is In comparison to well known Roman Kingdom, byzanthian kingdom which existed side by side lived longer than the Roman kingdom.

  • 0
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    The culture of impunity and immunity for Financial Crimes and Hate crimes is the direct result of the institutionalization of the Neoliberal Economic system and it Violence globally and locally. No one named in Panama Papers has been investigated in Sri Lanka.
    Financial Crime and Hate crime against minorities and immigrants go hand in hand, and promote a culture of impunity for both kinds of crimes . This is the neoliberal cultural agenda of Fake Human Rights to protect the global 1 percents as evident from bondscam Ranil, Mahinda Jarapassa and Pathala Champika’s (attacks on Muslims).
    Hate crime against ethnic and religious others is a direct result of and reinforces the neoliberal economic model of developing massive inequality and poverty, and promoting debt traps, desperation and violent conflicts, while CIA’s and Mossad’s and RAWs play books are all about weapoinizing ethnic and religious identity politics to distract people from the root cause of the problem which is the Winner Take it all Society

  • 0
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    Some very good insights.

    Although the idea is rife that governments create money by printing ……… much more money is created by banks when they lend. A google search for “how banks create money” will explain this.

    Now everyone has forgotten Japan ……… a study/examination of the rise and fall of the post-war Japanese “miracle economy” ……… will be instructive how some of the countries are going to end.

  • 2
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    US Dollar appreciation will not prolong and US Dollar will fall for a record lows in near future – just a matter of time. Not just South Asia, even EU is affected due to US’s crazy economic war.
    It is time rest of the world boycott US products

    1-Buy more Chinese products

    2-Buy Indian software or push SL software industry

    3-Buy oil from Iran, ignore US sanctions (India already started)

  • 0
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    My point is they created Inflation, mpney prinintg and salary incrfeases to make employees happy. In order to run wars Debt has to be distributed all over the world. So, some how 1% is filthy rich. Debt wpn’t be a problem in th enear future as the Dollar is strong. That shows TRMUP is producing miracle and people vote. Then the dollar goes down and every thing will be to help the filthy rich 1% and dollar goes down. They also predict a recession because of the trade protectionism by the most democratic and poor but humongous nation (God Saint PEter)

  • 1
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    All this is aimed at saying yahapalanaya is not at fault in the collapse of SL economy. The fault is with either MR, Trump or global financial capital. Ranil, Mangala etc should be exonerated. 2008 crash occurred when MR was in power and he navigated through it. But still he is at fault.

  • 0
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    Debt crisis is not global. USA, Britain and France have bankrupted nations rich both Gold and Oil. On the other hand, USA’s debt is some $23 trillion and China holds about $ 3 trillion of that.Sri lanka is a bankrupt country because ultra right wing and ultra liberal Ranil and MCC agent MANGALA HAVE SOLD SRI LANKA FOR AMERICAN DOLLARS. nOW, THE DOLLAR IS HIGH THEY PULLED BACK EVERYTHING LEAVING sRI LANKA IN A HUGH RUPPEE CRASH.

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