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.