23 October, 2017

Why Is Global Economic Recovery So Tardy?

By Kumar David

Prof. Kumar David

There is more to the recession than the toxicity of finance capital: Why is global economic recovery so tardy?

My ‘Dummies Guide to Solar & Wind Power’ two weeks ago elicited encouraging responses. Obviously, there is a market for simple pieces. Since I know even less about economics than electrical engineering maybe I can risk straying into the territory of this essay. It’s a dummies guide written by a dummy and the target is again the 100% layman. I want to provide a primer on finance capital, why it rose to prominence in the last two decades, what led to the 2008 debacle, why this was unavoidable (you will not hear about that from bourgeois ‘experts’), and how capitalism bailed out its banks and financial institution. I will touch on why ‘recovery’ from the Great or Global Financial Crisis is still absent despite limitless massaging since Q4-2008 and why a second recession is likely.

Everybody is in debt – amazing! Surely if some are in debt others must be creditors. What’s the secret? Sovereign debt is rampant; the US government is in hock to the tune of $17 trillion; US corporate and household debt (mainly mortgages and credit cards) add to another $30 trillion. Governments, corporations and households in Britain, France, Brazil, Russia, nearly all of Europe, most of Asia and all of Africa are saturated in debt. Aside from the oil rich Gulf, Singapore and New Zealand, I can’t recall any sovereign (government) not drowning in red ink. This is true of China if you include the 26 provinces, state enterprises and private companies; in China, it is domestic borrowing. In the West households are up to their neck and savings rates are low or negative. Some businesses are in debt; others cling to cash like limpets and refuse to invest.

If everyone is in debt, who the devil is the creditor? Whose money do these wretches borrow? The IMF, global funds and banks (except central banks) do not print money; they acquire it from elsewhere and lend. [After 2008 central banks went on a printing binge, Quantitative Easing (QE)]. You have heard of the richest 1% and 10% owning more than 60% and 90%, or whatever, of global, American or European wealth. Well that stuff is hired as bonds, deposits and investments to banks, mutual and hedge funds. It is this vast pool of loot that the rest of the world is in hock to. Global bank and fund assets amount to $ 150 trillion (world GDP is $68 trillion). Pension and social security funds and post office savings, that is ordinary people’s money, accounts for maybe a third (I am not sure) of the $150 trillion. The rest is the filthy lucre of the ugly rich. That’s where the stuff comes from and that’s why the elite, the banks and global bureaucrats fight to get interest paid and debt repaid.

Finance capital

The rise of finance capital to superpower status, divorced from the real economy of business, material investment and households, is recent. At the turn of the nineteenth century, finance capital facilitated global expansion (Ceylon’s tea plantation, Suez and Panama Canals). It was handmaiden to investment in an age of classical imperialism. It is different now; finance capital is the senior partner.

Behind this change lies stupendous capital accumulation that cannot be profitably invested in manufacturing, agriculture, services and traditional activities. Bernanke called it the savings glut because he doesn’t know his Marx. The old Moor would not have raised an eyebrow; excessive accumulation and the limits of surplus value generating reinvestment are intrinsic to the lifecycle of capitalism. The very growth of wealth produces gigantic slush funds. The 1991 recession and the dot-com bust of the late 1990s revealed that there was nowhere left to invest profitably. High savings generated by China’s industrial revolution and explosion of exports created another leviathan. This monster needed safe parking and found its way back as dollars stacked in American Treasuries, the Bank of England and Frankfurt. Such is the genesis of finance capital, which then flexed its muscles as a powerful new global player. It is crucial for getting a command of this essay that you appreciate that finance capital did not emerge sui generis; it was an overgrowth of capitalism’s life cycle.

It was then inescapable that finance capital would begin to play with itself; a naughty and dangerous pastime. Unless capital is employed for generation of surplus value it is merely a board game like Monopoly. Money going round and round creates no real value; otherwise the making of wealth would need only a printing press and a game board and Indrajith Coomaraswamy could turn us all into millionaires. Wealth creates wealth only in productive activity. That’s common sense, but it underpins the theory of capitalism’s collapse under the weight of its own internal contradictions.

Two features of modern finance capital: (i) Now banks (and finance houses) are intricately interconnected. One failure has a knock-on effect across the system. (ii) Highly complex financial products known as ‘derivatives’ have emerged, some to serve needs (futures contracts, hedges) and others to enable finance capital to play with itself (CDS-credit default swaps, CDO-collateralised debt obligations, risk tranches and subprime mortgages); risky, opaque and at times verging on fraud. Proven risk analysis has given way to complex algorithms invented by ‘bright’ mathematicians newly minted by elite universities. (Rather like some of my pie in the sky, computing besotted, ‘brilliant’ PhD students). George Soros and Warren Buffett described derivatives as weapons of mass destruction whose purpose is speculation to conjure up profit out of thin air. Denied profits in conventional economic activity by capitalism’s sclerosis, finance capital has no option but the casino.

A feature of modern finance capital is staggering leverage ratios. (Leverage is the ratio of bank deposits plus market borrowing to the equity base). The ratio in Q3-2008 was invariably 20 to 30; in Iceland and Ireland nearly 50! If a liquidity run was fortuitously set off, banks lacked the asset depth to weather it, and liquidity problem transformed into a solvency issue. (Solvency: Is a bank’s balance sheet strong enough for it to survive a short-term liquidity challenge?)

The 2008 tsunami and after

Mistakes may have been made, Fed governors Greenspan and Bernanke, BoE’s Mervyn King and ECB and BoJ governors may have made slips, but there is no way they could have prevented the 2008 catastrophe. Can the cleverest seismologist foil a gigantic earthquake? That is my punchline in this essay. The size and structure of the forces that had evolved within capitalism by the first decade of the twenty-first century were too big to subdue by higher or lower interest rates, more or less money injection, bank legislation or central bank intervention. To prevent the crisis would have required a lobotomy of the logic and laws of capitalism itself.

The 2008 story is well known; an incident here (BNP Paribas in August 2007), a difficulty there (bankruptcy of subprime borrowers in 2007-08), a convulsion in New York (Lehman Brothers bankruptcy, September 2008), then insolvency of Royal Bank of Scotland and Halifax Bank. This was a runaway train, the saga of the collapse of finance capital.

How the state intervened to bail out banks and tottering industries is also a known story. The state and central banks – that is the public, future debt burdens, taxes, earnings, and current pension and savings funds – were pressed into service. In the name of QE some $5 trillion has been injected into banks world-wide. Interest rates have been slashed to hover effectively at zero to encourage investors. The public purse has been ravished to resuscitate morbid capitalism.

Still not risen from the dead

Jesus Christ did it in three days; capitalism has not been able to repeat it in a decade. The Resurrection is the cardinal event of the Christian faith; in contrast, a second recession in the wake of continuing inability to rise again from the fall of 2008, will prophesy the demise of capitalism in the decade of the 2020s.

But why is capitalism unable to rise again; because nothing has changed in the fundamentals. What has been done is banks have been strengthened by new regulations on reserves, certain activities have been outlawed and ‘stress tests’ to ensure ability to withstand shocks have been implemented. Yes, banks are stronger and more secure. But this is all shooting at the wrong target, or at least shooting the aide-de-camp instead of the champ.

The principal contradiction lies in investment, profit, accumulation and competition as per the established model. Despite central banks gorging the economy with money and pushing monetary stimulus as far as it can go, there is no climate of investment. Interest are near-zero, hence the 10-year US Treasury Bond yield has been declining like a ski-slope; still no robust recovery. To put it in market jargon “there is absence of confidence, there is fear that investment will be stranded”. Risk and uncertainty terrify post-2008 investors. The exceptions are social media and IT. All US economic indicators pop up and down like a jack-in-the-box. Global capitalism is in the doldrums of investment blight despite a structural surplus of capital.

What 2008 has displayed is a classic contradiction in the real economy manifesting itself as crisis and crash in the financial economy; a rash as symptom of internal pathology. I don’t see a way out on a simple all-capitalist road. But social democratic medications may alleviate it since fascism and austerity are ruled by the balance of social and political forces.

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    Your analysis is from one living in the capitalist world. See Why Japan is not in debt even though there the interest is Zero%. Japanese citizens did not listened to the govt and they saved money. Because of that, even though govt is in debt people are not. It is not the same with debt. Europe like countries they enjoyed the life and considered everything else secondary. See Greece. Then the other example, as I read, Federal reserve, printed 3.5 trillion for QE and distributed that money among big corporations and bought their assets. Bank of Japan, European and UK banks and their own involved in it. But, it did not work. Now they want to go back. I thin at that point there will be a recession. Additionally, they want to make russia, Iran and North Korea pay for not listening to them. that may cause a recession in europe because that stops certain things coming to Europe. I don’t think anything affects. with foreign money, china developed some areas and about 350 million people have good living standards. Now they are spreading that within the country. So, how can that affect outside. I think Economists go bust analyzing that.

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    The CT do no having any policy at all by accepting different options and views of principle issues capitalist by hide of Tax money thought out the Globe? The Money and capital dictated terms to CT , but by that CT Editors discard right line of thinking ?

    @Wimaladasa – You should write your comment within the word limit as mentioned in the comments policy- CT

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    Kumar David wonders “Why Is Global Economic Recovery So Tardy?”
    Prof Kumar David shows his genuine angst coming of the bottom of his heart that the Global Economic System he loves most, is not “recovering” fast enough.
    Kumar David obviously does not know that the basic mechanism driving the Global Economic System is WASTE and ARMS TRADE.
    The waste of used farm machinery in US is estimated only by the manufacturers to plan production. In developed countries a large portion of food is wasted, and along with it the plastic containers which end up the ocean. For example Colombo is the developed part of Lanka and we had the Meemotamulla garbage mountain waiting to collapse on the poor who live near by. In rural Lanka how come there is no garbage mountain?
    All the rich nations live off arms trade eg UK & US sell arms to Saudi Arabia who use the toys for target practice. The reconstruction is a gold mine. In Lanka Arms are imported to protect the ruling class – this breeds corruption, nepotism etc etc.
    Socialism has been reduced to an interesting concept. It got buggered by socialists. Whoever thought that China will turn out to be an extreme capitalist country?
    Do not worry AKD. The manthra now is to establish a state of permanent recession. This is not tardiness but well planned.
    Of course in Lanka the chinthanaya is to create a permanent language/religion divide. Who benefits?

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    I think prof writes articles with his common knowledge just by reading periodical magazines available in the store shelves. Other wise the truth is different. They can not make only wealth is only variable and that goes up without any hindrances. They tried it by getting migrents, signing various trade facts. Now all over. UK was living good lives with stolen everything. There is one UK – scientist, who has about 140 or more patents in his name. Do you think he really invented those. I say, all those were the knowledge stolen mostly from India and secondly from Asia. Some how UK was over the day they involved in Suez Canal. Some say, Trump is the end of US decline. US is living with weapons sale, international transaction fees because of the internationalized dollar and so many wars which they get others to fight they give weapons. As the poor people are fighting wars, weapons are given free of charge and China provides money for that. Europe lived a good life. Now, there good time is over. I don’t know why you don’t read and just write useless articles.

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    US Interfered in Elections of at Least 85 Countries Worldwide Since 1945
    America has a long history of meddling in the elections of foreign countries, new research shows

    Read the above article. One of those countries is Sri lanka.

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    Dr. David,

    I didn’t see any analysis of demographic trends.

    Most of the Western world is struggling with the burden of an aging population with the attendant massive welfare state commitments to social security, pensions, healthcare, etc. These countries cannot afford those commitments when there is insufficient birth rate, which results in a smaller working population to provide the tax base. That is the major reason why growth remains weak.

    That is true of countries like Japan as well.

    Reneging on those commitments and leaving the elderly population to suffer is not something these countries are willing to do yet. The only other way is high rates of immigration of young people, but then that will require a big cultural adjustment that these countries are not yet willing to make. Predominantly white nations, as well as Japan, accepting more immigration of young brown, yellow and black people, to the point where these countries lose their ‘heritage.’ This is a wrenching change for them and it creates a backlash. The election of Trump and the rising popularity of far right groups in Europe is a manifestation of these realities.

    And when liberals do try to make that adjustment and support more migration, it leads to ISIS-inspired terrorism, so these countries are caught in a bind. I think the economies will muddle through for a couple of decades more, but it could also lead to major wars and power realignments internationally.

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    Indeed that NO way of Global Economy will be recover or revival by USA ,EU and Japan led system by weak system of USA led leadership. The Global economy of by US led forces are out of touch growth to as well the driven force which of that new height of another period of coming years. After US of Trumps being to power in White House , its has lost hope of that big portion of recovered chances once and for all?
    It is not that weakness of USA economy only but that is failure of USA led politics of oligopoly ..

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    Indeed that NO way of Global Economy will be recover or revival near future by USA ,EU and Japan led that by weak system of USA led leadership. The Global economy of by US led forces are out of touch growth to as well as the driven force which of that new height of another period of coming years.
    After US of Trumps being to power in White House , its has lost hope of that big portion of recovered no chances once and for all?
    It is not that weakness of USA economy only, but that is failure of USA led politics of oligopoly ..

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