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Debt contagion spreads

In the aftermath of Davos, the annual skiing trip for the bankers, businessmen and tame governments of the global economy, one key theme runs through the post-mortems in the wake of the economic and financial crash: the free market requirements of corporations are in open conflict with the political constraints of a world of capitalist nation-states.

The Financial Times’ Martin Wolf, who moderated the “economic outlook” session sums it up like this: “We have a globalised economy, but politics remains local. In times of crisis, the pressure to look after the former dominates the latter.” What Wolf is indicating is that local “politics” either gets in the way and/or is not up to the job. He is right but Wolf fails to grasp that the contradiction between globalising corporations and nation-state politics is insoluble.

So struggling to take much if any comfort from the less-than-impressive signs of a return to growth after renewed and unprecedented overdoses of “stimulus”, the talk in darkened corners is now turning to “rebalancing the global economy” with all the unspecified pain for millions that brings in its wake. 

The crash exposed massive over-capacity in production around the world, after decades of the increasingly credit-led investment needed to maintain the expansion on which capital feeds. In the last 12 months, many countries have relied on individual attempts at rescuing domestic economies, creating export-led growth as a result.

But it isn’t happening. 

Whilst the stimulus enabled banks to refill their capital balances, and, particularly in China allowed production to continue and even grow, it has failed to get people buying. Consumers aren’t consuming. 

In countries like Spain, the United States and the United Kingdom and its nearest neighbour Ireland, as well as some of the countries of the former Soviet Union consumption was funded by borrowing against absurd inflation in property prices. Property prices have collapsed, so consumption collapsed. It can’t be restored to previous levels. The patient has suffered a near fatal illness. 

Growth certainly hasn’t returned to countries like the Ukraine where GDP fell 14% last year. All across the world unemployment is high and soaring, hours and wages are being cut. Pensions wiped out. In the US, where some of the production numbers look positive, Lawrence Summers, Barack Obama’s principal economic adviser, admits “what we are seeing in the US and perhaps in other places, is a statistical recovery and a human recession”. 

The obscure language of the financial commentators can be difficult to untangle at times, but the threatening messages are getting clearer day by day. They speak on behalf of the global investors, speculators who move vast funds to the source of highest return. And the message to governments is this – those with an excess of debt had better give up on stimulus pretty soon to avoid the growing threat of state bankruptcy that is spreading like a global contagion. 

Italy, Portugal, Spain, the UK, Iceland are joining Greece – which has its hand out for help to the International Monetary Fund and the European Union – in the emergency ward. Those with excess savings like China had better get their people increasing their consumption pronto, or face the consequences.

No wonder the political crisis is growing in all the major economies. Cut spending and the economy will dive (or die); don’t cut spending and the state faces bankruptcy. In short, there are no answers within the present framework. That doesn’t mean the forces of extreme reaction will give up and go home. If conventional nation-state politics won’t work, there is always the danger of unconventional “solutions”. 

In our draft Manifesto of Revolutionary Solutions we set out our proposals to bring this obscene and increasingly dangerous system to its end. Join the discussion.

Gerry Gold
Economics editor
3 February 2010

Your comments


Gerry says:

Charles,

The creation of money is an important, but is far from being the only component of the extreme expansion of credit and debt that was needed to sustain the long period of crisis-ridden growth.

Right now, faced with excess capacity in the midst of an uneven global recession, the pressure is on heavily over-exposed countries to reduce their debt, especially those such as Greece, Portugal, Italy, Spain, the UK and the US which are facing state bankruptcy.

The biggest problem for them all is that their populations won't be prepared to put up with the social costs of restoring the economic system to profitable growth, without a fight. The people of Iceland, for example, have shown their determination to resist.

Little of this, and less of a scientific explanation is taught on economics courses as far as I am aware, and much of what does appear in the popular media has been limited to blaming the only too recently celebrated bankers rather than the system they operate.

In the consultation on our Manifesto and the conference planned for May, we are attempting to draw out the political implications of this historic reversal in the fortunes of capitalist production. I hope you will add your comments to that discussion as well.

I've not read Molly's latest article, but hope to have the opportunity to discuss these issues with her soon.

Gerry


Charles says:

I found the exchanges below very interesting. Gerry, in your comments under point 3 in your reply to Ray, you seem to have come closer to my concerns re the need for a socialist campaign to highlight capitalism's dependence on debt and particularly the way most money (about 97%) is created by private banks via loans i.e. debt. I think this important aspect of today's capitalism is at last receiving more attention on the left, although still not enough by revolutionary socialists.

I was encouraged by two articles related to this question in the present issue of Red Pepper (which often disappoints in being too reformist) by Molly Scott Cato (whose work we have discussed previously) and Costa Lapavitsas (a new name to me). One question I would like to ask, Gerry. Molly states "How banks create money through debt is something we teach economics students in their first year." I am sure Molly does, but would you say that is generally true? If it is, it seems remarkable that the general public is so ignorant about it - or, as Molly continues, "somehow the political implications of it do not filter into the public consciousness." Of course, the media filters Noam Chomsky is always reminding us about, are very effective.


Gerry says:

Ray,

Thanks for your dense set of questions.

1 I fear that the words ‘the contradiction between globalising corporations and nation-state politics is insoluble’, or as you put it ‘an irresolvable dichotomy of interests’ taken by themselves are misleading. Of course there can and will be a resolution one way or another. We try to warn of the dangers of a resolution within the capitalist framework and put forward our own proposals for ending capitalist rule.

2 Whilst the specific roles of the World Bank and the IMF have changed since they were set up at Bretton Woods in 1944 (see A World to Win p 43 ff), the activities of these international agencies can be understood as attempting to limit damage to the capitalist system as a whole from problems, difficulties, crises, arising in individual countries. They provide some of the glue that holds the whole system together.

A detailed account of the sources of IMF funding can be found here.

The World Bank is really better understood as a group of organisations each with different objectives, all subordinate to the stated aim ‘advancing the vision of inclusive and sustainable globalization.’

You can find detailed information about some of the World Bank’s better known components’ funding here.

3 Distinguishing what you call ‘REAL capital’ from ‘mirage debt capital’ is quite a task. It occupied a great deal of Marx’s time in the mid-19th century and has got a lot more complex since. The most important thing to grasp is that capital of every kind is a social relation. So whether it appears in the form of a machine-tool, a computer or in its symbolic form as numbers on bank account, its function as capital is to demand its own expansion through the extraction of surplus labour from people employed to work.  

Over the last few months I’ve been trying to analyse and explain the historically-evolving dialectical relationship between the production and distribution of commodities in the form of goods and services (what some people call the ‘real’ economy), and the operation of the financial system which deals in seemingly infinite forms of credit and debt.

What has become clear is that the expansion of the real economy – global GDP growth – could only be maintained, or rather funded by the expansion of credit at a rate far greater than that of GDP. And growth had to accelerate to sustain the demands that ballooning credit imposed. Estimates vary widely, but there’s no dispute that this happened. The continuation of the whole system became increasingly dependent on expanding credit, which in all its forms is borrowing on the basis of repayment (at least debt servicing/interest payments) from expected future surplus-value. So, it’s not so much that the IMF imposes a ‘norm of poverty’, but a requirement that the government of every country it lends to puts its people to work contributing to the global surplus value, and where possible, joining the ranks of consumers.  Any other way leads to state bankruptcy.

4 You’re right that capital has no ‘natural national home’. But there are reactionary forces at work who do want to pursue what they see as national interests. The anguish around the fate of Cadbury’s is a local example. The unconventional ‘solutions’ we refer to include fascism and war, but these cannot be a simple repeat of the events of the 1930s and 1940s. Thirty-plus years of globalisation have ensured that the problems for capital are far greater.

5 We certainly need an international movement, that’s why we’re launching the manifesto, but an international co-operative of labour won’t be enough. Even Gordon Brown  - a Co-operative party MP - is reported to be basing his election manifesto around a return to co-operative principles.

Our Manifesto appeals to ‘like-minded individuals, groups and movements throughout the world to work with us for the building of a new international revolutionary organisation.’


Ray says:

Gerry your outline is correct in pointing out that the global pursuit of profit for corporations comes into conflict with nation states' needs to retain 'independence' thereby producing an irresolvable dichotomy of interests. What I want explained is: wherefrom do the supposedly supra-national bodies like the International Monetary Fund and World Bank obtain the capital which they use to impose 'political strictures' on nation states. Is this REAL capital or is this mirage debt capital only realisable once the living standards of 'rogue lenders' populations have been coerced to conform to the 'norm' of poverty imposed by the criteria of the largest contributors to the IMF etc. Is this therefore not an empire of capital without a standing army of its own - but they rely on the individual states to drum the populace into submission as direct agents (somewhat like a franchise)to the corporate brand. Finally you say the forces of reaction won't throw in the towel an d 'go home' - but this capital has no natural national home it will go only where it can obtain returns commensurate with its own needs where taxes are minimal, where laws are geared to exploit human labour to the maximum. Do we not need an international co-operative of labour to overcome the global co-operative of capital.


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