Dethroning the profit motive

It is an article of faith among mainstream economists and other defenders of the existing world order that the mainspring of economic advancement and welfare, from the perspective of the public as a whole, is the pursuit of maximum profit by private individuals or enterprises acting in their own individual interests or that of their shareholders. Most, however, would probably also recognise that such a simple proposition – corresponding to Adam Smith’s famous metaphor of the beneficent working of the Hidden Hand – needs to be severely qualified in any analysis of how the real world actually works.

In particular, the dynamics of private corporate enterprise, as it has evolved in the West since the 19th century, have revealed a powerful tendency for it to permit – or even encourage – the emergence of damaging conflicts of interest both a) within enterprises and b) between enterprises (individually or collectively) and the wider public. While such conflicts stem in large part from the inherent tendency of human beings to prioritise the pursuit of their individual self-interest, they have unquestionably been exacerbated by the institutional structures put in place since Victorian times with the supposed purpose of enhancing the benefits of the system to the public.

Corporate governance. The inherent conflict created by the often inevitable separation of ownership and control of an enterprise has long been understood to be a fundamental flaw in the theoretical equation. Indeed it is a little known fact that Adam Smith himself was broadly opposed to the idea of joint-stock (i.e. shareholder) companies because of the risks involved in individuals entrusting others with the management of their assets. Despite this objection, however, the dominant “capitalist” system has evolved since his time in ways that failed to address this “agency problem”. So far from that indeed efforts have focused on persuading those who might otherwise shy away from putting their capital at risk to do just that, notably by the granting of the automatic right of enterprises to limited liability (embodied in the original UK Companies Acts of 1854-55), which indemnifies shareholders against any potential loss beyond the amount of their shareholding in any given company. Implicitly the justification for extending this privilege to all was the need to attract far more investment capital at a time when it was still scarce in the face of growing demand for it as the industrial revolution was continuing to spread across the world.

In fact, as a result of this tendency, companies have been enabled to evolve in such a way that management – in the shape of the board of directors – is able to exercise effective total control of the company without any meaningful accountability to shareholders. For although shareholders nominally appoint the board and have the power to replace any of its members (though not in the United States), they often find it difficult to exercise that power, principally because of a) the multiplicity of shareholders rendering it hard to mobilise a majority in support of any resolution opposed by the board, and b) their limited access to information on the company’s affairs compared with that enjoyed by the board. The impotence of shareholders has been further demonstrated during recent attempts in the UK and elsewhere to try and limit the exorbitant remuneration packages that company boards routinely vote themselves and top executives even in the wake of poor results. Thus for example at Royal Dutch Shell shareholders actually passed a resolution to cut the executive pay increases proposed by the Board, only to find that the rules meant their vote could only be advisory and the final decision would rest with the Board in any case.

Corporate vs. public interests. Such abuses of corporate accountability, we might think, are precisely what Adam Smith would have expected given his hostility to joint-stock companies. What he might not have foreseen is that in an age of globalised production and distribution such huge and unaccountable corporate power could have been allowed to be concentrated in so few hands on a world scale. Still less might he have imagined that this concentrated corporate power could have enabled them to exercise correspondingly disproportionate political power by deploying their huge financial resources and lobbying power to distort the actions of supposedly democratic governments contrary to the popular will and the public interest.

In fact this implicit conflict of interest between the owners / shareholders and management of companies under the existing régime of corporate governance (particularly in the Anglo-Saxon countries) is at the root of the fundamental negation of democracy which is inherent in the existing global economic order. Moreover, it is compounded by the absence of any serious restraint on corporate donations to political parties, exemplified at the extreme by the notorious Citizens United judgement of the US Supreme Court (2010), which effectively ruled that any attempt to impose legal limits on companies giving financial support to political parties was a violation of the constitutional right to freedom of speech. The net result is that our supposedly democratic body politic is effectively under the control of a tiny number of corporate directors who cannot even claim to be representative of their own shareholders, never mind the rest of the population.

Disastrous consequences

For most people it is of course nothing new to find that corporate interests have a large, if not decisive, influence over elected governments and their policies. Yet perhaps relatively few are aware of the extent to which this influence is exercised in ways contrary to the public interest, often at huge social and economic cost. Of the innumerable examples of its malign impact that could be cited two major ones may serve to illustrate the point.

The food industry and public health.

Although after decades of bitter struggle governments have managed to impose some limited restraints on the marketing of tobacco – whose lethal impact on public health has been known since the1950s – the same cannot be said of the hardly less harmful alcohol and food processing industries. The cost to the public of excess consumption of these – particularly of such ingredients as sugar – is reflected not only in the reduced well-being of individuals but of the cost to the public of remedying the resulting damage – such as the billions spent annually by Britain’s National Health Service in treating the ravages of diabetes. Meanwhile attempts to force the food industry to accept legal restrictions on excessive sugar content in their products run up against the malign power of the food lobby to prevent effective action.

Energy production and consumption

For at least the last 30 years there has been growing evidence that global warming and climate change are very real phenomena and that they are to a large extent a function of the steadily rising use of fossil fuels (hydrocarbons and coal) to meet the energy needs of a growing world economy and population. In face of this evidence – and the growing recognition that this trend is likely over time to pose a serious threat to the welfare, if not the survival, of large sections of the human race – there have been a number of highly vocal and politically influential campaigns devoted to disputing the evidence and claiming that consequently there is no need to moderate, let alone eliminate, our dependence on energy derived from fossil fuels. What is most significant about such organised denial – whether of the reality of climate change or of the role of human activity in causing it – is that it is largely financed and orchestrated by the major oil companies, notably Exxon Mobil, although this fact is often not reported in coverage of the issue in the mainstream media. It is thus fair to say that the failure of the international community hitherto to halt the growth in carbon emissions and thus the rise in global warming, notwithstanding numerous international conferences and agreements starting with the Rio Convention of 1992, owes much to the concerted efforts of the corporate-dominated lobby of climate change deniers, although it is also right to point out that until very recently they had strong allies among major Third World states such as China, which regarded efforts to impose limits on emissions as unfair discrimination against poor countries, which had historically contributed little to global warming compared with the industrialised nations.

It is of course true that under any market system individual private economic actors will inevitably tend to advance their own interests at the expense of others unless restrained by official regulation backed by law. What is especially pernicious about the dominant “Anglo-Saxon” model , as described above, is that it effectively compels company boards to pursue the maximisation of private profit as their overriding policy goal, to which all other corporate priorities – such as enhancing the welfare of their employees or supporting local communities – must be subordinated. This is because company law a) requires that the interests of shareholders (the owners) be given priority over those of all other “stakeholders” – such as employees or the general public – while b) owing to the large number of shareholders in many companies and the impossibility of consulting all of them on corporate strategy and management issues the board of directors will inevitably tend to interpret their mandate according to the lowest common denominator – i.e. maximisation of (short-term) profit. Moreover, their propensity to do so is further enhanced by the competitive pressures of the capital markets, which tend to mean that chief executives who fail to achieve a return on capital at least as high as that of the average of other companies are liable to be ousted from their highly paid positions.

These pressures on corporate management have intensified during the present “neo-liberal” phase of capitalism – i.e. since around 1980 – as market growth has progressively faltered and opportunities for productive investment have dwindled in the face of a cyclical downturn compounded by the more long-term negative impact of technological change. As a result there has been a growing tendency for corporate bosses not merely to give lower priority to the public interest and social considerations but to engage in blatantly criminal actions in pursuit of extra profit. Although the Enron fraud scandal shocked the world when it broke in 2001, it might until quite recently have seemed an “outlier” in that few, if any, other cases of major corporate fraud hit the headlines in the years before the start of the global financial crisis (GFC) in 2008. Since then, however, such scandals have flowed thick and fast – from the massive criminal manipulation of currency and other financial markets by the world’s major banks to systematic accounting fraud at major Japanese industrial corporations such as Olympus and Toshiba and now, most stunning of all, the Volkswagen emissions fraud at the heart of German industry.

An additional flaw in the system is that the dynamics of corporate power, as described above, allow the directors to structure management policy in such a way as to link it to their own personal interests. This commonly results in structures of executive remuneration that incentivise the short-term maximisation of the share price – such that this triggers huge bonuses for a few individuals at the top, even though it may well have an adverse impact on the company’s well-being in the longer run. Such self-serving behaviour of management is further encouraged, it should be noted, by their capacity to manipulate the share price by buying back their own shares, a practice that had been effectively outlawed for 50 years up to the 1980s – precisely because it was seen to have led to distorting price manipulation prior to the Wall Street Crash. Equally it is hard to imagine that such wide-scale perversion could have occurred if the same dynamics had not worked to put governments so deeply in thrall to corporate power.

The key: limiting limited liability

It can scarcely be denied that the huge dysfunctionality of the modern economic system, as described above, has resulted in large part from elevating the pursuit of profit maximisation to the status of a supreme social virtue. If we are to create structures less prone to this tendency – which permeate every sector and level of our ever more commercialised and privatised economy, from public utilities to professional sport, as well as those dominated by large corporates – we must be prepared to consider institutional reform at a fundamental level.

While a number of enquiries into how to improve corporate governance have been conducted in the UK since the 1990s – typically in response to some conspicuous failure of the system – none has resulted in the introduction of effective restraints on management. Indeed the abject failure of the authorities hitherto to initiate any criminal prosecutions against senior executives responsible for the multiple abuses associated with the banking crisis of 2007-8 has engendered enormous public cynicism as to the integrity of the regulatory structures in place.

Meanwhile awareness is growing, except among those with vested interest in preserving the status quo, that restricting the right to limited liability will be a crucial step in ensuring that corporate management serves the public interest better. The primary justification for such a reversal of this market-distorting provision of company law is that, in contrast to the position in the 1850s when it was first introduced, there is no longer any real scarcity of finance capital (rather the opposite) and therefore no need artificially to stimulate inflows of it into the market. Indeed it is becoming increasingly clear that such incentives to unnecessary investment are resulting in ever greater misallocation of resources. Well known examples in Britain are the building of the hugely wasteful High Speed 2 rail project and other white elephants such as the massively expensive London Olympic Park, built for the 2012 games but devoid of any real utility after that brief event. The damaging consequences of such follies is put in even sharper relief by the fact that they cannot be undertaken without the help of subsidies from the public purse, often open-ended, to the profitability of the private corporate sector – which appear all the more perverse at a time when vital forms of public spending, such as on health and social welfare, are being sacrificed in the name of fiscal rectitude.

It would thus be a very logical first step in any reform programme aimed at rebalancing the role of the corporate sector to make the right of any enterprise to the privilege of limited liability conditional on its accepting the inclusion in its articles of association a requirement that it be made formally accountable to the state (whether at national or local level). This would need to involve scrutiny mechanisms and rights of effective public veto on board decisions concerning significant change in the allocation of value added – e.g. major investments, pricing, remuneration of employees and management. While entrepreneurs would still be free to pursue an independent strategy without the protection of limited liability, it can hardly be doubted that the net effect of such a shift in the balance of power over the management of businesses would be a reduction in the level of private investment. But given that, as we have suggested, the volume of fixed capital investment is now excessive in relation to genuine, undistorted market demand, such a reduction would be no bad thing from a public interest perspective. But self-evidently the ultimate implications for the survival of capitalism would be dire.

The Only Way Out

2015 is witnessing what may well prove to be the climax of the greatest humanitarian disaster in modern world history. Its most visible manifestation is the swelling flood of refugees – likely to amount to several millions in 2015 alone – trying to enter Europe from adjacent regions of Asia and Africa in their attempt to escape conflict or economic collapse in their own countries. This phenomenon has been building steadily over many years, but particularly since the onset of the Global Financial Crisis (GFC) in 2007-8 and the political upheavals known as the Arab Spring that began in 2011. By now – in October 2015 – the scale of this mass exodus from these regions has reached such intensity that the flow has become almost uncontrollable, with the forces of law and order in the European countries to which the migrants are mainly fleeing (nearly all illegally) increasingly unable to impose their authority and their governments totally at a loss as to how they should respond. At the time of writing there is no telling how large or sustained this influx will be; but, bearing in mind that the continent as a whole is already severely crippled by seven years of economic recession and stagnation since the start of the GFC, their capacity to assure minimum acceptable standards of living and public services – as well as preserve social peace and stability – is bound to be sorely tested.

At the same time the ability of the world’s leading economic powers – all of which, including the United States, are to some extent subject to similar pressures to those affecting Europe – to take remedial action to stabilise the “developing” countries from which these migrants are so desperate to escape are evidently quite limited. As noted in earlier postings of this blog, this impotence stems both from the growing economic and material weakness of the leading powers and from their ideological incapacity – that is to say an inability to come to terms with the failure of the economic and social model that the West has imposed on the world since the 19th century, and most particularly of the “neo-liberal” version that has been dominant for the last 35 years.

The unravelling of this ideology appears to have come as a huge shock and surprise to the Western ruling élite – at least as much as was the collapse of the ideology of “communist” central planning that fell with the Berlin Wall in 1989 in the eyes of the Soviet establishment. Such a reaction by ruling élites to what they might well have recognised as existential threats to the established order might seem unremarkable given the scale of wealth and power that they stand to lose – as typically in any potentially revolutionary situation. In the case of the Western establishment it may be all the more understandable given that a mere 25 years ago they felt able to proclaim the final triumph of the liberal-capitalist model following their “victory” in the Cold War.

On the other hand as rational beings they might perhaps by now have felt forced to conclude that the multiple disasters we see unfolding across the globe could endanger the very survival of the civilised order that has evolved in the Western world over the last several centuries. Hence world leaders’ continued public denial that there is any fundamental flaw in the still dominant neo-liberal economic model based on “free” global markets can only be explained in terms of either a) a psychological / institutional inability to allow serious exploration of radical alternatives – akin to the totalitarian mindset of their Soviet counterparts in the 1970s – or b) a conscious willingness to risk or even promote conflict on such a scale as to cause destruction of life and civil order – perhaps even to the point of precipitating a world war – in a desperate attempt to defend their own narrow class interest come what may. The latter hypothesis might well be thought consistent with the track record of the notorious “military- industrial complex”, whose malign influence over US foreign policy – viewing expansion of the armed forces and the production of armaments as economically and commercially benign – is traceable from the aftermath of World War II up to the Western invasions of Afghanistan and Iraq in the present century.

The need for a new ideology

Despite the continued danger that such pathological unreason might lead humanity to self-destruct we must believe that a more hopeful resolution to the intensifying crisis is possible. For such optimism to be plausible, however, a critical mass of those with power and influence must emerge to lend support to a radical reset of the global order, which would also need to be quite sudden in view of the advanced state of systemic disintegration that is now apparent. The essential focus of this drastic change in collective thinking would need to be on four central realities:

  1. The entire neo-liberal agenda that has dominated official policy in the West since at least 1980 has been fundamentally misguided and has exacerbated rather than ameliorated the condition of the vast majority of the world’s people, resulting in a decline in living standards for most of the “99%” relative to the “1%” – or even in absolute terms for many – and consequently increased inequality and social division;

  2. The failure of this “free market” agenda – including “globalisation” – has been particularly catastrophic for the poor countries of the Third World and has contributed greatly to converting more and more of them into failed states – starting with Somalia, which has been effectively without a government since 1990;

  3. The need to renounce economic growth as an instrument for advancing human welfare, given that rapid growth is no longer attainable in a world of chronic excess capacity and vanishing scarcity, nor desirable on a finite planet where the biosphere is increasingly threatened by indiscriminate overproduction;

  4. The required remedies in both the short and long term will entail a) massive redistribution of both wealth and income – from the tiny minority who control far more of it than they can possibly either need or put to good use to the vast majority who have virtually nothing and hence must struggle to survive on the margins of existence without hope of improvement in their lot, and b) a fundamental shift in the organisation of the world economy from the anarchic instability of competitive markets to more stable markets based on regulation and cooperation.

Acceptance of these insights, taken together, amounts to a recognition that the attempted revival of laissez-faire capitalism since around 1980 has proved a catastrophic failure. The reasons for this failure, as argued in earlier posts, are to be found in long-term economic and social trends which, like earlier instances of revolutionary change, have been driven largely by technological advance – see Failure by the ruling élite to recognise and react to such irresistible tendencies has brought us to a point where emergency steps to implement radical change are unavoidable if terminal disaster is to be averted.

A plausible dénouement

It is obvious that the global ruling establishment is still very far from being able to contemplate such an agenda as that briefly outlined above. Indeed, as this blog and others have frequently suggested, the only way that the powerful might be induced to “think the unthinkable” is under conditions of total breakdown of the existing order, such as is now apparently gathering momentum across the world, and is exemplified by the refugee crisis engulfing Europe. Given the imminent prospect that this catastrophe will combine with intensification of the GFC to precipitate inescapable financial collapse, it could even be imagined that some of the necessary changes in official attitudes and policies will come about by default.

In fact default is, quite literally, the most likely scenario to be involved in easing the unprecedented burden of debt (public and private) now crippling the global economy – which at $200 trillion is 40 per cent higher than at the start of the GFC in 2007, since it is now widely accepted – even by the IMF – that most of this can never be repaid while the attempt to continue servicing it is perpetuating mass poverty and hardship as well as corporate paralysis. Such mass debt default will in turn trigger a collapse in other asset values, including stock markets and real estate, which the authorities will be powerless to prevent – although they will certainly try, probably by resorting to indiscriminate money printing – instead of the selective purchase (monetisation) of assets which is presently practised under the name of quantitative easing (QE) – which is all too likely to precipitate hyperinflation.

Given the steadfast refusal of the ruling élite and the mainstream media even to discuss the possibility of such a scenario, it is impossible to tell what the response of governments and the public at large around the world might be to its realisation, especially as it must be assumed that the official propagandists will continue to use all their ingenuity to distort the truth. Ultimately, however, we may expect that some event or series of events – such as bank failures, currency collapse, outbreaks of social unrest or war – will be the catalyst for a more general financial upheaval and social disintegration in a growing number of countries. This in turn could well lead to a breakdown in the global order such as to bring about widespread political revolution and demands for fundamental ideological change.

Underpinning all the reforming and rebalancing of the global economic order that will be entailed in applying the principles outlined above must be recognition of the need to restore a commitment to the ideals enshrined in the Universal Declaration of Human Rights (dating from 1948), which have been progressively abandoned by Western leaders since the 1970s in favour of a cynical realpolitik more worthy of Hitler or Stalin. This would need to be reflected in a system of international law enforcement which ensures that perpetrators of human rights abuses such as torture or imprisonment without trial, as well as high-level fraud and other financial crimes, are effectively brought to justice – even if this involves punishing the leading officials and businessmen of the United States and other leading Western countries as well as Russia who have hitherto enjoyed almost total impunity. Such a demonstrated commitment to the rule of law and genuine political accountability must be seen as a prerequisite to bringing about an economic and social order that holds out hope of restoring a minimum degree of peace and stability in place of the present deepening chaos and misery.

As the once dominant neo-liberal order – supposedly involving a return to the laissez faire values of early capitalism – now crumbles to dust it is ironic to recall that its early protagonists in the 1980s, led by the Thatcher government in Britain, adopted the slogan “there is no alternative” in support of their ideological crusade. For what is now required is a recognition by world leaders that a pre-condition of our salvation must be a de facto rejection of those values in favour of ones more conducive to the well-being and happiness of the overwhelming majority of humanity. For while, as suggested above, we must fear the possibility of the present systemic chaos ending in a terminal cataclysm for our species, it can also be envisaged that visionary leadership will enable us to realise that, in a world of growing abundance and vanishing scarcity – thanks to technological advances – the mass of the world’s people could easily be provided with the material security that all crave but so few attain under the existing distorted and anarchic world order.

The Graveyard of Western Civilisation?

Few people could probably have predicted that the Greek debt crisis that has been building in intensity since early 2015 would finally have taken such a vicious turn as it has since the end of June. It seems clear that this was the result of a continuing impasse in negotiations between the leftist Syriza government, elected in Athens in January on a strong anti-austerity platform, and the “troika” of creditors – comprising the European Commission (representing the 19 Eurozone members), ECB and IMF) determined to continue imposing harsh measures of economic “reform”. Ultimately, faced with the prospect of imminent debt default and financial collapse threatened by the troika on 12-13 July, the Greek premier Alexis Tsipras capitulated to far more draconian demands than those which his voters had overwhelmingly rejected in a referendum a week earlier. This surrender was imposed in a way which seemed deliberately designed to cause maximum political humiliation and pain to Athens and the Greek people. Above all it was made clear that there could be no write-down or restructuring of Greece’s foreign public debt – thereby substantially reducing the amount of the debt – even though it was obvious to all, including the IMF, that there was no chance of the debts ever being repaid without this.

How can such a rancorous outcome, which has caused huge ill will not only between Germany and Greece but among other member states as well – such as perhaps to threaten the long-term cohesion of the Eurozone, if not the EU itself – have been allowed to happen? At such a moment of extreme distress affecting a member state it might have been expected there would be a display of maximum possible empathy on the part of other member states in keeping with EU traditions of community and solidarity. A similar reflection was prompted by the extraordinary spectacle of the other members of the Eurozone almost unanimously ganging up against Greece at a meeting in Brussels on 12 July – this moreover after years of hardship caused by the prolonged austerity that its people have already endured in vain. It might seem that Greece had all the more right to expect such solidarity now that it is having to bear the brunt of an uncontrolled flow of refugees from its Eastern neighbours as conflict and revolution continue to rage throughout the region. So far from sympathy, however, Greeks seem to be receiving little but abuse and bigotry from their fellow Europeans, whether at the personal or official level.

Such a collective failure of statesmanship in the Eurozone demands an explanation that goes deeper than a facile analysis of national stereotypes or the possible character weaknesses of the leaders involved. A more serious explanation would need to consider the possibility that the crisis is systemic – i.e. inherent in the institutions of the European or global economies – and that what has happened is essentially a symptom of intolerable pressures building to the point where they are becoming impossible for their leaders to control. The likelihood that this is so seems all the greater given that not only is there no sign of an end to the Global Financial Crisis (GFC), now in its seventh year, but rather that it is intensifying.

Dangerous alternatives

It is not hard to believe that politicians in Europe and elsewhere, increasingly desperate in the face of this loss of control, see it as politically convenient to sacrifice international solidarity in favour of simplistic nationalism – even if more sober calculation of the long-term political dangers might suggest that the resulting conflict could lead to the break-up of the EU, especially given the possible negative fall-out of a British no vote in its forthcoming referendum. Even more alarmingly, such perversity could be a symptom of the historical tendency of the rulers of states to initiate or provoke disputes with a supposed enemy when faced with intractable problems at home – even to the point of outright war (the Anglo-US attack on Iraq in 2003 is an obvious case in point).

Such a scenario seems particularly plausible in a situation where, as now, virtually every country (in the EU or outside) is basically bankrupt – and would be revealed as such if their assets were allowed to be “marked to market”. That this is the reality – and getting worse by the month – is apparent from a little publicised study produced by McKinsey in February 2015 – – showing that attempts to reduce national debt burdens (public and private) since 2007 through policies including budgetary austerity, so far from leading to a reduction in global debt (as their advocates have continued to claim they would) have actually resulted in an increase of 40 per cent – to $199 trillion. No wonder the authorities in the EU and elsewhere would rather divert our attention from this and focus it instead on a powerless scapegoat like Greece.

In such a context there are reasons for suspecting that Germany’s banking sector is particularly exposed to “contagion” from debt default in Greece or other Eurozone countries. This is because, according to the McKinsey study cited above, the German financial sector itself currently has one of the highest ratios of debt to GDP among major industrialised countries, while Deutsche Bank (the largest in the Eurozone) was recently reported to have a leverage ratio of 40:1, the same as that of Lehman Bros when it collapsed in 2008). This could easily explain why the German government in particular has so adamantly refused to countenance any debt relief for Greece – even though the IMF, traditionally the international institution most committed to upholding the rights of creditors, has openly admitted that Greece will never be able to return to stability without its international debts being substantially written off. Hence, even though Greece’s debt to German institutions may be relatively small, if it should succeed in establishing a precedent for debt write-down / forgiveness it is all too predictable that other heavily indebted Eurozone countries would demand similar treatment – which, if permitted, could push the German banking sector over the edge, precipitating an even deeper world-wide financial crisis.

Another desperate remedy that Western leaders may be tempted to try could be more rapid price inflation. Yet while this could certainly help to stimulate higher incomes and faster growth in the short run, as well as serving to devalue debts and thus make them easier to service, it would inevitably run the risk of generating hyperinflation, which could be hard to bring back under control once unleashed and could soon prove even more damaging than austerity to the living standards of the poorest and most vulnerable.

The Failure of Austerity

Likewise any such development as spreading of debt default or hyperinflation could produce another “demonstration effect” equally unpalatable to the global economic establishment, namely yet more conclusive proof not only that austerity can never be a feasible path to restoring balance to an economy suffering from demand deficiency, but that, as has been well known since the depression of the 1930s, it tends to exacerbate the problem by depressing demand and growth even further. Given this incontrovertible evidence from the past, most economists have watched in amazement as Western industrialised economies have adopted strategies of austerity since 2008 without thus far precipitating rapid economic collapse.

Their ability to do so may be attributed to a combination of

  1. highly unorthodox, expansionary monetary policies based on the monetisation of public debt – a practice known as “quantitative easing” (QE) which is akin to outright money printing;

  2. selective deployment of the funds thus artificially created to boost the market value of government and other securities as well as assets such as real estate (QE would otherwise have been highly price inflationary, whereas in practice its main effect has been to inflate the asset values of the wealthy; at the same time it has enabled the authorities to keep interest rates artificially low, thereby saving the fundamentally insolvent financial sector from open bankruptcy) ;

  3. falsification of official statistics so as to understate inflation and overstate real GDP growth, which in reality has been nil or negative, so as to obscure the reality of an economy trapped under an ever greater debt burden.

By means of such unprecedented market-distorting methods the world’s ruling élite have succeeded since 2008 in preventing the onset of total financial meltdown such as would undoubtedly have happened otherwise. However, this strategy – referred to by many market practitioners as “kicking the can down the road” – has obviously not brought us near to “recovery”, as leaders of such as the US Federal Reserve Board and the Bank of England have wished us to believe. Rather the intensifying Greek crisis has apparently brought us close to a point at which disbelief can no longer be suspended – when further austerity can no longer be imposed on the long-suffering masses while at the same time the global debt burden cannot be further increased, in the vain hope that by some miracle prosperity will return.

Since its inception in early 2012 this blog has sought to explain why there is no way out of our economic predicament as long as, in a world being dramatically transformed by epoch-making technological change, we remain wedded to an economic system based on unattainable rates of economic growth and maximisation of useless private profit. It is now clear that, as often predicted, a point has been reached where the sacrifices needed to satisfy the gods of profit are no longer bearable for a critical mass of the world’s people, and that if reason and humanity are to prevail the vast bulk of the capital assets must be allowed to fall to a market value that reflects their dwindling utility to society – even though this must obviously entail the wiping out of the wealth and power of the parasitic owning class.

The crisis of Greece and the Euro is an illustration of the dangers to the global community – and the EU in particular – arising from these intolerable economic tensions – and of how easily one might imagine they could descend into a shooting war. Greece is with good reason identified as the cradle of Western civilisation. If after 3,000 years it is to avoid the fate of now becoming also its grave, it surely behoves us all to unite in support of replacing our destructive economic model based on ideological bigotry, competition and conflict with one in which the more enduring values of reason, justice, cooperation and moderation are allowed to prevail.

The Withering Away of the Financial Industry

Few would dispute that technology is one of the most important determinants of economic and social development. Thus the impact of the invention of the printing press on the evolution of the Renaissance and the Enlightenment in Europe between 1500 and 1800 was clearly crucial, as was the development of steam power from the 18th century in driving the Industrial Revolution and the related social and political upheavals.

It is perhaps equally uncontroversial to say that one of the consequences of that Industrial Revolution, in turn, was to give powerful impetus to the rise of bourgeois capitalism, based on the ownership of finance capital, as the dominant form of socio-economic organisation from about 1800 – replacing the traditional, medieval model of feudal aristocracy, based primarily on the ownership of agricultural land. This process was famously – and approvingly – described by Marx and Engels in the Communist Manifesto (1848). Around the same time the essential superstructure of the capitalist economy – including stock exchanges and companies acts (incorporating the right to limited liability) – first became established at the heart of Western economies.

In the century and a half since then financial institutions have come to be seen as central to the working of national and international economies alike, bodies where it is generally understood all the most important decisions on investment and the allocation of resources are taken.

The power of finance

This position is the basis of the dominant role of the capital markets in determining the pattern of economic activity and investment – and thus ultimately in the distribution of income, wealth and political power. This notion is reflected in the famous statement attributed to a member of the great Rothschild banking dynasty in the 19th Century, “Give me control of a nation’s money and I care not who makes the laws.” Hence the abiding perception that it is the financial sector that not only dominates all other sectors of the economy but effectively determines, or at least limits, the exercise of political power. A graphic illustration of how this power works in practice is provided by the presently unfolding crisis in Greece, where a government newly elected with a commitment to drastically revise the clearly ruinous economic strategy of austerity pursued by its predecessor was told by its creditors that it could not modify this strategy even though it had proved demonstrably self-defeating, leading the country only deeper into total bankruptcy.

Such dominance of the financial sector, it may be noted, originally derived from an implicit perception that capital had become the scarce factor of production by the mid-19th Century, just as the earlier perception that agricultural land was the scarce factor of production underpinned the dominance of the landed aristocracy under the feudal order. As in the case of the old feudal ruling élite, the power and importance of the financial sector is further reflected in the fact that its senior executives generally receive much higher material rewards than their counterparts in other sectors of the economy. This dispensation they of course justify on the basis not only of the supposed continued scarcity of the product they are supplying – risk capital – but also of the supposedly rare talents of the individuals concerned and the personal risks they are running through their investment decisions. Increasingly, however, the self-serving bias of such claims has come to be recognised by the public, not least because of the need for massive state intervention to bail out the banking industry since the start of the global financial crisis (GFC) in 2007-8, giving the lie to any lingering belief that bankers are taking risks with anything but other people’s money.

Hence it is apparent that the belief that finance capital is a scarce resource is the basis of the disproportionate power and wealth of the ruling élite and that this is in turn based on an illusion which has been carefully nurtured and perpetuated by a political establishment (including the mass media) that is obviously dominated by the same élite. In this the financial industry’s situation is little different to that of the agricultural sector in Britain prior to 1846, when the landed interest was still politically powerful enough to sustain the view that maintaining the wealth of that sector – still protected by the Corn Laws from the threat of growing foreign competition – was of vital importance to national security. Once the balance of political forces had shifted in favour of financial, commercial and industrial interests the repeal of these protectionist laws heralded the final passing of the landed interest’s dominance and the rapid marginalisation of the British agricultural sector.

The glut of capital

What few Western economists have yet grasped – to judge at least from their public pronouncements – is that the GFC is a symptom of the dwindling economic relevance of finance capital over the last 40 years or more. This has been reflected in a steady decline since the 1970s in the share of fixed capital formation (new investment) in the national output (GDP) of the world’s industrialised economies (OECD countries). The present writer can lay claim to being one of the first economists to draw attention to this phenomenon in his 1998 book The Trouble with Capitalism.

Even the few other economists who have recognised this phenomenon have been reluctant to grasp its most significant implication, namely that the productivity of capital has risen as a result of technological change and that consequently the need for it relative to any given unit of output has diminished, while at the same time overall global growth has evidently entered long-term decline.

What this means is that the problems of capitalism go well beyond the familiar one (identified by Marx) of inherent instability due to its cyclical tendency to over-investment and overproduction – “boom and bust” – now recognised as a weakness by even the most ardent defenders of the system. Rather the probability has to be faced that, thanks to technological change, the surplus supply of capital has now become structural (i.e. more or less permanent). Yet few latter-day economists or historians appear able openly to consider this possibility, which would clearly mean that capitalism has now been rendered as outmoded as feudalism was in Marx’s day.

The reluctance of the establishment to confront this stark reality is understandable. For the implication of such trends is that most of the financial institutions and instruments that have been put in place over generations – and the well paid jobs that go with them – are now obsolescent and will soon be totally redundant. As noted in an earlier post (Twilight of the Investors – November 2012) since World War II the fate of the world economy has become progressively more tied to that of the ever-expanding financial sector, as individuals have been incentivised to invest their savings in a variety of instruments – from mutual funds and pension funds to hedge funds and private equity – on the assumption that this would provide them with security in retirement. In the process the most highly educated and intelligent members of the workforce have been drawn to devote themselves to fund management and other questionable activities in the service of this ever more financialised economy.

The savings delusion

It is significant that the huge growth of investment funds derived mainly from the personal savings of millions of ordinary people in industrialised countries has been a phenomenon of the post-war era. Previous generations had had to rely almost exclusively on state-financed schemes based on the pay-as-you-go principle, in which workers’ contributions were paid out directly to cover the benefits of those already in retirement (as under the British state pension and US Social Security system). From around 1950, starting in the US, people in relatively rich countries became sold on the idea that they could and should save more for their retirement through investment funds that promised them a high return, particularly in view of the tax breaks they were offered. At a time of generally rising affluence and corresponding growth in the value of corporate assets and fund values – such as prevailed up to the mid-1970s – it is not surprising that such a proposition proved attractive. What was hardly understood was that a) this apparent success depended on maintaining more or less continuous economic and market growth without significant cyclical downturns and b) saving for retirement was in any case inefficient and unnecessary, given that experience had already shown that state-run pay-as-you-go systems are far simpler and more cost-effective.

In short, the whole apparatus of individual savings and investment was conceived purely as a benefit to the financial sector and should never have been sold to the general public – nor would have been if that vested interest had not enjoyed such disproportionate political power. By 1975, however, the comfortable delusions of the post-war boom had started to be exposed by the reality of financial upheaval and recession on a scale not seen since the 1930s. Yet those whose wealth and social prestige depended on this artificial structure of income distribution were not about to allow market forces – or historical materialism – to consign them to oblivion, any more than the French aristocracy of the ancien régime were prepared to surrender their parasitic and privileged position in society without a fight.

Terminal decline

Viewed in this light the history of the last 40 years can be portrayed as a prolonged struggle of the ruling élite to perpetuate their power by means of any available technique of market manipulation, distortion or deception to sustain the impression both that capital is still very much needed and that those who decide how it is to be deployed and allocated within the economy are the indispensable “wealth creators” who are worth every penny of their fabulous remuneration. At the same time they have inevitably been driven by the logic of the market to use every conceivable device to inflate their reported profits as much as possible. In the process they have been compelled increasingly to resort to

  1. investment in purely speculative ventures – as opposed to productive enterprise – which are really indistinguishable from gambling;
  2. criminal manipulation / rigging of markets (notably interest rates, foreign exchange, precious metals and stock markets);
  3. mis-selling of insurance, pensions and other financial products to their banking customers.

The ability of the élite to pursue such strategies has been greatly facilitated by the actions of the authorities – with whom they are of course symbiotically linked – in

a) relaxing legal restraints on market abuse and manipulation – many of which had been introduced following the Wall Street crash of 1929-31 – including the right of banks to operate as market traders on their own account and the right of companies to buy back their own shares and thereby manipulate their market value;
b) turning a blind eye to actual fraud (there have been no criminal prosecutions of high-profile financial-sector executives following the débâcle of 2008);
c) allocating public resources to underwrite markets and subsidise favoured private-sector projects to insure investors against loss.

Over and above this record of serial betrayal there now hangs the shadow of the paralysing global debt burden, itself the result of the latitude given to the financial industry to borrow and lend indiscriminately, confident in the expectation that any major credit failure could be averted by taxpayer intervention – as in every case since the Lehman Brothers collapse of 2008. Once it becomes clear that these unfathomable debts cannot in fact be paid and must be largely, if not wholly, written off we may hope and expect there will emerge from the wreckage a new economic order in which the financial sector will occupy as marginal a place as the agricultural sector.

Responding to the great disintegration: denial or renewal?

The crisis consists precisely in the fact that the old is dying and the new cannot be born – Antonio Gramsci (1935)

As noted in my last instalment (The Big Lie of “Recovery”), the never ending disaster of the Global Financial Crisis (GFC) that started in 2008 is increasingly marked by systematic deception and misinformation practised by those in power. In particular, the propaganda machine – whether in the shape of official pronouncements or those of the corporate media – has redoubled its efforts to falsify data and bamboozle the public with false hopes even as signs of intolerable distress proliferate.

But even if there is greater and more widespread awareness of the problems afflicting the world than at any time in the past, it cannot be said that there is any greater capacity or political will either to understand what lies behind them or to formulate and implement solutions to them such as to restore a degree of global order and stability. Indeed there is perhaps a greater sense of collective helplessness in the face of apparent disintegration than at any time in living memory. This failure seems all the more striking given that since 1945 the “international community” has for the first time endowed itself with institutional structures, centred on the United Nations, devoted to preventing or remedying causes of disorder and conflict.

The conspicuous impotence of the world’s leading powers (and the West in particular) to come to terms with deepening global breakdown can be illustrated by considering its response (or lack of it) to just a few of the major international catastrophes now unfolding.

Arab turmoil

Syria’s descent into barbarism since the uprising that began in 2011 may well rank as the greatest humanitarian disaster since World War II. Yet it must also be seen as just one episode of the “Arab Spring” that has brought political upheaval to several countries across the region, starting in Tunisia, over the same period. There is no example of such a general outbreak of unrest across frontiers since the revolutions that swept Europe in 1848. As in the case of that epoch-making explosion, while its immediate causes have undoubtedly been economic – almost certainly intensified by the ripple effects of the GFC – there are certainly other factors involved, social and political, giving the uprisings particular characteristics in each country.

In contrast to the events of 1848, however, the authoritarian élites ruling each of these Arab countries have found themselves too weak to put down the uprisings, at least without depending on military force from outside powers. The fact that such outside powers have largely failed to come to their aid – even if so far Russian intervention in Syria has managed to keep President Assad nominally in power (at enormous human cost) and Saudi Arabia has financed a tenuous counter-revolution in Egypt – only serves to underline Western weakness and confusion, although this has not stopped some analysts, steeped in knee-jerk Cold War thinking, from suggesting the Arab Spring was the result of some form of fiendish plot concocted in Washington. The more obvious reality is that neither the US nor its European partners – still less its Israeli client – welcomed this upsetting of the Arab political order to which they had long been accustomed and which had enabled the West to maintain a rough semblance of order in the region for several decades.

Now that the situation in the Middle East threatens to descend into total chaos, as long-established frontiers dissolve in a climate of deepening lawlessness, the one thing that can be predicted with any certainty about the outcome is that suffering on a huge scale will have to be endured before anything resembling stability is restored.

The refugee explosion

The intensifying disintegration in the Middle East is to a greater or lesser extent mirrored in the whole of North Africa, where local political breakdown is compounded by the fall-out from economic and political failure across much of the continent to the South, from Somalia and Eritrea in the East to Mali and Senegal in the West. This is reflected in the ever-swelling flood of refugees and economic migrants converging on the Mediterranean, desperate to reach the promised land of Europe – just a fraction of the more than 50mn refugees and internally displaced persons recorded globally by the UN Refugee Agency in 2013 (the highest figure since World War II).

At the same time most European countries, themselves buckling under the weight of economic stagnation and deprivation stemming from the GFC, are likewise bereft either of the resources to cope with the mounting influx of migrants or any idea as to how it can be stopped, let alone reversed. The political fall-out of this apparent helplessness is being felt in the rise of more or less xenophobic parties in elections across the continent year by year, all the more so as mainstream parties seemingly prefer to try and hide their impotence behind a smokescreen of complacency and mindless mantras on the supposed benefits of “globalisation”. This tendency is starkly illustrated by the total inability of the French and British authorities to address the problem of the growing army of largely destitute refugees now besieging the port of Calais in their desperation to reach the UK, their favoured destination.

As if to underline the dire consequences of the developed world’s serial neglect of the “developing” world over many decades – and particularly since the rise of neo-liberalism from around 1980 – an additional “black swan” has now appeared in Africa in the shape of an epidemic of deadly Ebola fever. While it seems unlikely that this will turn out to be a global plague (as some parts of the media have rather hysterically suggested), it has demonstrated how vulnerable poor countries are to such threats when they lack even the most rudimentary health care systems. This should serve to remind us of the dire conditions from which impoverished migrants from sub-Saharan Africa are desperate to escape and which are the inevitable consequence of the anarchic global economic system that has been imposed on these countries in the name of “globalisation”.

The perpetual GFC

Amid such spreading symptoms of breakdown the immediate cause of it all – the now 6-year old GFC – predictably shows no sign of abating. The evident stalling of the largely imaginary “recovery” – supposedly being spearheaded by the US and UK – has been reflected in the abandonment of any pretence by their monetary authorities that interest rates are about to be raised, as signs of panic hit the stock market (virtually the only economic indicator that is showing any signs of recovery thanks to the artificial stimulus of Quantitative Easing / monetising debt). At the same time the best prospect that Christine Lagarde, head of the IMF, could offer at its annual meeting in October was what she termed the “new mediocre” – in tacit recognition that the global economy is at best trapped by its immovable debt burden in permanent stagnation. Combined with self-defeating policies of austerity – which can only lead to even greater public deficits and indebtedness – this stance means that the inescapable onset of a renewed banking collapse must now be viewed as imminent, even as the global syndicate of governments and big finance resort to ever more criminal methods to manipulate markets and maintain the public perception that all is more or less normal.

The triumph of unreason?

It may seem obvious that the last thing to be expected of the global ruling élite is that they would publicly express any doubt as to the validity of the neo-liberal ideology that they have so vigorously propagated for the last three decades and which has remained dominant even as it has brought the world progressively closer to total economic and social collapse. A good example of their stubborn refusal to face reality was provided by what purported to be an analysis of the causes of the “new world disorder” by the BBC’s World Affairs Editor, John Simpson on 5 September. In it Simpson focused on the recent violent events in the Middle East (Gaza and the advance of ISIS in Iraq and Syria) and in Ukraine, as well as “Islamist” insurgencies in sub-Saharan Africa. Remarkably the only cause he could identify for these symptoms of disorder was “extremism”, not even mentioning the possible role of a patently unjust and dysfunctional world order – designed by and for the tiny privileged ruling élite of the industrialised West – in provoking violent resistance by the marginalised masses.

Thus the BBC’s “analysis” – which can be taken as broadly representative of the global mainstream media as a whole – carefully airbrushes from the picture all traces of such instances of Western lawlessness and malfunction as

a) illegal invasions of weak states – from Iraq to Ukraine (Crimea) – by stronger ones, without any serious attempt to respect the requirements of the United Nations Charter;
b) lethal drone / aerial bombing attacks on innocent civilians (notably in Pakistan and Yemen) by the US and by Russia in Syria, supposedly in the name of a “war on terror” whose parameters are not and cannot be defined;
c) detention and torture of alleged international terrorists – such as at Guantanamo Bay – in defiance of established international human rights norms;
d) the chronic injustice and illegality of the Israeli occupation of Palestine, facilitated by uncritical US support for Israel;
e) rampant corporate crime – including bank fraud, rigging of financial and commodity markets, theft of state assets and money laundering (often orchestrated by state authorities themselves) where perpetrators enjoy almost total impunity;
f) continuing inability / unwillingness to address threats to the survival of the species from ongoing damage to the biosphere (including climate change);
g) the terminal global economic meltdown, which of course cannot be described as such in any section of the mainstream media.

Given his shallow and blatantly biased analysis, which manages to reduce the cause of such systemic disintegration to “extremism” – thus effectively putting the blame for the global crisis on its victims – it is hardly surprising that the only response the BBC’s World Affairs Editor can suggest is repression – even while conceding that there is no military solution.

It would perhaps be naïve to suppose that a global establishment typified by such perverse attitudes might after all be collectively capable of retreating from what has become a manifestly untenable stance. This despite a history which suggests a certain capacity on the part of the Western establishment to learn from its mistakes – notably under such 19th century leaders as Bismarck and Disraeli, who recognised the need for some form of welfare state to cope with the upheavals brought on by the first Industrial Revolution, much though it jarred with their own ideological instincts and class interest.

For the world leaders of today the task is, first and foremost, to confront the reality that the world order based on the primacy of private profit has been rendered obsolete by technological change, just as feudal aristocracy was 200 years ago – and that different, more sustainable and equitable mechanisms must henceforth be used to determine the allocation of resources and wealth. But if instead, in thrall to the corrupt and criminal syndicates that increasingly dominate our political structures, they continue to try and sustain the status quo through a combination of violent repression and unrestrained lawlessness it is hard to foresee any end to our seeming descent into a new dark age.

The Big Lie of “Recovery”

As suggested in this blog in early 2013 – see Last Days in the Bunker? – the position of Western leaders then, faced with the utter failure of their “extraordinary” economic policies to overcome the Global Financial Crisis (GFC) which started in 2008, was analogous to that of the Nazi leadership trying to confront unavoidable military defeat in 1945.

More than a year on it would seem they have now in fact adopted as their role model one of the last die-hards holed up in the Berlin bunker, Joseph Goebbels, Hitler’s notorious propaganda chief. It was he who famously boasted that “if you tell a lie big enough and keep repeating it, people will eventually come to believe it” – a principle he can be said to have applied effectively throughout his career. Perhaps Goebbels’ last big lie was that Germany was going to win the war even as its defences collapsed before the Red Army invasion of 1945. But inevitably, as more and more territory was overrun by the enemy and life became increasingly intolerable for ordinary Germans this bravado progressively lost all credibility.

This delusional claim is today being paralleled by that of the Western establishment – governments, business leaders and mainstream media – that the world economy is at last broadly on the road to recovery from the deep recession in which it has been mired for at least 5 years. The hard evidence for this proposition is, however, extremely thin. For while it purports to be based on official statistics on estimates of economic growth (GDP) and other indicators – particularly price inflation and employment – virtually no government spokespeople nor commentators in the mainstream media point out that such data are increasingly suspect and generally subject to revision.

Fantasy vs. Reality

Thus, for example, data from the US Bureau of Labour Statistics show that the national rate of unemployment fell from 6.3 per cent to 6.1 per cent of the labour force in June. However, while this looks like positive news – and is being spun as such by the media – it fails to allow for the fact that the nominal labour force has continued to shrink as unemployed workers, increasingly unable to claim unemployment benefit and discouraged by the poor prospects of getting a job, drop off the register, so that the true unemployment ratio is really significantly higher. Likewise the US Consumer Price Index (CPI) – the main indicator of price inflation – has for decades excluded both energy and foodstuffs from the basket of goods and services used to calculate it, supposedly on the grounds that the prices of these two key components of household budgets are so volatile that their inclusion would unduly distort the index. As a result the CPI is consistently registering an annual rate of increase of around 2 per cent at a time when recorded retail prices of many individual food items, notably including meat and potatoes, have risen by well over 10 per cent in the last 12 months. As economists know well, the impact of an artificially depressed CPI goes much wider than deluding the public about the level of their real incomes and net worth – thus enabling the authorities to uprate benefits and pensions by less than would be required to match the true rate of price inflation. It also allows them to record an artificially high rate of real (inflation-adjusted) growth in GDP (national income) – by applying an unrealistically low price deflator to the unadjusted figure (in current prices) – thereby flattering their own apparent economic performance.

Thanks to such massaging of official data in the US it is possible to show (according to official data) that its economy has been growing at around 2 per cent in real terms, at least up to end-2013 – much the same as it was before the GFC broke out in 2008. Such figures provide a basis for claiming that the US is now in recovery mode and on course for returning to “business as usual”. In contrast growth figures for most of the rest of the OECD (industrialised countries) – where statistical measurement is probably less distorted than in the US – are still averaging closer to 1 per cent, and in the Euro zone are even negative (according to the most recent data from the IMF World Economic Outlook).

The UK, having remained in or close to recession (negative growth) for the last four years, has since the start of 2014 managed to engineer an apparent revival of activity, enabling the Coalition government to claim that it is currently the fastest growing major economy in the world, projecting GDP growth as high as 3 per cent for 2014. This narrative – orchestrated by the “officially independent” Office of Budget Responsibility – has been uncritically taken up by most mainstream financial journalists, business representatives and others (not all necessarily with a vested interest in enhancing the prospects of the Conservative party in the election due in 2015). But what is conspicuously missing from this chorus of euphoria is any analysis of what lies behind the apparent surge in growth, such as might indicate how real or sustainable it is. In truth such a sudden change of fortune seems hard to credit in an economic climate where under the government’s policy of budgetary austerity the real incomes of most Britons are contracting, most export markets are stagnating, international competitiveness is being squeezed by a strengthening pound and there is correspondingly little appetite for fixed investment. Hence any improvement in the GDP numbers since the start of the year must be mainly attributed to a) the huge volume of monetary growth resulting from so-called Quantitative Easing (allowing the Bank of England to buy up the still rapidly expanding government debt while holding down interest rates), which has facilitated rapid growth in speculative investment, particularly on the stock market, and b) subsidised lending for house purchase, which has also helped to boost belief in a further rise in house prices and thereby stimulate speculation in real estate generally. Such artificially induced optimism, particularly among home owners, has also helped to encourage more borrowing for purchase of significant items such as cars.

Hence it is clear that, to the extent there has been any recovery at all in the UK, a) it is based on the artificial stimulus of extra debt in an economy that is already the most heavily indebted among the major industrialised countries (taking public and private sectors together) and b) for that very reason it cannot possibly be sustained. If anyone were to doubt this there is one indicator of economic performance that should put the matter beyond doubt: the Bank of England base rate, which has now been stuck at 0.5 per cent since March 2009 – a phenomenon without precedent in the 320 year history of the Bank, during which the rate had never been set at less than 2.0 per cent at any time. Indeed it is striking that, whenever it is hinted by the governor of the Bank that the base rate might soon need to be raised as the economy approaches a more normal level of activity representatives of the business community such as the director of the Confederation of British Industry, for all their claims that the economy is indeed recovering, are quick to insist that any rate increase in the near future would be premature.

Taken together with the fact that the government still struggles to hold its annual deficit / borrowing requirement below £100 billion – double the highest level ever recorded before the start of the GFC in 2008 – and that it can only promise still further public spending cuts till 2020, it is clear that instead of sustained recovery the prospect can only be one of perpetual recession and declining living standards . Moreover, the truth that dare not speak its name – but well understood by all the leading actors – is that even a small rise in interest rates would push monumentally indebted institutions (public and private) into open insolvency, leading to a systemic collapse far more catastrophic than that of 2008.

The above description of the evolving position of the UK is broadly applicable, it can be said, to all the world’s major economies. This includes the US, which even with the benefit of its distorted inflation measure recorded negative growth in the first quarter of 2014, and the Eurozone, which has pursued austerity even more zealously than the UK and is now so desperate to revive sliding growth rates that the European Central Bank has begun to impose negative interest rates on some deposit accounts (effectively a tax on savers) in order to try and induce people to spend. At the same time China, whose reportedly high growth rates have been seen by many as the potential “locomotive” of a global recovery, is now not only seeing its growth slow but is facing its own looming debt crisis as its astonishing construction boom turns to bust.

Compulsive Denial

Amid the welter of seemingly authoritative claims – whether based on half-truths or outright lies – that a global economic recovery is gathering strength it is easy to be confused. To cut through the confusion the average person perhaps needs only to keep their attention focused on just two indicators of economic health which even Dr Goebbels might have found it hard to distort:

  1. Interest rates. As in the UK, central bank base rates in all major industrialised economies (G7) have remained at or below 1 per cent – negative in real terms – since 2009, a situation without any precedent in the history of global capitalism.

  2. Baltic Dry Index. This measure of average global shipping costs – which fluctuate in line with the volume of merchandise trade – is widely accepted as the most objective single indicator of the level of world economic activity. Despite recovering in 2009-10 to over 40 per cent of its all-time high of 11800 points attained in 2008 (before the market crash) it has been stuck at 20 per cent or less of this level since early 2011 and since May 2014 it has moved below 1000.

It should be obvious that the only logical conclusion to be drawn from these indicators is that, so far from there being any prospect of sustainable recovery, there can be no escape from deepening economic paralysis unless and until the vast bulk of the unserviceable private and public debt is effectively written off – something which the present writer and a very few other analysts have consistently pointed out right from the start of the GFC. In short there not only is no recovery, there cannot be one without first allowing a destruction of capital so drastic as to entail the wiping out of most of the world’s paper wealth – to be followed, it may be hoped, by the emergence over time of a very different and more humane economic order.

This reality is by now more or less understood by at least a minority of members of the global ruling élite, although such is the power of their own propaganda that they may well be in the grip of Orwellian “double-think” – i.e. having mutually conflicting perceptions of reality. Whether or not that is the case they naturally feel they cannot afford to admit the truth of impending, and possibly final, systemic failure. That is not because of any deep ideological commitment to the capitalist profits system – which has in any case long ago seen its own fundamental “free market” principles terminally corrupted and betrayed. Rather it is born of a desperate commitment to self-preservation for themselves and their class – which may perhaps be identified as “the 0.01 per cent” of the world’s population.

The survival of our civilisation – indeed of our species – arguably now depends on whether this global ruling clique can even at this late stage discover a capacity for enlightened self-interest such as will lead them to accept a more equitable distribution of wealth and power in a world where equity and social justice have seldom been more absent – or the danger of global conflict more menacing in consequence. An essential pre-requisite for such a change of heart must be to allow more open recognition of the realities of our situation in place of the incessant propaganda designed to convince the public that the naked emperor is wearing clothes. Failing this we can only expect a continuing slide to global disintegration, such as we can already see unfolding – as will be described in our next instalment.


The Ukraine crisis – a measure of global bankruptcy

The unfolding of the latest “revolution” in Ukraine since late 2013, and the reaction to it of leading foreign powers, is a particularly graphic indication of the impotence of the world’s rulers to confront the multiplying failures – political, economic, financial and social – that are now overwhelming the global community.

There seems little doubt that the overthrow of the Yanukovitch régime was primarily the result of chronic economic mismanagement and serial corruption and abuse of power. Such failings are of course only too familiar from the collapse of scores of governments of more or less underdeveloped states around the world over many decades. Also familiar is the complicity of Western governments in the misdeeds of the country’s leaders – even if there seem to be few precedents for the brazen flaunting of manifestly ill-gotten wealth demonstrated by Ukrainian billionaires in the UK, where one of them has recently paid over £130 mn for what is said to be the most expensive apartment in London.

But while both Western and Russian support for such kleptocracies comes as no surprise, what does seem different is the inability and / or unwillingness of the major powers, in either East or West, to take the necessary steps to restore some semblance of order and stability, such as would have been expected following the downfall of their client states in the past, particularly during the Cold War. In those days it was common to see failed rulers replaced with ones more acceptable to their own people or amenable to the dominant foreign power (whether the US, Soviet Union or former colonial master) with relatively little fuss. This was typically facilitated by easing deposed rulers into exile and providing successor régimes with financial sweeteners to help them consolidate their political support at home.

Such was broadly the practice followed for many years by the dominant Western powers towards their client states in much of Africa and Latin America – and also by the Soviet Union in respect of its satellites. Arguably it was for long largely successful in keeping the lid on geo-political disorder, albeit at the price of perpetuating the economic and social injustice afflicting the mass of the people in these regions. Where it came seriously unstuck – as in Cuba, Vietnam and, for the Soviets, in Afghanistan – this was only where internal opposition received substantial backing from the rival superpower.

How the world has changed since the 1980s

By the time the Cold War ended with the fall of the Berlin Wall in 1989 it was clear that the Soviet economic model had imploded, rendering it impossible for the Soviets to maintain their imperialist great power pretensions; hence the dissolution of the Soviet Union. Yet even as this development was being proclaimed in the West as the clear triumph of liberal capitalism it was starting to become apparent that the latter model also was coming under increasing pressure. The most obvious symptom of this was the series of financial crises, starting with the stock market “crash” of 1987, followed by successive market upheavals across the world through the 1990s – each one resolved by publicly financed bail-outs or guarantees of actually or potentially insolvent financial institutions – and culminating in the Global Financial Crisis (GFC) of 2008.

The main immediate cause of this chronic malaise was the rapid build-up of debt in both the public and private sectors which began in the 1980s, encouraged by moves to liberalise financial markets initiated in the United States and spread across the world thanks to “globalisation”. The rise in indebtedness was in fact a response to the underlying weakness of the global economy, which reflected a long-term tendency of the rate of economic growth to decline from the historically high levels recorded in the 1950–73 period. Failure to maintain relatively high growth – so vital to ensuring a healthy capitalist economy – thus posed a threat to the stability of the whole system. In this context the global build-up of debt, much of it used to finance speculative rather than productive investment, was merely masking a systemic decline that was already discernible before the Soviet collapse – albeit unanimously ignored by mainstream propaganda and media.

Emasculation of the state

The apparent hope of Western policy makers was that by extending yet more debt they could create the conditions for a self-sustaining revival of GDP growth and tax revenues, thus enabling the colossal indebtedness, particularly of the public sector, to be paid down over time. This delusion has even survived the onset of the GFC, although it is by now clear to a growing number of analysts that most of these huge debts can never be repaid and will sooner or later have to be written off. One thing not to be contemplated is that taxes should be raised, particularly on the mega-rich corporations and individuals best able to sustain the extra burden for whom, thanks to global liberalisation, taxation has by now become largely voluntary. Indeed such is the continued dominance of the Reagan-Thatcher “supply side” ideology that many political and business leaders still advocate even more cuts in already much reduced rates of direct taxation.

The net result of these ruinous tendencies over decades is that governments – even of the world’s richest countries – have been rendered progressively more unable to fulfil the basic functions of the state as their fiscal resources have shrunk. This has been reflected most obviously in the steady erosion of the welfare state over the last 30 years or more – although this trend has also owed much to the predominant ideological bias against social welfare, particularly in the US and UK. In contrast there has been no tendency to stint on spending on corporate welfare – particularly when it comes to bailing out the financial sector in a crisis. Likewise spending on defence and the “military-industrial complex”, so far from facing any cuts, has benefited from massive and often corruptly wasteful spending on the open-ended “war on terror” – including the disastrous and illegal conflicts in Afghanistan and Iraq.

Strikingly this spendthrift irresponsibility in the West, concentrating ever more wealth in fewer hands while the social fabric is allowed to decay, is largely mirrored in Russia and the rest of the ex-Soviet world, where economic and social conditions have in many cases been allowed to sink to Third World levels since the 1990s (most notably in the Central Asian republics). Both regions are likewise marked by increasing lawlessness, such that in both West and East wrongdoing by corrupt financiers and oligarchs goes largely unpunished and “whistle-blowers” and others seeking justice are marginalised or actively persecuted.

End of the road?

What the Ukraine crisis appears to show is that the limits of such fiscal profligacy, officially sponsored criminality and neglect of the public interest may now have been reached. While the US and the EC on one hand and Russia on the other are ostensibly competing to try and draw Ukraine into their respective spheres of economic and political influence, it is apparent that neither side has sufficient resources or political will to save the country from impending economic disaster. In fact there are grounds for believing that their rivalry is to some extent more apparent than real. For there is no doubt that the two sides have for the most part actively colluded with each other in the ruthless pursuit of their questionable foreign policy goals – so that, for example, Russia has been happy to have its brutal repression of Chechen and other separatists in the North Caucasus identified with the US-led “war on terror”.

On this reading the main cause of the dispute over Ukraine is that President Putin has suffered an important political setback – and loss of face – through the downfall of his client Yanukovitch, a reversal which could clearly have serious negative consequences for him at home in Russia, where he is evidently struggling to repress growing popular dissent. If this is so, and if the Western leadership does indeed covertly view Putin as more of an ally than deadly enemy in the wider geo-political game, they may well be anxious to help find him a face-saving way out of the confrontation in Ukraine. Their willingness to do so may be all the greater given their incapacity to contain Ukraine’s domestic crisis without at least tacit Russian cooperation.

In this context Russia’s obviously superior military capability on the ground may not count for much, given that a) it would face overwhelming popular opposition to any military intervention outside Crimea and b) it could not on its own mobilise the other material resources needed to make its intervention politically sustainable. Equally, however, the EU and US combined can evidently afford to offer only quite limited financial support, which would prove grossly inadequate if Russia were to withdraw its own aid to Ukraine.

It thus transpires that the leading powers involved (Russia, EU and US) are effectively incapable of acting individually to help Ukraine achieve the minimum level of financial stability to save it from economic and social collapse. Yet it may also be questioned whether, even if all three could agree on an acceptable political outcome in Ukraine, they could actually muster the resources needed to stabilise the country beyond the short term. This is not only because their own financial and economic fragility reduces their capacity to act – as shown by the inadvertently revealed British government memorandum indicating that it would contemplate no sanctions against Russia that might imperil City institutions – but because they lack the ideological or moral commitment to act in the public interest of the Ukrainian people as opposed to favouring their own dominant vested interests.

Arguably this same combination of financial and moral bankruptcy may explain the incapacity of the “international community” to address other signs of economic, social and political instability that have emerged recently in the world’s poorer, more marginalised countries and taken the world by surprise. In particular such an analysis might seem applicable to the series of upheavals since 2010 that have come to be known as the Arab Spring. The impotence of the major powers in face of these uprisings has been matched by their inability to offer a coherent explanation of their causes – although there seems little reason to doubt that a major catalyst for them has been the chronic negative impact of the GFC (particularly in Europe) on the whole Mediterranean region.

What all this surely tells us is not only that the Western liberal-capitalist economic model is now as terminally outmoded and discredited as the dead Soviet model of central planning, but that we can only expect to find a way back from the brink of global disaster if our structures of government – in both East and West – are made far more responsive to the needs and aspirations of the mass of ordinary people rather than those of corrupt and unaccountable oligarchies. Sadly, the lesson of the Ukraine crisis to date is that nothing can be expected to change this balance of forces without intensifying conflict both within and between states, with dangerously unpredictable consequences.

The Mirage of Intellectual Property

Perhaps few incidents could better define the present phase of global capitalist decay than the lawsuit brought by Apple against Samsung Electronics over alleged infringements of its intellectual property (IP) in respect of its iPhone and iPad handsets and tablets. The case – which has evoked counter-claims by Samsung of comparable IP infringement by Apple – was initiated in April 2011 and has involved litigation in various jurisdictions around the world. By mid-2013 it has resulted in numerous, often contradictory, judgments from different courts but with no decisive victory for either party. Hence any damages or compensatory actions that may result to or from either side seem likely to be largely self-cancelling. Meanwhile the costs of the litigation to both parties, which have not been disclosed, may be conservatively estimated to run to tens of millions of dollars. Arguably growing market recognition of the futility of the whole exercise may have something to do with the 30 per cent decline in Apple’s share price since September 2012 – at a time when the broader stock market has risen by nearly 20 per cent. Thus the only evident gainers from this exercise are lawyers and consultants, while the supposed beneficiaries – shareholders, and ultimately consumers – are the losers.

The Apple vs. Samsung case may in fact prove to have served a wider public purpose if it makes people aware of the absurdity and wastefulness of trying to enforce patents granted in different countries to different companies for what may often appear to be broadly similar technologies, let alone claims (as also complained by Apple) that the shape of one firm’s handset screen may be a copy of another’s. Indeed it should force us to confront the whole question of the role of IP in the modern economy and whether any genuine public interest is served by seeking to enforce proprietary patent rights in an era of rapid technological change, particularly when the claim to such rights often seems questionable in the first place.

The question is all the more pertinent given that intellectual property rights seem only to have become a major issue in international economic relations (or even within national economies) within the last 20-30 years. It is true that the right of individuals to be granted patents on new inventions has been recognised for centuries by national governments in the West. However, it is striking that they never till now seem to have loomed large in the development and spread of technology either before or since the industrial revolution of the early 19th Century. This is probably because the value of patents has not been generally perceived as great enough to justify the cost and effort of obtaining them, given that they do not normally offer protection to inventors / patent holders for more than 20 years and may be hard to enforce.

This naturally begs the question of how and why attitudes have changed in recent years. The key to understanding this is evidently the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) which was included in the rules of the World Trade Organisation (WTO) established in 1995 as the governing body regulating international trade. The WTO replaced the General Agreement on Tariffs and Trade (GATT) which had fulfilled the same function since 1948 and had not included any rules governing IP, although the United States in particular had been anxious to remedy this deficiency at least since the 1980s. As a consequence all countries joining the WTO are required to sign up to TRIPS, which commits them in principle to granting and enforcing IP rights to and for all legitimate claimants from whichever country. (It should be noted that this applies to copyright on content and recordings of creative / artistic works as well as technological innovations.)

The most obvious reason for the new-found determination of US and other Western countries to impose IP protection rules internationally is that they are the main source of both technological innovations and mass-market “cultural creations” such as films and musical recordings and that they wished to secure the maximum share of the value generated by these for their corporations and national economies – or even in some cases to limit access to them if that was seen as in their strategic interest. What is less obvious, but arguably a more compelling reason, is that business cycle and competitive pressures combined with market and technological change have been pushing global big business to seek new outlets for investment of their continuing flow of surplus profits. In particular, they have been forced to respond to a) the slower growth and increasing saturation of traditional markets for consumer goods (such as electrical appliances and motor cars) as well as greater competition from low-cost producers such as China, and b) the correspondingly greater importance of services in consumer markets, also associated with a relatively bigger need for investment in intangible assets (such as technological research) rather than plant and buildings. (Another vested interest probably behind this trend may be worthy of mention, namely the voraciously expanding legal services industry, which has rightly viewed IP litigation as a potential bonanza.)

A difficulty posed by this growing dependence on such “software”-intensive markets is that big corporations do not necessarily enjoy the protection from competition that goes with large size, economies of scale and corresponding barriers to new entrants – which have typically protected big players in traditional heavy industries such as engineering and petrochemicals. Hence other ways to protect profits by limiting competition have had to be sought. While Microsoft Corporation demonstrated in the 1990s how to do this by successfully operating a highly profitable monopoly with its Windows software – notwithstanding a US federal anti-trust prosecution – such tactics may well seem difficult for others to replicate, not least because competitors (notably Apple) were ultimately able to eat into Microsoft’s ruthlessly acquired market share. But even as such options for capturing economic rents from IP appear to be dwindling, major players in different technology sectors still seek to use patent law to limit competition.

The trouble with this approach is that the task of designing and enforcing an effective system of patents that meets general acceptance faces as many serious constraints as ever. Of these the central one is that IP restrictions on economic activity are widely perceived as either inherently unfair or unenforceable – even by most countries which have signed up to them under WTO / TRIPS, not least because (as developing countries have argued in WTO negotiations) the already industrialised countries have the competitive advantage of being able to subsidise research and development for their corporate interests. Moreover, to the extent that patent rights are enforceable it is also argued by many that, so far from being an incentive to investment in research and development that may lead to desirable technological progress, they permit and encourage those with control of existing dominant technologies to prevent any advances to them in order to maximise their returns to their past investments. Such a charge could indeed be convincingly levelled at the major pharmaceutical companies, which have often sought to extend the life of patents (typically by making very slight modifications to existing products) rather than undertaking or allowing research by others so as to permit development of new drugs incorporating vital advances in treatment. This constraint has been identified by at least one very respectable body of academic opinion – including two Nobel prize winners – as a reason for recasting the entire global structure of IP law and regulation (

At the same time there is growing recognition that most of the vital innovations that are central to the modern global economy are largely the result of publicly financed research, so that the claim of any private sector companies to any exclusive rights over them seems obviously indefensible. This is the clear implication of a recent study (authored by a leading economist, Prof. Mariana Mazzucato and published by the think-tank Demos – – pointing out that such key technologies as the algorithm central to Google’s search engine and the touch-screen facility used by Apple and other smart-phones were largely developed with the aid of US federal funding, while many important advances in biotechnology made by UK public bodies have been made available at little cost to pharmaceutical companies which have used them to make substantial, patent-protected profits.

Perhaps the most egregious perversions of the concept of IP have been those based on attempts to patent new products derived from naturally existing ones such as the human genome and planting material for crops. The latter case in particular has been the subject of a long campaign (led by the main chemical company concerned, Monsanto Inc.) both to promote the adoption of genetically modified (GM) seeds and to ensure that farmers using them cannot save and replant them – according to traditional agricultural practice – in supposed breach of the manufacturer’s patent. The seemingly endless controversy surrounding this campaign – centring mainly on the issue of the costs and (highly questionable) benefits of GM varieties – has thus far led to no objectively measurable public benefit; rather the contrary. Indeed Monsanto’s recently announced decision to abandon attempts to have its GM seeds authorised for use in the EU would indicate they are starting to see the whole campaign as a futile waste of effort. Yet unquestionably in the absence of restrictive patent laws and TRIPS Monsanto and others would hardly have had the incentive to embark on such a wasteful course and those resources could have been devoted to more constructive purposes.

As suggested earlier, all these largely vain efforts to assert IP rights to an extent that has never been attempted before may come to be seen as worthwhile insofar as they have provoked a strongly hostile reaction against the idea that certain economic actors should seek to claim a right to monopoly control of access to productive assets – and the economic rents that go with them – which are either the common heritage of mankind or have been developed at public expense and thus, notionally, in the public interest. Nowhere has this revulsion been stronger than in the area of pharmaceutical products when the dominant global corporations have sought to deploy their patent rights to deny access to the world’s poorest to affordable life-saving drugs (e.g. to treat HIV) in pursuit of maximum profits. But equally significant is the trend towards developing freely available “open source” software – such as the Linux alternative to Microsoft’s Windows, which has clearly been conceived as an express rejection by its creators of Microsoft’s anti-social values.

There seems every reason to hope that such developments (as well as the inconclusive outcome of the Apple / Samsung litigation) point to a future where such intangible productive assets will be regarded as freely available to individuals or communities to use for whatever legitimate purpose they choose. This is akin to the increasingly popular concept of the “creative commons”.

It needs to be stressed that this does not mean that the concept of intellectual property is wholly without validity. Indeed it is likely to remain the consensus view that inventors, authors and producers of intellectual “products” – whether technological or “cultural” should be entitled to reap a monetary reward from their creations. The question of how this may be achieved, while balancing the interests of individuals and the public at large, in an age when copyright is increasingly hard to protect, needs to be the subject of international public debate. Perhaps the most rational solution would be a structure of rewards for properly authenticated inventors or originators of different types of IP that allows them to be suitably (but not exorbitantly) compensated on a one-off or time-limited basis, preferably according to internationally agreed criteria.

What these developments in relation to IP do signify, however, is that the attempt by the global corporate establishment to seize control of intangible assets on an increasing scale in order to meet their helpless addiction to seeking ever more high-yielding investment outlets is doomed increasingly to fail.


17 September 2013

Capitalism’s terminal debauch

As the Global Financial Crisis (GFC) drags on, the inability or unwillingness of the ruling global elite to recognise or address its true causes appears ever more surreal, not to say terrifying. The sense of impotence and ideological bankruptcy among political leaders is manifested almost daily – as in President Hollande’s attempt on 9 June to convince his Japanese hosts that the Eurozone crisis is “over” ( and in Britain’s opposition Labour party simultaneously embracing the governing Coalition’s policy of austerity and welfare cuts even as the independent Institute for Fiscal Studies projects that this strategy will preclude any relief from public spending cuts and tax rises until at least 2020.

This flight from reality is a sign of the utter helplessness felt by world leaders in face of their failure to find a solution to the global economic paralysis stemming from the GFC. From their perspective, of course, any such solution must be compatible with preserving the present “neo-liberal” world economic order, which since the 1980s has concentrated untold wealth in the hands of the tiny minority that they represent, while the vast majority of the world’s population sinks deeper into impoverished hopelessness.

A conspicuous recent symptom of their frustration is the attempt by the new government of Japan, whose economy has experienced no significant growth in over 20 years, to break free from chronic stagnation by engaging in a renewed massive bout of Quantitative Easing (QE) – or money printing by any other name. The main idea behind this move is ostensibly to promote domestic inflation – instead of the chronic deflation the country has experienced since around 1990 – by encouraging a devaluation of the Yen and thereby, it is hoped, a rise in consumption and growth. The immediate impact of this initiative was dramatic, prompting a 25 per cent fall in the value of the Yen against the US dollar in the 6 months to mid-May 2013 and a corresponding rise in the Nikkei stock market index (over 80 per cent) in anticipation of the higher inflation and economic growth investors apparently believed would result from this stimulus.

The scale of this intervention – involving the purchase by the Bank of Japan of government bonds (JGBs) with Yen newly created by itself – has been even larger (proportionate to the size of the national economy) than the parallel initiative in the United States, where the Federal Reserve’s QE programme is currently monetising debt at the rate of over $1 trillion annually. Not surprisingly, it may seem, such massive injections of funds, channelled through major banks and investing institutions, have served to underpin the broad-based market euphoria building round the world since late 2012, which has seen most stock market indices rise by upwards of 20 per cent. Yet for all the efforts of politicians and mainstream commentators and media to spin this market surge as an indicator of rising economic optimism and the long-awaited revival of economic growth (GDP) – even though it has failed to lift most market indices as high as the all-time peaks attained before the bursting of the bubble in 2000 – manifestly it has been an entirely synthetic, liquidity-driven bonanza.

Moreover, mainstream propaganda is at pains to downplay the vital role of QE in allowing both public and private debt to continue to be financed. Yet without such massive official purchase of government bonds (and also private-sector “toxic waste” such as US mortgage backed securities) there is no doubt that their market value would have fallen – and interest rates correspondingly risen – to unsustainable levels, thereby forcing public and private institutions into open insolvency and mass default.

Corruption of the market place

The artificial nature of the recent stock market “boom” is still more obvious once we discover that a large proportion of the stock purchases fuelling it has been made by companies buying back their own shares, ( often financed by increased debt rather than retained earnings. In other words, company executives and directors are using the opportunity provided by the abundant cheap finance conjured out of thin air by QE both to manipulate their share price higher – facilitated by the prospective reduction in the number of shares outstanding – and to enrich themselves by selling their own shares in the company at a higher price, as well as through increases in their remuneration where (as is often the case) this is linked to rises in the share price. At the same time the whole process reflects dwindling rather than growing confidence among corporate insiders in the prospects of their businesses and an irresponsible tendency to cash in while they can, even if that means further weakening balance sheets (now loaded with more debt which will be even more of a handicap once interest rates rise again).

These corrupt, market-distorting practices in the stock market may be seen as just another manifestation of a broader climate of manipulation now pervading all asset markets. The best publicised case of such market rigging has been the LIBOR interest rate fixing scandal exposed in 2012. On top of this now come allegations – which have thus far received little media coverage – that the vast foreign exchange market (with daily turnover of more than $4.5 trillion), whose epicentre is once again London, is also subject to widespread distortion of exchange rate benchmarks by market traders. Even more hidden from view is the abundant evidence that the US authorities are colluding with private sector financial institutions to suppress gold and silver prices ( (in the interests of maintaining the value of the US dollar, otherwise severely threatened by the Federal Reserve’s ever more profligate monetary policy) – a process which is illegal under anti-trust law.

All this reinforces the growing sense that virtually all international financial markets are by now effectively rigged – and that the often criminal practices involved are tacitly sanctioned, indeed orchestrated, by the governments of the industrialized world under US leadership. Indeed, while evidence of this has been building for many years – as witness the establishment of the shadowy US presidential Working Group on Financial Markets following the stock market plunge of 1987 and a number of well documented instances of official share buying in Japan and other Far Eastern markets since then, it may be said that the widespread adoption of QE since the onset of the GFC has served to underpin and sanctify the whole principle of generalised market manipulation.

It should go without saying that allowing such an essentially fraudulent market climate to develop is extremely hazardous for those who would preserve the illusion that the world economy is governed by more or less free markets and a “level playing field” for all. For once market players perceive that markets have become institutionally perverted and corrupt arenas where a privileged few with inside information can make vast profits at the expense of the mass of ordinary investors the latter are bound to start leaving the casino in droves – if not burning it down. At the same time it will become harder and harder to convince the public at large that they should make huge sacrifices to keep the system afloat.


Against this background the continuing resort to QE – an unprecedented experiment that turns the basic principles of market economics on their head – represents an enormous gamble. It has been justified largely on the basis that it can stimulate revived growth by pumping more money into the economy. However, its failure to do so thus far – notwithstanding attempts to pretend that the US economy at least is now recovering – has led in recent months to growing worries in the markets that it will soon prove unsustainable. For without the prospect of a boost to growth leading to a reduction, let alone a reversal, of budget deficits holders of US Treasury Bonds and JGBs are losing confidence that they will hold their market value. This concern is already being reflected in a slight rise in market interest rates. Yet for reasons noted above any significant rise in interest rates – of 1 percentage point or more – would likely precipitate mass global insolvency, which would be compounded by a generalised collapse in asset values. Even more chilling is the prospect that, even if the longed for revival of growth were to occur, it would inevitably lead to a sharp rise in interest rates as both demand for capital and inflationary pressures pick up. The only way this might be averted would be by engaging in further monetary expansion (via QE) so as to continue bearing down on interest rates, although this would bring the obvious danger, indeed certainty, of hyperinflationary collapse. Either way, therefore, there is now evidently no way of avoiding the catastrophic market meltdown that policy makers have been struggling to avert since 2007.

This harsh reality is finally starting to be reflected in the mainstream media, as it continues to pay lip-service to neoliberal orthodoxy while at the same time being forced to recognise its inevitable failure. Thus a leading commentator in the right-wing Daily Telegraph ( on the one hand chides both the Tories and Labour for their failure to make serious cuts in the welfare budget, but none the less concludes that the British national debt burden is after all too large be paid down and can only be eliminated through inflation or default. This thought is echoed by a former senior economic policy official in the George W. Bush administration, Dr Pippa Malmgren, who in a recent interview states that “at the end of the day, the magnitude of the debt that is held by the United States, and indeed by all of the industrialized economies that have a debt problem, is so great it cannot be paid down. The human suffering involved would be so far beyond our capacity to withstand, so it has to be defaulted on.” ( – 8 June).

Thus the global elite – or criminal syndicate – which attempts to manage the world economy in its own interests now finds itself in the position of a chess player who has run out of moves. Yet such is the irresponsibility of those in charge that, so far from conceding defeat, we can only expect them to try ever more desperate ploys – such as precipitating yet more wars – in trying to escape the inevitable. One thing that seems most unlikely to deter them is the scale of human suffering they might unleash.

20 June 2013