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.


Last days in the bunker?

As the economic news across the world has turned increasingly ugly since the beginning of 2013, signs of intensifying desperation within the leadership of the industrialised nations are starting to appear. In the face of negative growth of GDP in all major countries (including the supposedly more buoyant US) in the last quarter of 2012 politicians, central bankers, leading economists and captains of finance and industry have all begun to express alarm at the failure of official measures designed to stimulate revival to have any positive impact.

As from the start of the global financial crisis (GFC) in 2007-8, there are two broad strands of official opinion as to how it should be overcome, starting from the common perception that its initial manifestation – the impending mass insolvency of the financial system – had to be averted by unprecedented state bail-outs of (largely private) banking institutions. The first, and predominant, strand of opinion has been that the resulting huge extra burden of public sector debt must be reduced by means of intense fiscal austerity, principally through cuts in expenditure rather than tax increases. The second strand asserts that, in order to reduce the excessive levels of debt in both the public and private sectors there needs to be yet more public sector borrowing – thereby increasing the debt level, at least initially – to finance new capital spending on the basis that this will boost growth throughout the economy and hence raise the extra revenues needed to pay down the debt. Although economists continue to argue about which of these somewhat conflicting strategies is more likely to lead to the desired recovery, most governments have in practice pursued a combination of both. At the same time there has been near unanimity that monetary policy must be extremely relaxed, so that near zero interest rates have been the norm ever since the start of the GFC – on top of which “quantitative easing” or QE (using money created by the central bank to buy government debt and thereby increase liquidity in the economy while also serving to prevent interest rates on the debt from soaring to unsustainably high levels) has increasingly been resorted to by central banks.

In fact at the time these “extraordinary measures” were first widely adopted following the banking disaster of 2008 it should have been obvious, on any objective analysis, that such measures could never lead to anything resembling normality – let alone a sustained revival of growth – while the economies of all major countries remained weighed down with such a crippling burden of debt, and that consequently most of this debt would need to be written off before equilibrium could be restored. Despite this the main organs of establishment propaganda – naturally including the mainstream media – have for the last four years maintained a public posture of confidence that the global economy is on course for recovery.

However, now that it is apparent that all the policy measures, conventional and unconventional, that governments have managed to deploy have predictably left their economies flat-lining at best – with real GDP no higher now than in 2007 and public indebtedness still rising – panic is evidently starting to set in. Thus in Britain two leading establishment economists – Martin Wolf, chief economics commentator of the Financial Times, and Lord Turner, Chairman of the Financial Services Authority – have seemingly joined forces to call for the printing of “helicopter money” (cash freshly minted by the state) to be distributed across the economy in a last-ditch effort to stimulate consumer demand. Yet it must be obvious to them that such an approach, if adopted, would risk much higher levels of consumer price inflation (which is already well above both the official target level and average income growth) and / or a renewed bubble in asset prices, including house prices, which are still well beyond the reach of most first-time buyers five years into the downturn. As it is, one of the few positive symptoms resulting from QE is that, as a result of the extra liquidity injected into the system, stock market prices have risen significantly in recent months, although strikingly the main benchmark indices in the US and UK are still below the all-time high levels reached in 1999-2000. Doubtless Wolf, Turner and their colleagues are also aware that, if they could get away with such an “inflationist” strategy for a few years it could significantly devalue the huge debts still weighing down the economy, albeit at the price of reducing many millions dependent on small savings and low incomes to penury.

At the same time right-wing commentators and Tory politicians desperate for some action to revive growth are calling for huge tax cuts on business and investment (corporation and capital gains tax) to be paid for by even bigger cuts in spending than those already inflicted on the bleeding body of the public sector. This despite the copious evidence from past experience that a) “supply side” measures such as cutting direct taxes tend only to result in only higher public debt (as under Reaganomics in the US in the 1980s) and b) trying to cut one’s way to fiscal balance is equally self-defeating, as most recently demonstrated by Greece and Italy. Yet all the while the inescapable reality remains, as it has been since the start of the GFC, that there is no way of restoring any kind of stability or balance to the global economy without effectively writing off virtually all of the unpayable debt still paralysing the system. However this is achieved – whether through the ending of state support for financial institutions and asset values or via hyperinflation through QE or other forms of money printing – the inevitable outcome will be a market meltdown even more cataclysmic than that of 2008 and a consequent collapse of personal income, wealth and savings such as to threaten social stability and civil order across the world.

This intensified resort to vain fantasies as the inexorable forces of systemic failure close in calls to mind the delusional behaviour of Hitler and his dwindling entourage in the Berlin bunker in 1945, summoning non-existent divisions to be thrown into the Eastern front as the Red Army remorselessly advanced on the capital. For Hitler the stark choice was surrender or suicide. For Chancellor Osborne and his peers in other countries the options may seem almost as unpalatable, although unlike the Fuhrer they may hope to survive capitulation personally.

In contrast to the position facing Germany in 1945, however, there is now no obvious alternative regime available offering a vision of a more humane economic and social order that could restore some degree of stability and hope to the world. This is because, despite the West’s supposed commitment to pluralism and democracy, all our political institutions – including most of the media – have, over the last 30 years, been progressively coopted and absorbed into a monolithic structure committed to sustaining the neo-liberal ideology propagated by and for big business interests.

In this climate of extreme market liberalisation and globalisation – modified by highly distorting government-supported manipulation and subsidy favouring selected groups or individuals – there has been no place for any notion that the resources of the state could or should be deployed to control or restrict economic activity in the wider public interest if that is seen to be at odds with corporate power and private profit maximisation. Hence it seems quite hard to conceive of any major Western government having both the will and the capacity to do what now needs to be done to maintain or restore minimum conditions of survival as the global economy progressively disintegrates. For this would require the creation, at least on a temporary basis, of some form of command economy, involving tight government control over all aspects of the economy – including not only credit but prices, incomes, production, trade, foreign exchange and capital flows – as a prelude to restoring economic life on a more stable long-term basis.

Given the current balance of political forces in the world’s rich countries there is evidently no prospect of any government acting to pre-empt the gathering financial holocaust. Even once it clearly manifests itself – almost certainly in the form of a new round of bank failures – it seems hard to believe that the increasingly criminal ruling élite will easily submit to the need for such a command economy. For this would entail not only a) huge financial losses for themselves (and the rest of the “1 per cent”) as asset values are wiped out on the markets, but b) a demonstrable failure of the dominant neoliberal ideology (if not of capitalism itself) as comprehensive and terminal as was that of Soviet Communism in the 1980s. For the powerful few, therefore, the stakes are high. Yet for the mass of ordinary people round the globe they are higher still, and many may increasingly feel they have nothing to lose but their lives in the struggle for a more hopeful future, as the Arab “Spring” arguably demonstrates. As the world approaches the moment of maximum danger it is crying out for leadership to take it in a different direction.

3 March 2013


Britain’s one-party state

      Amid the continuing economic paralysis brought on by the global financial crisis attention has lately been focused on the chronic huge imbalance in government revenue and expenditure in the world’s largest economy, the United States. Without some moves to close this gap, it is widely perceived, there is no hope of reducing the enormous level of public debt which, along with equally massive private sector debts, is crippling the economy and threatening generalised bankruptcy. In order to achieve such a reduction there must either be an increase in revenue – through higher taxes – or cuts in public expenditure or some combination of the two. The extent to which the emphasis should be more on direct tax increases (particularly on the wealthy who enjoyed massive tax cuts under the Bush administration) or public spending cuts is a matter of fierce political debate between Republicans and Democrats in Congress, with most Republicans rejecting any tax increase whatever on principle.




      Leaving aside the fact that fiscal austerity on its own cannot possibly restore stability (let alone growth) to such heavily debt-ridden economies, what seems striking from a British perspective is that tax increases are at least on the agenda in the US – notwithstanding Republican intransigence. By contrast in Britain, which has an even greater public deficit and debt problem than the US, debate between the political parties or in the mainstream media on how to remedy this dire situation centres exclusively on the extent and nature of the necessary cuts in spending – with the main emphasis on public services, where cuts most severely affect the poorest and most vulnerable in the community. As for taxes, the only significant increase enacted by the Coalition government has been on Value Added Tax, an indirect tax levied on all members of the public equally – and therefore hitting those with the lowest incomes hardest. So far from any proposal to raise direct taxes on those with higher incomes (those best placed to help close the gap) the Coalition has since 2010 favoured them with a cut in the top rate of income tax and a further cut in corporation tax on top of those lavished on them by successive Tory and Labour governments over the past 30 years – resulting in a decline in the top rate of income tax from 83 to 45 per cent and in the rate of corporation tax from 52 to 21 per cent since 1979.




      These concessions, combined with the enormous opportunities for tax avoidance provided by the ever more complex regulations and the ready access of companies and wealthy individuals to offshore tax havens, have led to spreading public resentment at the unfairness of the system, particular at a time when the British public is facing seemingly endless demands for greater austerity. This animosity – mainly articulated by ad hoc groups of activists such as UK Uncut, the Tax Justice Network and the Occupy movement – has built to the point where politicians have felt the need to react. Amazingly, however, their response has so far consisted solely of denunciations of a few US-based multinationals (Amazon, Google and Starbucks) for paying virtually no tax on the substantial profits they derive from their UK operations. Understandably, when summoned by MPs before the Public Accounts Committee to answer charges from its Chairman that their failure to pay more UK tax was “outrageous” and “an insult”, the three companies all pointed out that their conduct was in full compliance with the laws laid down by Parliament and with their obligation to maximise returns to their shareholders. Nevertheless, spurred by threat of a consumer boycott, Starbucks announced a decision to make a voluntary extra tax payment of £20 mn over two years – a derisory sum in relation to their hundreds of millions of UK annual sales. As even one Coalition MP was forced to admit, such a demonstration that tax was effectively optional for large corporations makes a mockery of the system.




      Despite the ridicule brought on themselves by such pathetic antics no politician from any of the major parties has called for any changes in tax laws or rates to compel either corporations – or wealthy but lightly taxed individuals – to pay more. Nor have there been any demands from mainstream media for any such legislative changes. Likewise even the trade unions, the traditional champions of social justice on behalf of the working masses, are largely silent on this issue, merely echoing vague calls for reduction of tax avoidance loopholes. Such conspicuous cowardice from the British establishment confirms the existence of a political consensus in Britain that the idea of direct tax increases, whether on corporations or individuals, is to be considered taboo even at a time of extreme fiscal crisis; rather it is proposed to extend the grotesquely inefficient and divisive practice of means testing to universal benefits such as child benefit in order to try and close the gap.




      Instead of challenging this consensus by calling for redistribution of income via direct taxation the official opposition, the Labour Party (founded and, incredibly, still substantially funded by the unions), is going through the motions of looking for other ways of achieving more equitable income distribution. The latest buzz-word to surface from the think-tanks in this context is “pre-distribution”, a term which party leader Ed Miliband himself and a number of his colleagues purport to take seriously. Yet those who regard sloganising as an inadequate substitute for rational thought will find on closer inspection that the concept has as much substance as the Emperor’s New Clothes and is merely another attempt by its advocates to hide their ideological bankruptcy in pseudo-academic verbiage. For its essence, apparently, is that a) it does not and must not entail spending more public money on benefits of any kind and b) it will mainly involve exhorting private business to create more and better paid jobs for the underpaid and underemployed without putting any pressure on them to do so. Such a stance is obviously of a piece with that which begs companies like Starbucks voluntarily to pay more taxes than they are obliged to. It also fits all too well with the record of a party whose leaders appear comfortable with their public image as “cabs for hire” and which has shown no remorse for its part in the greatest war crime perpetrated by any European government since 1945.


     All this demonstrates once again the firm resolve of Labour, along with the other mainstream parties, that no policy change must be proposed – or even publicly discussed – that is at variance with the interests and agenda of the huge and shadowy global big business “syndicate” that effectively dominates the world. Party managers and financial backers are clearly mindful of the widening gulf thus being created between the political class and the mass of public opinion – as shown by their strenuous efforts to fabricate opinion polls purporting to demonstrate that most people think it is right to impose greater austerity on the poor and most vulnerable even as the corrupt financiers whose crimes have reduced the economy to such dire straits not only walk the streets with impunity but continue to be rewarded with high salaries and tax cuts.



      The need to deploy such totalitarian methods in order to try and foist this perverse ideology on the public may seem all too logical to a ruling élite resolved to make no concessions to either reason or humanity. For whereas until lately our rulers have clearly felt able simply to ignore public opinion most of the time, they may well now feel that the dangers of serious unrest are such that it needs to be more actively managed – or distorted. A classic example of the more relaxed approach was the unanimous refusal of all three main parties to contemplate renationalisation of the railways at the time of the 2001 election – notwithstanding a series of horrendous accidents following privatisation and opinion polls consistently showing at least 70 per cent of the public favouring a return to public ownership (as it still does). Yet given the growing signs of civil disorder elsewhere in Europe in the face of deepening social deprivation and repression – not to mention the uprisings associated with the Arab “spring” – the authorities may reasonably fear that such disconnect between rulers and ruled will soon become explosive.




      The question crying out for an answer is why Britain – or indeed any of the other Western industrialised “democracies” that are heirs to the Renaissance and the 18th century Enlightenment – is unable to conduct an open, pluralistic public debate on what needs to be done to stem the spreading tide of global chaos and conflict before it engulfs us all. While there may be no single factor capable of explaining such ideological paralysis, it is hard to escape the conclusion that the failure to limit the power of big money to buy the political process (including control of the media) is a principal cause – a power perhaps made more dangerous by the tendency of modern capitalism to concentrate vast wealth in far fewer hands than ever before in history.




      The effect of these distortions in Britain is that our supposedly democratic constitution is now less representative of the popular will than at any time since before the Reform Bill of 1832, when the franchise was limited to a tiny proportion of the population and those with wealth and connections could buy seats in Parliament without the need to present any policy platform to the electors. Such a reversion to open debauching of our institutions seems bound to lead to calls for drastic reform to make them more genuinely accountable and free them from the corrupting power of big money. But perhaps we may doubt whether any such reform can happen in time to avert social collapse and civil disorder on such a scale as to push us back still further in terms of our history to when conflicts were resolved largely by force rather than the rule of law. Given the manifest obduracy of those in power in the face of looming collapse – and increasing signs of high level lawlessness (not only among the “banksters”) – we are entitled to suspect that they now see such an outcome, with all the monumental suffering that implies, as a price worth paying for them to cling to power a bit longer.




3 January 2013


Twilight of the investors

     A striking symptom of the unending global financial crisis (GFC) has been the announcement by Union Bank of Switzerland (UBS) on 30 October of 10,000 staff redundancies across its world-wide operations – almost 20 per cent of its existing personnel. In London, where some 3,000 of these lay-offs have occurred, the development has been made all the more dramatic by the fact that many of those affected only learned of their fate when they arrived at the office to find that their passes had been disabled and they were given a letter informing them of their suspension on full pay (pending termination) before being escorted off the premises by security staff. According to press reports the reason for this seemingly brutal procedure was the management’s fear that, should these individuals be allowed further access to their computer terminals they might feel they now had nothing to lose from engaging in reckless trading, either in the hope of making one last killing for themselves or else, out of spite, to saddle the bank with massive extra losses. Such worries seem all too understandable in the light of the current fraud trial of an ex-UBS London trader in connection with a loss of $2.3 billion allegedly resulting from his dealing, although the defendant claims his bets well above the defined risk limits were placed with the encouragement of his superiors.

     Nothing could better symbolise the terminal decadence of the financialised capitalist economy than this sordid episode. It demonstrates graphically both the climate of dishonesty and mistrust now pervading the investment banking industry and its utter abandonment of any notion that it exists to support economically viable productive investments in favour of a purely parasitic casino culture. While some might suggest that this tendency is somehow attributable to a spontaneous outbreak of moral decay – whether in the financial sector or more generally – such a claim would be no more plausible now than when it was used to explain the Enron and numerous other financial scandals that occurred before and after the bursting of the “dotcom” bubble over 10 years ago. Indeed that event can now be seen to have marked the ending of the prolonged global stock market boom that began in the early 1980s, as equity prices have been declining or stagnating ever since and in real (inflation-adjusted) terms now stand far below their peak in 2000.

     Rather what is now becoming inescapable is the ever greater impossibility of making sufficient returns on investment – as reflected in the level of operating profits relative to capital employed – to satisfy the competitive markets other than by reckless gambling, a requirement made inevitable by the classic cyclical implosion of the corporate sector under the weight of excess accumulated capital. This perception is reflected in a recent report in the Financial Times (8 November) that a number of City institutions have pronounced that the “cult of the equity” is dead or dying, claims that echo an earlier FT article by Samuel Brittan – The End of the Cult of the Equity (2005).

     This recognition is also mirrored in the declining share of equities in the total investment holdings of UK pension funds which, at under 40 per cent, is now below that of fixed interest securities (bonds) for the first time ever. This does not mean, it should be stressed, that bonds are viewed by the market as an attractive investment, but rather that they may be preferred by pension funds desperate for the higher yield offered by speculative, but correspondingly more risky, “junk” bonds – or else simply that bonds in general may be thought less likely to experience a sudden collapse in value such as that which affected equities in the 18 months to 2009, when the benchmark S&P 500 index fell by almost 60 per cent. However, given that the market price of corporate bonds is ultimately just as dependent on the value of the underlying assets as are equities, such a belief in their relative safety is almost certainly misplaced, as noted in yet another FT article (A false sense of security – 19 November). Likewise the high prices of many government bonds – and correspondingly low interest rates – can hardly be seen as sustainable when all the Western governments issuing them are essentially insolvent and can only maintain such market valuations by virtue of money printing and other blatant forms of manipulation.

     The implications of these developments are momentous, though little understood outside a rather small circle of the more clear-eyed market observers and investors – not least because of the huge vested interest in sustaining public belief in the continued viability of long-term investment in the market. The size and power of this vested interest has been growing over the last 60 years, ever since Wall Street (followed by the City of London) began to promote the idea of the benefits of saving through investment institutions such as mutual or pension funds. Its genesis, it should be noted, coincided with the post-World War II economic boom giving rise to unprecedentedly rapid sustained growth in the 1950s and 60s. Once this came to an end with the onset of the first global post-war recession in 1974-5 it might have been suspected that the “cult of the equity” would have a limited shelf life. By that time, however, the economies of the US and much of the industrialised world were already too closely tied to the fate of the overly powerful financial sector – on which the livelihoods of many millions had in any case come to depend – for there to be any question of calling this model into question. Instead it was determined, if only by default, that policy would be directed towards maintaining the value of financial securities and the buoyancy of financial markets at all costs.

     Over the subsequent four decades the constant refrain of official propaganda has been that prosperity would be revived – and reflected in steadily rising stock market values – if only appropriate policies of market liberalisation (including globalisation) were pursued, thus supposedly permitting renewed growth of investment and output (GDP). The fact that, despite the general implementation of such policies, the sustained recovery in growth has persistently failed to happen has been constantly glossed over by mainstream commentators as well as governments – even to the point of ignoring or denying the reality of a steady long-term decline in real global GDP growth rates since the 1970s. At the same time, as in previous world financial crises – such as that precipitated by the Wall Street Crash of 1929 – an increasingly dominant part has been played by speculative investment, which essentially means the buying and selling of existing assets rather than creating new productive capacity. Such activity – defined by defenders of the status quo as “wealth creation” but more aptly characterised by Lord Turner of the Financial Services Authority as “socially useless” – has been greatly facilitated by the great liberalisation of financial markets that has occurred since the 1980s. Indeed it was precisely thanks to this liberalisation – involving the removal of restrictions which had been put in place in the 1930s to prevent the very type of dangerous risk taking that had led to the Wall Street Crash – that the global stock market boom of 1982-2000 was able to happen in spite of persistent stagnation in output.

     Ignoring these growing symptoms of economic failure and systemic dysfunction since the 1970s, propagandists for the ruling élite, particularly under the Thatcher régime in Britain, have promoted the idea of “popular capitalism” and a “property-owning democracy”, concepts that were quite easy to sell politically in the 1980s as the sustained stock market boom was taking hold and belief in more state-centred ideologies was weakened – not least by the terminal failure of the Soviet model. However, since the start of the new century, which coincided with the end of the market boom, it has become more and more obvious that investing in financial securities of any kind offers no secure route to a prosperous retirement for anyone – all the more so as the world is faced with many years of global economic stagnation before its huge debts can be unwound or written off.

     The reality of bleak investment prospects was evidently grasped – even before the onset of the GFC in 2008 – by the Pensions Commission reporting to Britain’s Labour government in 2005 on how to resolve the mounting “pensions crisis”. For it was forced to recognise that the sacred promise of the private funded pensions industry – that it could guarantee an adequate level of retirement income to contributing individuals – was soon to become a thing of the past. Yet rather than drawing the obvious inference – that the model of funded pensions was always doomed to failure and was thus an idea whose time should never have come – the Commission felt politically compelled (in the interests of the City institutions) to pretend that people should still be encouraged to save for their retirement through funded schemes, albeit ones that would offer no guarantee of any level of pension. At the same time the Commission was forced to recognise that non-funded (pay-as-you-go) pension schemes such as the vast majority of occupational schemes in the public sector were inherently more viable than funded ones, although subsequently successive governments (egged on by the City and with little resistance from the unions) have done their best to undermine them.

     As the global outlook darkens further, both market players and the authorities are becoming ever more shameless and irresponsible in their efforts to avert systemic collapse by rigging markets – through “quantitative easing” (money printing by any other name), manipulating LIBOR, stock markets and energy and other commodity markets – or turning a blind eye to other forms of fraud (mis-selling of payment protection insurance and interest rate swaps). Yet this struggle to hide the reality of a generalised collapse in the market worth of corporate assets – and indeed of the entire capitalist profits system – is now increasingly revealed to be as futile as it is criminal. Hence, as investors become an endangered species, thousands more City traders may well already be wondering, as they leave their office in the evening, whether their passes will still work when they return the next day.

21 November 2012

Energy: The Ultimate Case of Capitalist Dysfunction

In the last instalment we described how since the 1970s the capitalist economic model has become progressively more maladjusted in a world of transformational technological change which is tending to make it as obsolete as the feudal model based on pre-industrial technology became at the start of the Industrial Revolution two centuries ago. However, a glaring difference between the situation now and at the start of the 19th century is that throughout the world the class with a vested interest in the survival of the existing (capitalist) order is still overwhelmingly dominant, whereas 200 years ago the then ruling élite (the landed aristocracy) were increasingly being challenged by the rising bourgeoisie.

Because of their continued dominance – based on their disproportionately huge share of global wealth and income – this group still retains almost total control of the political agenda via its virtual monopoly of the mainstream media (even though this position is now being progressively eroded by the growth of the internet and social media), not to mention the persistence of corrupt structures of political party funding and lobbying which ensure that money talks loudest in public discourse. Hence it is all too easy for big business to disseminate propaganda favouring its interests in the channels that most strongly influence public policy.

Thanks to this influence it has been possible for the very substantial vested interest comprising the global energy industry – representing not only the major oil companies but leading OPEC states as well – to conduct a sustained campaign of misinformation to try and discredit the overwhelming scientific evidence that man-made global warming – resulting primarily from exponentially growing consumption of fossil fuels – is a reality which may pose an existential threat to human society in much of the planet. While the strength of the evidence is such that this campaign of denial has only been partly successful, it has undoubtedly had the effect of sustaining a high degree of “climate change scepticism” among the global public, thereby weakening and delaying moves towards radical change in the pattern of energy use.

Furthermore, to the extent that the giants of the energy industry – and the rest of the traditional corporate sector (including big finance) – have found it necessary to “go green”, by promoting low-carbon forms of energy supply, they have not done so in ways best designed to serve the public interest. Thus rather than support policies designed to limit or phase out particular types of operation, such as coal-fired power generation, corporate interests have given priority to the seriously deficient mechanism of “cap-and-trade”, based on the idea that it is possible to reduce global production of carbon emissions by means of a market mechanism, namely trading in permits to pollute within an officially mandated emissions ceiling. Although this system has had some marginal benefits – mainly in facilitating investments that limit the growth of emissions in developing countries through the Clean Development Mechanism (CDM) – the overall experience of carbon trading to date (largely confined to the European Union) suggests it is highly unlikely to lead to significant reductions in emissions or promote the most cost-effective choices. Indeed it has been shown there is a danger of it having precisely the opposite effect if the incentives are badly calibrated. An example of this is provided by a widely used coolant gas whose by-product in the form of a waste gas resulting from the manufacturing process produces a massive amount of global warming – the destruction of which is accordingly assigned an extremely high value in terms of carbon credits saleable on international markets under the CDM. Hence the unintended result of this incentive has been a huge increase in output of the coolant gas in China and India – far beyond the demand for it simply in order to make profits from the excessive credits available on the harmful by-product (see Profits on Carbon Credit Drive Output of a Harmful Gas by Elisabeth Rosenthal and Andrew W. Lehren. New York Times, 8 August 2012).

Such counter-productive distortions illustrate the perverse rationale of the global ruling élite in trying to ensure that any new initiatives or activities aimed at limiting potentially harmful forms of production and consumption must as far as possible be designed to provide opportunities for the investment of profit-seeking capital and should extend rather than restrict the scope for market trading of assets and resources.

But arguably the most pernicious way in which the profit-maximising model works to subvert and defeat the public interest in the effort to rationalise global energy production and consumption is its tendency to promote those investments and technologies which are the most profitable for the private sector but which constitute the least cost-effective allocation of resources from the public’s perspective. This is reflected in the extent to which publicly supported programmes of research and investment (heavily influenced by corporate interests) tend to

  1. Give low priority to supporting energy conservation – notably in respect of the design and refurbishment of buildings – which has the potential to meet up to half the requirements for emissions reductions in the industrialised world by 2050 at a far lower capital cost than would be absorbed by investment in renewable energy sources on a scale sufficient to achieve the same outcome. (This problem has clearly been exacerbated by the privatisation of so many energy utilities, giving them a vested interest in expanding rather than restricting demand – as confirmed by the fact that the utilities most effective in supporting energy-saving investments in industry are those which, as in Canada, have remained largely in public ownership);

  2. Prioritise those forms of renewable / low carbon energy production that require relatively high levels of capital investment, thus providing outlets for the maximum amount of excess capital (surplus value) which will otherwise continue to weigh down corporate balance sheets and financial markets. The advantage of such outlets to investors is that the public interest in curbing carbon emissions is seen to justify high levels of public subsidy to energy utilities. This explains why the strategy of the UK and other OECD governments puts heavy emphasis on conventional nuclear and wind power despite – or perhaps precisely because of – the fact that they not only absorb high levels of fixed investment but are of such doubtful cost-effectiveness at market prices that projects can only be undertaken with the aid of a more or less indefinite state subsidy guaranteeing investors’ returns. (To the implied extra financial costs, moreover, must be added the environmental costs associated with both wind and nuclear power, which may be huge if scarcely quantifiable).

The criminal irresponsibility of pursuing such damaging strategies is apparent once it is understood that far more rational and efficient approaches to providing for future energy needs – while at the same time meeting the challenge of global warming – are increasingly available. Yet the existence of such options could scarcely be grasped from information provided by the mainstream corporate media; hence there is little awareness of the potential benefits to the planet, to consumers and to taxpayers alike from applying alternative technologies that have lately been developed. These should include:

  • Design / adaptation of buildings (to be encouraged through regulation and / or fiscal incentives) so as to make them self-sufficient in energy for space and water heating. This would be achieved both through a) extraction of heat from the sub-soil (geo-exchange) and b) improved building materials and insulation;

  • Development of small-scale electricity generation based on local / domestic installations (mainly solar), largely eliminating fossil-fuel dependence for power generation as well as minimising distribution costs (expensive national grid networks would become increasingly redundant);

  • Improvements in energy storage systems – batteries, hydrogen-based fuel cells using renewable energy – which could also render electric-powered transport systems much more competitive.

The adoption of such economically and socially desirable technologies would be greatly accelerated if more official support were provided to enhancing their commercial competitiveness. Given the active (if covert) hostility to such innovation from the existing corporate sector – for the reasons mentioned above – this would require the allocation of public resources to properly targeted research and development along with appropriately designed incentives to users – e.g. tax breaks for the capital cost of retro-fitting buildings for geo-exchange. The cost of such support would be a small fraction of that currently being devoted annually to subsidies to nuclear and wind energy.

While the overall scale of potential savings – in terms of reduced expenditure on investment in infrastructure as well as fossil-fuel consumption – is difficult to quantify a priori, particularly bearing in mind the continuing rapid pace of innovation, it is likely to be vast, especially once the qualitative benefits to the environment are factored in. One such saving might be the cancellation of the proposal for the mandatory installation of “smart meters” in all homes in the European Union projected to start in 2014, the benefits of which will probably far exceed the costs of at least 150 billion as consumers become less and less dependent on mains electricity supply thanks to the type of changes in supply sources outlined above. This prospect is of course what terrifies the existing energy corporates the most, which is why they and their political allies will continue striving to distort the debate with misinformation so as to foist wasteful investment and excessive use of fossil fuels (not to mention uranium) on the public for as long as possible. Equally, for those who have long sought to place some check on the enormously opaque and unaccountable power of the global energy conglomerates and OPEC this gathering revolution in the sector represents a welcome opportunity to advance economic democracy by empowering consumers and local communities alike.

14 August 2012

The tide of history and capitalist denial

Marx and Engels famously explained in the Communist Manifesto (1848) that the emergence of capitalism – or as they then called it “the bourgeois mode of production” – as the dominant economic model during the Industrial Revolution was the inevitable result of the adoption of new technology (steam-powered mechanisation) which totally superseded and marginalised pre-industrial technology. Although not all their contemporaries welcomed this development as much as they did – as a transition to the proletarian revolution they eagerly anticipated – few then or since have seriously disputed their analysis of how it came about.

Despite this implicit general recognition that capitalism became dominant largely as a result of a technological revolution some 200 years ago the ruling global élites of today – and the vast majority of economists and analysts directly or indirectly in their pay – seem unwilling or unable to draw the moral of what this implies for economic development in the 21st century. Hence they are apparently refusing to recognise that what the first industrial revolution did to the handloom – or indeed the “second” industrial revolution of a century later did to horse-drawn transport – the so-called Third Industrial Revolution of today has begun to do to the established manufacturing and other technologies inherited from the post-World War II era or earlier.

In fact this seeming resistance to change cannot be ascribed to today’s leaders of capitalism being either insensitive or ideologically resistant to technological change. Indeed it is their proud claim that the capitalist economic model has been the most crucial factor in bringing to fruition the unprecedented advances in human wealth and welfare made possible by technological change in the last 200 years. On the other hand they have long been aware that technological innovation is very much a two-edged sword from their perspective, threatening the viability of existing investments while at the same time offering outlets for investment in new products. That is why large corporations have always sought to control and (if necessary) restrict the rate of innovation in such a way as to maximise the rate of return on both their existing and new investments. Their ability to do this was for a long time enhanced by the fact that ability to compete in many areas of manufacturing still depended on large-scale mass production, requiring substantial capital investment – a reality which constituted a serious barrier to the entry of new competitors. Such was the basis of the model of corporate management dubbed the “planning system” by J.K. Galbraith in the 1960s, which enabled multinationals such as General Motors to maintain global market dominance throughout the immediate post-war period and beyond.

Increasingly since the 1980s, however, this privileged position of traditionally dominant global corporations has started to crumble in the face of competitive forces they can no longer control. While there are diverse factors contributing to this tendency, none has been more significant than the accelerated pace of technological change involving electronics, digitisation and advanced materials (such as carbon fibre). This is because

  1. The new technologies often require relatively small amounts of investment in fixed capital (compared with traditional factories based on mass production). Hence existing producers heavily invested in older technology tend to be more vulnerable to competition from start-ups which correspondingly find fewer barriers to entry.

  2. The speed of innovation can be such that investments in new technology are increasingly perceived as too risky – i.e. liable to be rapidly superseded by the latest “new thing” – particularly as the rate of return demanded by investors has been pushed ever higher by the cyclical forces of the competitive globalised market.

The effect of these forces has been to drive the investible funds of capitalists away from the dwindling opportunities in productive investment in favour of either a) purely speculative investment (e.g. the mergers and acquisitions boom facilitated by the great financial liberalisation of the 1980s or the more recent real estate and other bubbles much assisted by the repeal of the US Glass-Steagall Act in 1999) or b) investment in utilities or public infrastructure where competition is typically limited and high returns can be more or less assured by collusion with “captured” state regulators. These distortions, underpinned by the “moral hazard” stemming from states underwriting the financial sector as “lenders of last resort” and the political corruption enabling private investors to plunder the public sector at will, have been behind the huge misallocation of resources leading to the ongoing implosion of the financial markets since 2008.

In considering how the world is to emerge from this disaster we must look beyond the immediate problem of the financial crisis, which can only end – as argued in the first instalment of this blog – with generalised debt default and mass destruction of capital values. In order to prevent such a calamity ever occurring again it will be necessary to ensure that a future economic model is structured so as to avoid recreating the unnecessary and distorting treadmill of mindless accumulation which has brought us the ultimate capitalist catastrophe. At the same time we must respond to the ever more pressing need to limit, if not reverse, the threat to the biosphere posed by the compulsion perpetually to expand production and consumption – on a finite planet with a still exponentially rising population – inherent in the existing capitalist model. Fortunately the possibilities opened up by recent technological advances – including those referred to above as the “Third Industrial Revolution” – give us the chance to meet the needs of the world’s population at much lower cost and with less use of scarce resources than at present.

Yet while this is good news for the planet and the global community as a whole, it is clearly bad news for those still dominant groups who would restore a world of capitalist “business as usual”. Naturally their central preoccupation remains to maximise the opportunities for investing their capital at an acceptable rate of return. But as such opportunities continue to shrink – not only under the impact of changing technology but because the financial sector’s scope for reckless speculation has inevitably been curbed in the wake of the crisis – the perception has grown that almost the only promising outlets are ones in public infrastructure (whether nominally privatised or not) where competition is limited and / or the level of returns can be effectively guaranteed by state subsidy. Quite apart from the potential added burden to taxpayers at a time of extreme fiscal stringency, such pressures are clearly tending to result in huge misallocations of resources compounding those that have already brought the financial sector (and the entire global economy) to its present ruinous pass.

The main manifestations of this tendency since the bursting of the real estate bubble in 2007 have been in the form of investment in public infrastructure of all kinds, involving private sector capital underpinned by state subsidy or guaranteed revenue streams. Perhaps the most conspicuous recent example of this in Britain is the proposed high-speed railway (HS2) intended to link London and Birmingham – projected to cost well over £30 billion – the economic viability of which is extremely doubtful. Yet the world is already littered with similar white elephants – including several airports in Spain which will never open and roads and railways to nowhere in Japan and China.

Nowhere have the distorting effects of this tendency raised bigger threats to the public interest – both financial and environmental – than in the energy sector, as it struggles to come to terms with the demands of the low carbon economy of the future. This issue will be addressed in detail in the next instalment of this blog.

Set against the historic trend of technological evolution as described above, such perverse acts of waste and vandalism increasingly appear like desperate attempts to resist the tide of history. The next 10 years will be crucial in determining whether this struggle ends in ruinous global conflict and catastrophe (casting doubt on the survival of the human species) or the beginnings of a new era for global society in which new technology is at last allowed to benefit the community as a whole – both in terms of adequate living standards for all and a rational and sustainable management of the earth’s finite resources – without the need for endless growth of investment and production.

2 July 2012

The Debt Disaster and Keynesian Delusions

It is generally recognised that the most intractable symptom of the global financial crisis which has gripped the world since 2007 is the huge burden of accumulated debt weighing on the economy, particularly in the industrialised (OECD) countries.


While the precise volume of global debt outstanding is hard to pin down – particularly if one takes account of the potentially hundreds of trillions of dollars of contingent liabilities represented by Credit Default Swaps and other derivatives (the actual amount of which can only be guessed because of the opaque nature of the markets) – it is a fact that accumulated debt (public and private) relative to GDP now far exceeds any previously recorded level. A recent report by McKinsey Global Institute (MGI) indicates that total debt (of households and financial and non-financial corporations as well as the public sector) in the 10 largest developed countries (USA, Japan, Germany, France, Italy, Spain, Canada, Australia, South Korea and UK) had risen to an average level equal to at least 300 per cent of GDP by mid-2011 – which is close to double the average ratio prevailing in 19901 , and much greater than anything recorded earlier It is important to note, moreover, that public sector debt accounts on average for no more than about 30 percent of the total debt outstanding – although in most cases its share has sharply increased since 2008 because of the need to bail out insolvent banks (virtually all in the private sector). This aspect of the MGI findings is all the more significant in that it serves to emphasise (if inadvertently) that the deepening fiscal crisis of states is mainly a symptom of the insolvency of the private financial sector, which had been allowed to run up unsustainable mountains of debt prior to 2007, only to dump them in the lap of the state in its capacity of “lender of last resort”. This poses in stark relief the reality that these massive bad debts have now brought the states themselves to the brink of insolvency, with nobody to bail them out as they have bailed out the private sector.



At the same time the cost of servicing all this debt at anything like a commercial rate of interest is also at record levels relative to GDP and is far beyond the capacity of the economy to meet it without either reducing most of the population to absolute destitution or inducing total financial collapse – although for the moment this problem is being substantially concealed by the artificial suppression of interest rates.



With the global economy in this state of debt paralysis mainstream economists are virtually unanimous in asserting the need for a revival of economic growth in order to generate the resources needed to pay down debts to a more sustainable level. Most of them also recognise that the orthodox recipe of cutting public spending to achieve this end will – as even the IMF has conceded – be self-defeating in that it is bound to be negative for growth and thus result in even higher public sector deficits and debt – as has already happened most conspicuously in Greece. Hence they see the only alternative as being to expand public borrowing and indebtedness further in the short term so as finance expansion in investment and output (and employment), while at the same time maintaining interest rates as low as possible with a view to encouraging consumers and businesses to spend – on the supposition that, in line with Keynesian theory, such extreme fiscal and monetary laxity will induce the required GDP growth.



Yet, as has been obvious since the start of the crisis in 2008, such a strategy is doomed to fail by the reality that a) in a situation where levels of public debt are perceived by the markets to be too high in relation to the capacity to service or repay them, further increases in public borrowing must tend to raise the effective interest rate demanded by the bond markets on government debt – because of the increased risk of default – thereby pushing states closer to insolvency, while b) most consumers and businesses are already “maxed out” on debt and thus need to “deleverage” (cut their indebtedness) rather than borrow still more.



In their desperation to escape from this impasse the authorities in the US and the UK have since 2009 started to employ a radical and high-risk stratagem – never explicitly pursued by any industrialised country until Japan began to adopt it in 2001. This is the practice of monetising public sector debt with currency electronically created (printed) by the central bank – i.e. to buy up government securities such as US Treasury Bills. This mechanism – officially called “quantitative easing” (QE) – is justified by the authorities as a means of averting the risk of deflation, which could easily lead to outright slump, in a situation where the official benchmark interest / discount rate has already been set at close to zero and therefore cannot be reduced any further. It is hoped by the governments concerned that this process of debt monetisation (printing extra money by any other name) will stimulate effective demand in the economy by expanding the money supply – even though the earlier Japanese experiment along these lines had no such positive impact. What is not stated is that QE is also seen as vitally necessary in order to support the market price of government bonds, thereby keeping down the effective interest rate on them. Failing this artificial support, it would be impossible to conceal from market investors that the unprecedented level of indebtedness throughout the economy (see above) must call into question the solvency of all borrowers, both public and private. Once that happens (as sooner or later it must) the market rate of interest on all debt securities will rise to unsustainable levels as investors perceive the soaring risk of default, precipitating mass bankruptcy, financial collapse and the probable breakdown of civil order.



     The failure until now of the Eurozone authorities to resort to QE – mainly because of German refusal to accept such an unorthodox and potentially inflationary policy – is the main reason the Euro area has seemed on the brink of financial collapse since late 2011. By early February 2012, however, it is apparent that – under the influence of a new and more permissive President of the European Central Bank – mechanisms have been devised for making available liquidity to the many Eurozone banks in desperate need of it, even if there has thus far been no explicit adoption of QE. This has eased some of the pressure both on the banks and on similarly insolvent member state governments who would otherwise only be able to cover their soaring budget deficits by borrowing at impossibly high market rates. However, the threat of a sovereign debt default is still ever present, most obviously in the case of Greece, where in fact such an outcome now appears inevitable – and imminent.



     Those economists, still the overwhelming majority, who hold out some hope that such “extraordinary measures” can facilitate a revival of growth and living standards choose to disregard or play down the significance of the unprecedented burden of debt weighing on all sectors of the world’s major economies. Many of them point out, quite correctly, that public debt in these countries has on numerous occasions in the past been much higher than it is now (e.g. in the UK in the 1940s and 50s) and that this did not prevent them paying down such debt to more normal levels at the same time as permitting a rise in average real incomes. What such die-hard Keynesians ignore, however, is the grim reality that a) overall debt (mainly in the private sector, as noted above) is now at totally unprecedented levels and b) that – in contrast to the situation in the past (such as 50 years ago) there is no prospect of debtor countries growing their way back to solvency, not least because already crippling debt service liabilities severely restrict the scope for expanding consumption and investment.



     The only (slender) hope for the ruling establishment is that QE, by keeping real interest rates negative – i.e. below the rate of inflation – will enable them gradually to shrink the debt burden in real terms down to a more sustainable level. The problem meanwhile with such “financial repression” is that, as the UK Coalition government has already discovered, it has the effect of squeezing the incomes of savers and the lowest paid (already stretched to breaking point by recession and fiscal austerity) while favouring debtors whose profligacy is rightly perceived to have caused the crisis. It is thus likely that such an approach will prove as politically intolerable as it is economically unviable.



     As such realities dawn on mainstream economists and political leaders alike it may be hoped that more of them will soon feel forced to confront what is for them a still more intolerable necessity: the inevitable write-off of all the massive bad debts crippling the world economy and the consequent destruction of capital values on a vast scale. Whether such an outcome would signify the end of capitalism may be debatable. What cannot be doubted is that it would entail drastic and urgent restructuring of the economic order along more collectivist lines and a consequent curtailment of the power as well as the wealth of “the 1 per cent” – or else a cataclysmic global upheaval at least as destructive as World War II. If, as seems all too likely, the latter course is chosen, it may well be doubted whether our species could survive such an apocalypse.




6 February 2012




1McKinsey Global Institute, Debt and deleveraging: Uneven progress on the path to growth

. January 2012