By Jim O'Connor - October 30, 1998. To appear in Capitalism, Nature, Socialism, December 1998 issue
The Investor. The Investor is the spoiled brat of fin de siecle capitalism
The Investor presents himself as a risk-taking entrepreneur whose "services" are indispensable to the health and wealth of world economy. In fact, he is a parasite who gambles huge amounts of other people's money without a single thought to the effects of his financial machinations on the general welfare. The Investor thinks he is the mainspring of "economic development" hence a friend of the poor and oppressed when in reality he is their most dangerous enemy. In little more than a year, the Investor has caused the unemployment of millions of workers, the impoverishment of whole countries, and the fear of global depression. The Investor isn't even a bona fide gambler who has to live with the thought that he can go broke at any moment. At the first sign of trouble, our hypothetical risk-taker dumps his holdings of "emerging market country" foreign exchange, stocks, and bonds and buys U.S. Treasuries and other mom and apple pie securities. He is a fake gambler, the prodigal son who puts his tail between his legs and runs home to mama and papa to beg them to collect money still owed him or otherwise make his investments and loans good. There he is welcome with open arms. The Fed and the Treasury, his doting parents, are thrilled to see the money he has withdrawn from poor countries pour into the stock and money markets. However, thanks to the speculative nature of these markets together with the Investor's credo of total and complete selfishness, his money sooner or later vanishes in the inevitable bear market. This turn of events again reveals the true character of the Investor, who pleads with his government and central bank to do everything they can to prevent a collapse of stock prices. The financial magicians dutifully move cybermoney from one account to the other, wave their wands and repeat their mumbo-jumbo until the threat of a stock market crash is temporarily averted. The Investor regards as fair and just that the rich countries live by different rules than the poor countries. Last October, while the Investor was agitating central banks in the rich countries to lower interest rates, he got all hot and bothered that the Brazilian government hesitated to impoverish its people by slashing state spending by another $25 billion. This was because his friend the Economist welcomes economic and social devastation in the poor countries as the first step toward eliminating "market imperfections," which is the code expression for "expanding opportunities for rich country investors." This is the Investor's true cause: he is engaged in terminal to terminal, cell phone to cell phone, financial warfare, the ultimate aim of which is to overcome the taboo against theft by driving "real assets" into bankruptcy to make them bargain purchases. The Investor attacks first one currency then another, to cheapen local assets and cause harm to local stock and financial markets. His ultimate aim is thus to appropriate global wealth by the manipulation of foreign exchange and stock markets. As for the rich countries, their economies are of course seen as too big to fail. The rich get richer and the poor get poorer and in this sense there is nothing new under the sun, not even globalization. The basic function of the Economist is to pimp for the Investor. The Economist tries to make everyone believe that the Investor's money is indispensable to the economic health of the "emerging market" countries. The Economist then whispers in the Investor's ear, "you can do no wrong, whatever you and your markets do equals the best for everyone in this best of all possible worlds." The Economist's theory, which millions of students must learn at the risk of flunking their economic classes, is that the Investor's actions ensure that money (money capital) goes where it is most needed (that is, most profitable) and that any attempt to regulate or control the Investor will surely reduce the sum total of wealth and happiness in the world. The Investor is the key player in the world economy, whose financial markets rise and fall in accordance with his speculations and moods. Whole societies are "reformed" to keep the Investor happy while he himself is never asked to do anything but wear a clean shirt and pressed suit to work. Without freedom for the Investor, the Economist says, capital will dry up and economic development will come to a screeching halt. The fact that Asia has (or had before the Investor wiped out the Asian economies) a 25-40 percent savings ratio hence doesn't (or didn't) need the Investor's money is conveniently forgotten. So, too, is the fact that the export-led "emerging market economies" once earned plenty of foreign exchange to buy needed capital goods and services from the rich countries without any major help from, or the sacred blessings of, the Investor. =46ortunately, the Investor's days of wine and roses are numbered. Neo-liberalism and global capitalism were infected with their own self-destruct virus from the get-go. The Investor is enmeshed in so many contradictions that even many pro-Investor types are beginning to believe that he must be domesticated or else. This is true not only within the political classes of Malaysia, Russia, China, Colombia, Chile, and other countries that have had second and third thoughts about the Investor's real worth. As of last October, it's also true at the highest reaches of power. One can mention the split between do-or-die neo-liberals and more pragmatic types who are willing to support capital controls and certain financial reforms within the IMF and World Bank, and the division in educated opinion generally, even among some Economists. The political classes in the rich countries are getting tired of having to rescue the Investor every time he makes a big bad bet - exemplified by the extraordinary steps that the big banks and Treasuries are taking to prevent Investor plunder of Brazil hence the need for another Investor Rescue operation. Inevitably, there will be more reforms that lead to new rules of the game that will weaken the rule of the Investor in small and perhaps (one day) large ways. The alternative is unacceptable - a global depression (which may be in the cards no matter what the political and monied classes do about the Investor).
Global Slump. Until the stock market tumble last summer, the U.S. Investor and political class were not terribly worried about the chances of a global economic slump. Then in late September and again in mid-October Fed Chair Alan Greenspan lowered the Fed-funds rate to compensate for tighter bank credit and financial markets and also to help the economy grow faster so that it can continue to serve as the market of last resort (read cash register) for products from crisis-ridden Asia. If Greenspan continues to cut interest rates, and also loosens the money supply, the U.S. economy will grow faster and American consumers will be able to buy even more Asian products than they can afford, so long as foreigners (including Koreans, Indonesians, and other East Asians) lend the U.S. more money to pay for increased U.S. imports. Meanwhile, East Asians are told by the IMF to consume less themselves (IMF policy in East Asia until September, when the IMF declared that its exchange rate stabilization program had succeeded, and that Asian governments should increase spending to get their economies going).1 A nice racket! Americans buy more consumer goods than they can afford while Asians get fewer goods than they need - all in the name of "global economic stability." Meanwhile, numerous meetings between G7 Treasury and central bank officials, the IMF and World Bank, and the big global banks in October worried the question of a world slump without being able to develop a unified plan to prevent it. While Britain and Spain lowered interest rates, the other European masters of finance were reluctant to follow Greenspan's lead and reduce rates, which were already low (relative to the U.S.). While the new growth-minded social democratic governments will force interest rates down during the coming year, Europe depends on exports and a trade surplus with the outside world and will not and can not function as a market of last resort. At the same time, Japan still lacked the desire or will to restructure its banks and financial system. Instead, in late October, the Japanese treasury earmarked half a trillion dollars to nationalize banks that fail and socialize the debt of those that are in financial hot water but which haven't yet failed. (This completes the latest cycle of taxpayer subsidies and underwrites to banks around the world in financial crisis: bail-out, not neo-liberal restructuring, is the name of the game). Japan, as well, announced the expenditure of more trillions of yen in the form of public works, tax cuts, and the like, with the aim of increasing effective demand for goods and services. Whether or not banks actually use the money the government will offer them, lenders borrow monies that might or will be available, and consumers purchase more consumer goods, is anybody's guess. It should be wryly noted, however, that those who believe that an expansion of domestic demand in Japan is necessary to stave off a global slump (most of the political class within G7) urged Japanese authorities to increase the spending power of Japanese consumers because the world capitalist system needs them to spend more money, not because consumers need more money to spend (another triumph of exchange value over use value). Back in the U.S. of A., the Fed reasoned: lower interest rates in the U.S. (and rich countries) will be confidence boosters and also stimulate the growth of consumption and investment spending, which in turn will increase the growth rate of U.S. GDP, which will expand U.S. imports from troubled East Asia. This would help the region get back on its feet economically, thus increase imports from the U.S. (and expand U.S. exports). Helping Asia would ultimately help the U.S., the argument goes. An expansion of Japanese imports from Asia will also be necessary because of the importance of the Japanese market for East Asian exports. In this way, Robert Rubin and company hoped that Asian exports would be able to grow without a destructive competitive devaluation of East Asian currencies. (Foreign exchange stability is the be all and end all of Rubin/IMF policy.) The idea of employing U.S. (and G7) monetary policy to ratchet up Asian export markets is a novel one. Historically, while the U.S. has for a long time promoted Asian export-led growth, this country hasn't made a habit of helping the region at the possible expense of its own economic welfare. But "globalization" has changed all that: Greenspan's move in effect announced to the world that it's worth the risk of renewed inflation in the U.S., if lower interest rates here in fact help Asian economic growth by stimulating growth in the U.S. The basic premise is the U.S. as world leader must make its economy (and Europe's and Japan's) grow faster to help Asia and world economy as a whole. How the U.S. can grow faster than it's growing at present without inflation is a mystery to some Fed policy makers and others who quietly opposed interest rate reduction. It should be noted that this small (or large, only time will tell) sea-change in Fed policy at home is consistent with U.S. Treasury and IMF policy in Asia, which is to compel supplicant countries (Indonesia, Thailand, and Korea) and other Asian economies in trouble to look primarily to exports rather than domestic markets to get their economies going again. Japan is the exception: the U.S. has been cajoling Japan to expand and then some its domestic market for some time. Japan is due special treatment because of its huge foreign exchange reserves and strong yen (relative to the currencies of other Asian countries). Also, Japan's export machine is still working, in part, because its regional production system (developed after 1985 when the yen went sky high) is still intact: surprisingly, 15 Japanese corporations invested more in Asian joint ventures this year of economic depression. Boosting Asian exports and recapitalizing Asian banks and industry by government action and ultimately by making it profitable for foreign investors to return to Asia, and leaning on Japan to expand its home market, are two planks (or wishes) of U.S. policy. A third is to pressure Europe to keep interest rates low (in some cases, to lower rates further) and increase economic growth, and to ensure that the new common currency, the euro, enters the world foreign exchange market as soft not hard. At first, Greenspan's reply to those urging him to lower interest rates was typically, maybe I will, maybe I won't, which translated at first into a very cautious reduction in the Fed-funds rate of one quarter of one percent. The caution was partly due to the belief that the U.S. might be growing at its maximum feasible rate at present. Greenspan doubters inside and outside the Fed noted that productivity growth in the economy as a whole remains stuck at about one percent plus annually and that labor force participation is at an all-time (peace-time) high. Workers are scarce and wages are going up even though labor productivity shows no sign of long-run improvement. Therefore, it was argued, any significant (not merely symbolic) economic stimulus in the U.S. runs the danger of causing a profit squeeze and/or of being inflationary hence counter-productive. Any significant economic stimulus would also worsen the U.S.'s external balance with its trading partners, most especially Japan. The U.S. balance of payments (on current account) has been in deep deficit for many years and the Fed has kept interest rates high enough to attract foreign money to purchase (mainly federal government) U.S. securities, in this way preventing a decline of the dollar. Lower interest rates at home (unless matched by other rich countries) would discourage foreign lending at the same time that they helped to expand U.S. GDP and U.S. imports from Asian and elsewhere. The IMF's official analysis of the U.S. economy has lots of ifs, ands, and buts.2 One scenario is that the decline in the growth rate of aggregate demand in 1998 will continue through 1999-2000. Lower interest rates, which are good for world economy, will thus not be inflationary because the U.S. will be growing at a sustainable rate. A second scenario assumes that Asia will begin to recover economically (or at least the region's economy will not worsen), hence foreign demand for U.S. exports will increase and labor markets in the U.S. will tighten, which means that inflation may reappear. In this case, the U.S. will be obliged to raise interest rates, which, however, would have negative effects on sensitive world financial markets. According to the IMF, the U.S. could best help world economy by managing its monetary policy such as to achieve price stability and maximum sustainable growth. The IMF's position is, then, that the ability of the U.S. economy to help world economy as a whole is limited. In the U.S. itself, the country's leadership is assuming that the U.S. can and will grow at least as fast in 1999-2000 as it did between 1994-1998. Greenspan believes that the home economy is entering a period of slower growth, and possible recession, in which case significantly lower interest rates would not be inflationary, first, because of fresh slack in the economy, second, because slow growth or recession would reduce U.S. imports which would help the country's balance of payments and the value of the dollar. A recession, however, would lead to contradictory policy results because a decline in U.S. imports would improve the foreign balance at the expense of Asian exports hence of Asian economic recovery. Almost all the Big Economic Facts in the U.S. point to slower growth and probably a recession in 1999 and 2000 - a trend that I think will be too strong to be reversed by lower interest rates alone. First, the growth of U.S. exports has abruptly slowed due to the crisis in Asia and growing economic pessimism around the world. As noted before in these pages, the U.S. has become an export-led economy in the sense that exports have been the most dynamic source of increased spending on U.S. goods and services, accounting for one-third of total new increments to GDP in the 1990s while amounting to only 10 percent or so of GDP in 1990. The growing importance of exports for the U.S. economy (the "natural" result of globalization) is indicated by one Super Fact, namely, that over 60 percent of Fortune 500 company revenues spring from exports, repatriated profits, licensing agreements abroad, and the like. More importantly, the key U.S. exports (culture products excepted) are foods and raw materials and capital goods and services, especially high tech equipment. The supply of primary commodities and the demand for capital goods tend to fluctuate widely from one year to the next, which make prices unstable. A sharp decline of foreign demand will, then, lead to an even larger decline in the market for primary commodities and capital goods (already apparent in the farm and primary product sector, bound to be apparent in the capital goods sector in 1999), with the near-inevitable result of recession. Second, consumer spending has been (but will not continue to be) a dynamic, independent source of growth. The reason is mainly the upsurge of the stock market until last summer, which increased the paper wealth of millions of American families, most especially rich families, which led to higher levels of consumer borrowing and spending. The highly favorable influence of stock prices on consumption is now and will likely continue to be neutral or unfavorable, as the stock market becomes more unstable and/or flattens out or trends downward. Besides the negative effects of stagnation or decline in stock prices, the ratio of consumer spending/disposable income is very close to one (meaning that American consumers as a whole spend all increments to disposable income on consumer goods and services). Since consumers as a whole are saving practically nothing, it's clear that they can't increase spending via a reduction in current savings. Nor, either, can consumption grow very much via a further expansion of per capita consumer credit (consumer debt, keeps climbing, albeit at a lower rate than between 1992 and 1995). The truth of the matter is that consumer spending, recently a relatively autonomous source of effective demand, is or will soon become dependent on the profit and accumulation (growth) rates. Consumption will swing from a active variable in the growth equation to a more passive one. And, given that profit growth and capital accumulation are slowing down, so will consumer spending. The third source of effective demand hence potential economic growth is investment spending on new plant and equipment, fuel, new materials, inventories and the like. These expenditures, which were moderately strong throughout most of the 1990s, are also likely to fall in the near future. =46irst, capital spending to increase capacity in export and consumer goods industries will decline because of shortfalls of exports and consumer spending, respectively. Secondly, there seems to be a temporary lull in investment spending designed to cut unit labor costs (and also fuel costs, etc.), expelling living labor from production. Downsizing with given plant and equipment pure and simple seems to be the preferred path of U.S. business today, especially true because of a credit and money market crunch combined with a fall in corporate cash flow. Thirdly, investment spending driven by technological change in high tech sectors of the economy, which some economists regard as the most important source of the economic dynamism of the U.S. economy, may be slowing or increasing (the evidence is mixed). In sum, it seems unlikely that consumption, exports, and capital spending will be dynamic enough to maintain and increase economic growth into the next century, especially since the final component of aggregate demand, government outlays minus taxes, is growing less rapidly than private spending=20(domestic and foreign) hence can't be expected to play an expansionary role in the economy as a whole. Most significantly, the growth rate of U.S. corporate profits (reported corporate earnings) has declined in the last two years (as measured by Wall Street) and dipped into the negative column during the same period (as measured by the Commerce Department).3 Declining profits or profit growth rates are closely associated with the instability of both the U.S. stock market and the dollar, as well as a decrease in liquidity (tightened credit and loan terms). The one superficially apparent bright spot in the U.S. economy - the decline in what Marx called the costs of the "elements of constant and variable capital" (oil, raw materials, foodstuffs, and the like) - is a mixed blessing. On the one hand, cheap oil et al. reduce the cost of production and the cost of wages, exercising a positive effect on profits and growth. On the other hand, U.S. capital is invested heavily in oil and gas, timber, cattle, grains, and other materials and foods, hence a decline in these basic commodity prices has negative effects on profits in these industries and indirectly on the economy as a whole. While world GDP growth has always varied closely and inversely with the price of crude oil, cheap oil definitely harms U.S. domestic oil producers and economies such as Venezuela, Mexico, and Nigeria, whose export earnings (hence ability to import from the U.S.) have taken a big hit. I don't really know but I would guess that the effects of lower oil and raw material prices today on U.S. economic growth is a wash. To sum up, lower interest rates may do the U.S. economy more harm than good, first, because they might be inflationary until slower economic growth creates more unused productive capacity and unemployment; and, second, because while lower interest rates might indirectly help Asia expand exports to the U.S., the U.S. balance of payments will deteriorate further, putting new pressures on the dollar (especially if the euro breaks out of the gate as hard rather than soft, leading importers, exporters, banks and others to hold significantly more euros and fewer dollars as reserve currency). It is difficult to use fiscal policy to expand economic growth because of the constraints that neo-liberal ideology and practice place on government budgets. In neo-liberal economics, the reduction in budget deficits during the 1990s lowered interest rates, which neo-liberals see as the most important stimulus to economic growth during the decade.4 Further, the room for monetary policy is also narrowing. This is obviously true in Japan where interest rates are near zero and in Europe where rates are have been falling more or less steadily. A significant decline in interest rates before U.S. growth slows might be inflationary; such a decline after the advent of economic stagnation or recession is likely be too little and too late. If policy makers wait for slow growth or recession before they act, imports from Asia will already be falling hence the expansionary effects of lower interest rates on Asian exports and economic growth would likely be cancelled out. These are the kind of contradictions that appear when globalization reaches a certain stage - that is, when "national economies" mainly exist in name only. The truth is that when the many contradictions of the capitalist world system create crises along a number of socio-economic, cultural, and political fault lines, any economic policy is as likely to do harm as it is to do good - at which point policy will be more or less useless and global economy will be determined by systemic forces.
The Crisis of Crisis Management. The economics of crisis is only half (or less) of the story. The other half (or more) concerns the capacity of political systems and politics generally to generate, legitimate, and enforce effective economic policies. How do political systems and economic policy articulate with the dynamics of capital accumulation and economic crisis (especially accumulation through crisis)? This is an enormously important question that requires the research collaboration of economists, political scientists, sociologists, and social psychologists (which nowhere exists to my knowledge). In my opinion, a global slump and recession (possibly sliding into a depression) are all the more likely because of the disarticulation between politics and economics, or what we called in the 1970s the "crisis of crisis management." One problem is that economic policy is only as good as the theory it's based on and neo-liberal theory is not good theory. Another is that there are no visible mechanisms whereby the "general interest" of the ruling class can be formulated and legislated. The more intractable problem is that the supply of problems (various crisis trends and tendencies) increases faster than the supply of solutions (effective crisis management, coherent monetary and fiscal policy, and so on), a correlation that at worst has a negative sign. I think that the capacity of official bodies, national and international, to manage the developing world crisis is only moderately strong and possibly on the wan. First, world economy needs a strong leader pushing a strong economic policy acceptable to other leading countries. The only candidate for world leadership today and in the foreseeable future is the U.S., not an unfamiliar role for this country in relatively prosperous times (as contrasted with a period of global crisis). As Robert Samuelson wrote in Newsweek (October 12, 1998), "The United States is the last great domino propping up world economy. If it fails, woe to us all." Woe there may well be, as there are a number of tests that a world leader must meet, and the U.S. either fails these tests or passes them with a low grade. =46irst is a strong Presidency and executive and a bipartisan Congress willing to put the needs of world economy before the narrow interests of its business constituents. The second is a stable currency, strong productivity, and a strong economy generally not to speak of a strong stock market and decent rate of return on invested capital. As noted, another test is that the U.S.'s junior partners accept U.S. leadership and support the way that this country is conducting its mission. While U.S. leadership presupposes that the country is strong enough to anchor world economy (at the very least as the market of last resort or cash register of the world), the economic data discussed above suggests that this will be difficult - at least, compared with Britain for most of the 19th century and the U.S. itself between the end of World War II and the 1970s. The fact that (as of October) the President and Secretary of the Treasury were still clinging to neo-classical orthodoxy in general and capital theory in particular is perhaps the main case in point. This is a specific example of a more general set of management problems arising from the uncritical acceptance of neo-liberal ideology. Moreover, Europe and Japan are beginning to act on their own in regional and world economic affairs more than they have been accustomed to. The electoral victories of the German Social Democrats, French Socialists, and Italian Democratic Left have already yielded economic ideas antiethical to the neo-liberal Anglo-American political mind. One example is the (seeming) determination by left-of-center parties to curb financial speculation with capital controls. Another is the French demand for more authority within the IMF both for Europe and the "developing countries." A third is a new de facto willingness of the German central bank (and presumably new European Central Bank) to ignore provisions in its charter that forbid it to engage in employment policies, that is, which confine its work to fighting inflation (clearly the result of the left turn in European politics). A fourth is the stated intention of social democratic leaders to lower interests rates still further as Europe moves toward the European Currency Union (to perhaps one-half of rates prevailing in the U.S., an extremist move given German policy in the past and the Fed's mindset in the present). And a fifth may be Japan's willingness, despite it internal political contradictions, to act independently of U.S. policy for the first time since the 1970s. (The argument that Japan's famous economic flexibility is due to the need to be ready and willing to change course every time the U.S. alters its foreign policy is telling in this connection.) This is exemplified in obvious ways, for example, Japan's refusal to bury its "market share" capitalism for the "quarterly report" capitalism of the U.S. and its unwillingness (not only political inability) to resolve its bank crisis by "slaughtering the value of capital," but also in less obvious ways, for example, its reported support of Malaysia's capital controls and its (so far aborted) attempts to start up an Asian bail-out fund led and mainly run by Japan.