DH: That was July, man. And it was an accurate description of things at midyear. You've been predicting disaster for almost all of the 20 years I've known you! Does that make you more right?
PB: Yes, I'd say 'told ya so' now, as you might predict. :-)
DH: And my analysis evolved with the news... (FOLLOWED BY LOTS AND LOTS AND LOTS OF PARADIGM MAINTENANCE)
PB: Wonderful, comrade. But why didn't you have a better sense months, or indeed four years, earlier?
ZNet Commentary Crunch time for US capitalism? December 04, 2004 By Patrick Bond
If you are like many aggrieved people I know, the prospect of the US economic empire stumbling, tripping, and maybe even crashing is welcome indeed.
So cheer up, it seems like comeuppance season has dawned. Former Federal Reserve governor Paul Volcker warned earlier this year of a '75% chance of a financial crisis hitting the US in the next five years, if it does not change its policies.'
As Volcker told the Financial Times a month ago, 'I think the problem now is that there isn't a sense of crisis. Sure, you can talk about the budget deficit in America if you think it is a problem - and I think it is a big problem - but there is no sense of crisis, so no one wants to listen.'
That may have just changed. Volcker's successor, Alan Greenspan, scared the financial markets into a mini-seizure last week by admitting, 'It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point.'
Former US Labor secretary Robert Reich predicted in September: 'The mainstream view is that the budget deficit is going to get larger. Simultaneously, the mainstream view is that there is no reason to believe that the trade deficit is going to shrink any time soon. In fact, I see the dollar continuing to decline and I see at some point a tipping point?. because at some point it becomes a lousy investment.'
A week after the election, former Treasury secretary Robert Rubin accused Bush of 'playing with fire' for allowing the dollar to weaken alongside continuing federal deficit spending, a combination which would generate 'serious disruptions in our financial markets.'
Added C. Fred Bergsten, director of the Institute for International Economics in Washington (a voice of pure orthodoxy), 'Everyone in the market knows the dollar has to come down a lot. People are starting to run for the exits.'
That run for the exit could be extremely costly for China, for example, with former Treasury official Nouriel Roubini telling Reuters that about 8% of its GDP - or half a trillion $US - would be lost in the event the Chinese currency was allowed to find its real value, and the dollar crashed a further 20%.
Of course, this isn't about merely tracking the volatility of the dollar's price against other countries, which will dip and dive and strengthen for erratic short-term reasons. Deeper, structural analysis is required.
Yale-based anarchist David Graeber half-jokingly suggests 'a systematic division of labour in which Marxists critique the political economy, but stay out of organising, and anarchists handle the day-to-day organising, but defer to Marxists on questions of abstract theory; i.e., in which Marxists explain why the economic crash in Argentina occurred and the anarchists deal with what to do about it.'
Right, then, what do Marxists and other dissident economists have to say, what with mega-Argentine-scale financial problems looming?
To start with diagnoses of the situation, four critical schools of thought are worth citing because they have somewhat different - and often competing - ideas about what ails US and global capitalism:
1) Overly competitive corporations, which drive down the rate of profit; 2) Overconfidence within financial markets, which today act more like a casino than savings/investment mechanism; 3) Overproduction of commodities, as a persistent reflection of inadequate consumer buying power; and 4) Overaccumulation of capital more generally, a problem which cannot be displaced forever, but which one day must face more severe devaluation.
In the first case, the best example is UCLA historian Robert Brenner's 2003 book *The Boom and the Bubble* and subsequent analysis in New Left Review, London Review of Books, Against the Current, and other journals.
In the second, followers of the late US financial economist Hyman Minsky - like David Felix of Washington University and Steve Keen of University of Western Sydney - argue that financial markets inexorably move from >accommodating capitalism, to hosting speculative investments, to becoming a pure gamble, in the spirit of the old 'Ponzi'-style inverted pyramid schemes.
The third category draws on the legacy of John Maynard Keynes, whose solutions to 'underconsumption' typically involve loose credit and generous state subsidies, so as to boost consumer buying power. Many radical economists in the US have renewed this line of argument, perhaps because it is politically safer than calling for anti-capitalist revolution. (Reagan, Bush Sr and Bush Jr could be described as 'military Keynesians' thanks to their vast budget deficits and Pentagon-hedonism.)
Arguing the fourth case, eloquent classical Marxists like Ellen Meikskins Wood in her book *Empire of Capital* (2003) and David Harvey in *The New Imperialism* (2004) have updated important earlier accounts of overaccumulation by Simon Clarke (*Keynesianism, Monetarism and the Crisis of the State*, 1988), Harvey in *The Condition of Postmodernity* (1989), Harry Shutt (*The Trouble with Capitalism*, 1999) and Robert Biel (*The New Imperialism*, 2000).
Opposed to these is a Marxist position which respects the strength, resourcefulness and self-healing capacity within capitalism - and especially reflects upon the weakness of the system's main enemy: the working class. Those arguing that the system is *not* facing a systemic overaccumulation crisis include Leo Panitch, Sam Gindin and Chris Rude in the new *Socialist Register 2005: The Empire Reloaded*, Doug Henwood in *After the New Economy* (2003) and Giovanni Arrighi (criticizing Brenner) in *New Left Review* last year.
Some of these latter accounts stress a fifth school of Marxist theory: class struggle as determinant. And it is true, the world's working class and nearly all counterhegemonic national struggles have suffered persistent, debilitating defeats over the past three decades, which certainly helps explain capital's apparent recovery from 1970s woes.
Yet the internal contradictions continue bubbling up. Globalization has generated economic stagnation, not dynamism. According to even the World Bank, the increase in the world's annual GDP per person fell from 3.6% during the 1960s, to 2.1% during the 1970s, to 1.3% during the 1980s to 1.1% during the 1990s and 1% during the early 2000s.
Moreover, GDP measures are notorious overestimates of social welfare, especially since environmental degradation became more extreme from the 1970s. We must also factor in the extremely uneven character of accumulation across the world, with some sites - like Eastern Europe and Africa - suffering rapidly declining per capita GDP for much of the globalization epoch.
Or consider a classical symptom of capitalist crisis: the corporate rate of profit. At first glance, the after-tax US corporate profit rate - which fell precipitously from the mid-1960s - appeared to recover beginning in >1984, nearly reaching earlier post-war highs (although it must be said that tax rates were much lower in the recent period).
On the other hand, corporate interest payments remained at record high levels throughout the 1980s-90s. Subtracting interest expenses, we get a better sense of net revenue available to the firm for future investment and accumulation, which indeed remained far lower from the early 1980s- present, than during earlier periods, according to French Marxists Gérard Duménil and Dominique Lévy (http://www.cepremap.ens.fr).
Duménil and Lévy also deconstruct the ways that US corporations responded to declining manufacturing-sector accumulation. Manufacturing revenues were responsible for roughly half of total (before-tax) corporate profits during the quarter-century post-war 'Golden Age', but fell to below 20% by the early 2000s.
In contrast, profits in the financial sector rose from the 10-20% range during the 1950s-60s, to above 30% by 2000. Financiers doubled their asset base in relation to non-financial peers during the 1980s-90s.
What does this mean?
According to Harvey, the contradictions of capitalism were 'displaced' instead of resolved: they were moved across time and space, especially via hyperactive financial markets. Time is accounted for in the vast credit >bubble, which lets you pay now, on the basis of debt, and hope to earn future revenues to cover your loan repayments.
And capitalism's use of 'space' - geographic crisis displacement - is really what globalization has been about: allowing corporations facing falling profits to seek relief in sites where raw materials and labor are cheaper, where regulations are fewer, and where new markets for products might emerge. Hence corporate profits drawn from global operations rose from a range of 4 to 8% during the 1950s-60s to above 20% by 2000.
To be sure, some of the problems faced by capitalism have not been simply stalled and shifted around. Some vicious hits - asset devaluations - have occurred in different sites over the past 30 years.
These included the Third World debt crisis (early 1980s for commercial lenders, but still going on for most of the world's states and societies); energy finance shocks (mid 1980s); crashes of international stock (1987) and property (1991-93) markets; crises in nearly all the large emerging market countries (1995-2002); and even huge individual bankruptcies which had powerful international ripples.
Late-1990s examples of financial-speculative gambles gone very sour in derivatives, exotic stock market positions, currency trading, and bad bets on commodity futures and interest rate futures include Long-Term Capital Management ($3.5 billion)(1998), Sumitomo/London Metal Exchange (,1.6 billion)(1996), I.G. Metallgessellschaft ($2.2 billion)(1994), Kashima Oil ($1.57 billion) (1994), Orange County, California ($1.5 billion)(1994), Barings Bank (,900 million)(1995), the Belgian government ($1 billion)(1997), and Union Bank of Switzerland ($690 million)(1998).
>From 2000, subsequent US firm bankruptcies on an even larger scales - e.g., Enron, Anderson Accounting, World Com, Tyco - had more to do with corruption, but were also symptoms of financial gambling in immature markets.
Most importantly, the US stock market was the site of an enormous 'New Economy' bubble until 2000, perhaps culminating in the Dot Com crash which wiped $8.5 trillion of paper wealth off the books from peak to trough (in the US alone) - but on the other hand, seemingly reinflating in 2003-04 thanks to the return of household investors and mutual fund flows, and possibly rising further in future years if Bush begins social security privatisation.
There were crashes not only in New York, but also 1/3 declines during 2002 in Finland, Germany, Greece, Ireland, Netherlands,and Sweden, and other less severe falls in most other stock markets.
David Harvey provides a further idea to interpret how the system responds to overaccumulation and financial overhang. Inspired by Rosa Luxemburg's ruminations a century ago over the relations between capitalism and non- capitalist spheres of life, he describes new systems of 'accumulation by dispossession', which means, essentially, the looting of the commons and use of extra-economic power to gain profits.
The systems of dispossession today also more explicitly attack the sphere of 'reproduction', where exploitation occurs especially through unequal gender power relations. This reflects the 'reprivatization' of life, as York University political scientists Isabella Bakker and Stephen Gill argue in their 2003 book *Power, Production and Social Reproduction*.
Together, these concepts allow Marxists to explain why 'capitalist crisis' doesn't automatically generate the sorts of payments-system breakdowns and mass core-capitalist unemployment problems witnessed during the main previous conjuncture of overaccumulation, the Great Depression.
According to a careful analysis by York University's Greg Albo in last year's *Socialist Register 2004: The New Imperial Challenge*, 'The economic slowdown and neoliberalism led to a significant financialization of the economy from the 1970s onwards.' Today, 'The deflation of the asset bubble adds another tension between the US and other zones that complicates any path of adjustment in the world market.'
That's all I seem to have room for in this installment: some teaser quotes, a dash of Marxist theory, and preliminary evidence. In the next column, I'll unpack the statistics that indicate a new round of profound economic vulnerability, not to mention very serious 'tension between the US and other zones'. And there are, as well, some profound political lessons to learn, if we're not to be taken for a ride on the roller-coaster this time, as we were during the late 1990s.
***
December 26, 2004
World Financial Volatility
By Patrick Bond
Addis Ababa - When an Indian-based network of dissident economists - the International Development Economics Associates (http://www.networkideas.org) - recruited critical African intellectuals for two dozen seminar sessions last week, the stability of world capitalism naturally came up for debate. The Council for the Development of Social Science Research in Africa and the Ethiopian Economics Association mainly lamented the structural conditions in world markets which have left African cash-crop exporters ever poorer and more vulnerable.
Is a different, inward-oriented strategy appropriate? I think so, but perhaps a prior question is whether the world financial power center, in Washington, might weaken sufficiently to make a progressive approach more politically attractive, technically feasible and economically rewarding.
To answer affirmatively requires adding more meat to the bones of my last column, 'Crunch time for U.S. capitalism' (ZNet Commentary, December 4). I argued that the economic slowdown since the 1970s generated falling corporate profit rates and speculative investment bubbles. But the 'displacement' not resolution of these problems meant they actually get worse: through, for example, volatile financial markets, ineffectual Third World structural adjustment imposed by the World Bank and IMF, and more desperate, brutal imperialist looting methods.
It is a good time to think outside the neoliberal box, these economists agreed, since the Washington Consensus universally failed the masses of Ethiopians and billions of other Third World people. In addition, financial volatility has been evident not just in the dollar price, but in other markets across the world, even after the dust settled in East Asia following the 1997-98 meltdown. While the Clinton Treasury Department managed to pass the costs of these problems elsewhere, the chickens have recently been coming home to roost in the U.S. itself.
The main organizer of our gathering, Jayati Ghosh of Nehru University in New Delhi, is one of the sharpest critics of bourgeois macroeconomics, combining robust anti-imperialism with a Keynesian concern for consumption and equity: 'Financial liberalization that successfully attracts capital flows increases vulnerability and limits the policy space of the government. Unfortunately, the dominance of finance globally has meant that such debilitating flows occur even when individual developing countries or developing countries as a group have no need for such flows to finance their balance of payments or augment their savings.'
Concludes Ghosh, 'The real benefit of such flows is derived by the U.S. government, which, being the home of the reserve currency, can resort to large scale deficit financing which it opposes in developing countries.'
This isn't merely a government dilemma. Consumer credit is also expanding the bubble, as U.S. household debt (as a percentage of disposable income) ratcheted up from below 70% prior to 1985, to above 100% fifteen years later.
To be sure, on the one hand, financial product innovations and advanced technology permit a somewhat greater debt load without necessarily endangering consumer finances. On the other hand, during the same period, U.S. individual savings rates fell from a range of 7-12% of income to below 3%.
Moreover, household assets are mainly in real estate, in the wake of the 2000-02 stock market crash. But the property market began inflating out of proportion to underlying values following the 1998 drop in interest rates (the Fed's response to the Asian crisis), which spurred a dramatic increase in mortgage refinancings.
As a result of the huge rise in property prices that followed, the difference between the real cost of owning and of renting soared to unprecedented levels, according to the left's guru on this issue, Dean Baker of the Center for Economic and Policy Research in Washington. With the housing sector contributing roughly a third of U.S. economic growth since the late 1990s, this bubble is particularly important. Overpriced property is also a severe threat in cities in nearly every country.
Yet another speculative investment route has opened up in financial instruments called 'derivatives' (because they are not direct claims on underlying property - instead, gambles on price movements). Interest rate futures and options are especially hot trades, soaring by 41% in dollar activity last year.
Likewise, energy-related derivatives are a popular Wall Street gamble, resulting in huge price fluctuations in immature markets such as electricity, gas and oil. Thanks to U.S. dependence on imported oil, which has increased in price from $12/barrel in 1999 to more than $50/barrel a few weeks ago, such speculation-driven price swings have exacerbated Washington's trade deficit, already vast at 5% of GDP. The point, as Ghosh reminds us, is that U.S. financiers can place these sorts of bets in new markets because they receive vast loans from East Asia, money otherwise unavailable to the rest of the world for investment. This is especially unfair, given that Washington was the main beneficiary of the region's currency crash in 1997-98. Massive capital flows entered the U.S. banking system, and imports from East Asia were acquired at much lower prices by U.S. consumers, in turn lowering what might otherwise have been credit-fuelled inflation.
Still, more than $2 billion of overseas money is required by the U.S. each work day to cover imports and international debt repayments. As a result, foreign ownership of all outstanding Treasury bills has soared from 20% to 40% over the course of the past decade. Warns Ghosh, 'The problem now is that the willingness of private investors and governments to hold more dollar denominated assets is waning. If that continues, a crisis at the metropolitan centre of global capitalism is a possibility.'
The U.S. dollar's value is in the midst of a deep plunge, from a peak of $0.87 to the euro in 2001 to below $1.30/euro. But it may need to fall to as low as $1.56/euro in the short term before equilibrium is reached, according to some experts, with 10% annual declines thereafter.
Hence, perhaps aside from China, Japan and Taiwan - whose exporters need to keep liquidity flowing to U.S. buyers of their goods - it is sensible for most international investors to ditch the dollar. Not surprisingly, new international debt securities issued in dollars have been substantially lower than those denominated in euros since 2001.
The world financial system has been operating in favour of the U.S. and European players, and to the detriment not only of the poorest countries, but also roughly two dozen 'emerging markets' (in addition to Japan) which are suffering from severe capital outflows. These larger, relatively wealthier Third World countries had received more international investments than they repaid in profit repatriation and other outflows until 1999. But from 2000-03, a massive $550 billion flooded away.
Some countries - China, India and Malaysia - maintained stronger exchange controls and hence did far better during this period. But given the outflow, most large Third World economies were hit by extreme stock market and currency crashes, especially Argentina, Brazil, South Africa and Turkey. (Their subsequent recoveries have to be put into context of how far they fell from 1998-2003.)
Other risky countries - Nigeria, Bulgaria, Ecuador, Panama, Peru, Russia and Venezuela - are today paying extremely high rates of interest to attract foreign funds and also local finance, while the required returns are stratospheric in Argentina, Uruguay, the Ivory Coast and the Dominican Republic.
Worse, because of banking deregulation mainly imposed by the World Bank and IMF, these countries' own domestic financial markets can be easily upset. The rating agency Moody's lists the world's dozen most fragile banking systems: Argentina, Uruguay, Bolivia, Venezuela, Indonesia, Pakistan, China, Japan, Thailand, the Philippines, South Korea and Ukraine.
Naturally, China's impressive economic growth dominates the data and complicates matters. In spite of attracting - uniquely in the Third World - $40-50 billion in new foreign investments each year, the Chinese banking system is in such bad shape that, like Japan since the early 1990s, enormous amounts of worthless loans must be very gingerly written off.
Indeed, Central Bank deputy governor Li Ruogu resisted Washington's pressure to upwardly revalue the Chinese currency a few weeks ago, arguing that 'What we are trying to do is create the conditions for a market-based exchange rate… China needs to reform its banking sector first before it can change its exchange rate policy… How long it will take to get there, I don't know.'
Adding to all these problems is Third World foreign debt, which rose from $580 billion in 1980 to more than $2.5 trillion today. Most of it remains simply unrepayable. Moreover, who can disagree with the activist network Jubilee South that in many different ways, including the North's ecological debt to the South, it has already been repaid. In 2002 alone, the Third World lost a net outflow of $340 billion to service foreign debt, compared to measly overseas development aid of $37 billion.
Instead of repaying the foreign debt - which in so many cases was borrowed by odious, undemocratic regimes from corrupt commercial bankers without any input by (and benefit for) the citizenry - is there a default option? Here in Addis at a meeting of African presidents a few months ago, even the orthodox Columbia University economist Jeffrey Sachs recommended debt repudiation, and redirection of resources to health and education. The response was a frightened silence.
Tellingly, in three prior epochs of financial globalization - the 1830, 1880s and 1930s - similar conditions of international volatility and Third World overindebtedness led to defaults by at least a third of all countries.
The situation today is different mainly because of centralised creditor power. By rescheduling the debt and writing off a tiny trickle of it, the World Bank and IMF now make sovereign defaults against individual lenders or investors more difficult, unlike in the earlier epochs when the creditors were not so well cartelized, and less able to call on imperial military power to collect the collateral.
This is the story, in short, of amplified uneven development, reflected most starkly in these divergent patterns of financial volatility. It is also crucial to bear in mind the imperialist agenda, which today mainly links petro-military interests in the White House to those of Wall Street and its fraternal financial centers, via the Treasury, Fed and U.S. Trade Representative, with codification by the main multilateral agencies.
But the situation is not entirely dire. With capitalist vulnerability comes the potential for countervailing progressive strength, as the Argentine comrades have shown through sustained pressure against structural adjustment.
There is also renewed campaigning to urgently limit the power of - and indeed defund and decommission - the World Bank and IMF. The World Bank Bonds Boycott continues to be a pain in the neck to outgoing president James Wolfensohn. If, as rumoured, he is soon replaced by the thoroughly nasty U.S. Trade Representative, Robert Zoellick, the Bank's legitimacy will deteriorate yet further.
Indeed, without Wolfensohn's disingenuous charm, ventures like the Bank/NGO 'Joint Facilitation Committee' - a gimmick heartily condemned during a debate between activists and the Civicus NGO leadership in Lusaka at the Africa Social Forum last week - will be harder for even opportunistic civil society groups to endorse (as discussed by Michael Dorsey and myself in this space on September 11).
The Bank is trying now to bounce back from attacks by principled eco-social movements and NGO allies. Its International Finance Corporation private investment subsidiary was systematically boycotted in a series of scheduled October-November consultative meetings in Rio, Washington, Berlin, Manila, Tokyo, Nairobi, Paris and London because 'the whole process is a sham,' as a Friends of the Earth staffer put it.
Yet more encouragingly, last week the Bank was also defeated by an Indonesian labor-consumer initiative to prevent electricity privatization. In spite of arm-twisting and an added loan offer by the Bank's Jakarta representative, the country's supreme court was convinced by international evidence that the dangers outweighed alleged benefits, and it struck down Bank-promoted privatization legislation.
These are very good signs, but moving from defensive to offensive measures will be crucial in coming years. Meantime, you readers will be encouraged about the feisty tone of the Africa Social Forum, in preparation for next month's Porto Alegre gathering. More on that, next time.