Capitalism vs Democracy

This article in the Globe & Mail about the ongoing debt crisis in the USA and Europe caught my attention. Not because it offered any interesting or unique insight into the origins or solution to the present debt crisis facing western capitalist nations. What was interesting was the matter-of-fact assumption that democracy was a hindrance to the ability of capitalism's profitability and growth to be restored. As Konrad Yakabuski sees it, western political institutions are "dysfunctional" because populations don't want to see their living standards hammered in order to pay for a debt crisis that has been caused by the failures of the system and the attempts to overcome those failures by rewarding the wealthiest and most corrupt members of society.

European leaders are similarly hamstrung by dysfunctional political systems. Their attempts to contain the euro-zone debt crisis have repeatedly come up short because the measures needed to comfort financial markets exceed the tolerance of voters.

In reality it's not the political system that is dysfunctional per se. It's failure is a result of the fact that capitalism is failing. The pressure that this crisis creates demands one of two responses - abolish capitalism or see not just pundits imply the need for a curtailment of democracy - but see it implemented in practice.

Italy Votes To Kill Its Economy To Save Its Debt Rating

The parasites and rumour-mongers who run the debt ratings agencies, having done their work getting the Greek government to screw their population, have moved on to Italy. Let's be honest, the ratings agencies are just the propaganda arm - fully funded - of the American financial "services" industry. They issue reports and recommendations entirely based upon the needs of their masters. When that need was giving AAA ratings to the bags of doodoo that the investment banks quaintly named "collateralized debt obligations", they were there to do so. When the CDOs went tits up, taking Lehman Brothers and the insurer of choice, AIG, as well as numerous pension plans with it, the ratings agencies raised their hands and said "hey, it was just our opinion, you didn't have to listen." Given the transparent service that they provide to the big banks in fucking over the rest of the population, one wonders why anyone would listen to a damn word that they say. Actually, it's not that surprising; the rating's agencies help to organize the financial sector's response - read: assault - on those sectors of the global economy, corporate or national, that aren't doing the bidding of almighty banks.

Italy, led by a right wing dirtbag with a taste for underage prostitutes, bribery and political alliances with neo-fascists, has dutifully jumped to the tune of the rating agencies in less time than it takes to order a pizza. The Italian parliament today passed an austerity package that will immediately cut $67 billion and will lead to privatization of state-controlled enterprises, no doubt at fire sale prices that will be a big windfall for profiteers.

Well, here's a newsflash - this panic selling and austerity signal will cause consumers to retrench, will lead to a contraction of the economy and, probably, higher debt as tex revenues decline. That adds to the fact that, under Berlusconi, Italy has stagnated for a decade or more, with youth unemployment stuck at around 25% and a general perception of decline, even as Il Duce Nuevo frolics at his infamous "bunga bunga" sex parties and changes the laws to prevent himself from being found guilty on any of the long list of crimes for which he has been charged. Even the conservative Economist Magazine wants to see the back of Berlusconi, describing him as "the man who screwed an entire country." It seems that Italy isn't so much a country but a private party for its richest citizen. And now that the bill has come in for all the liquor and party favours, it's the serving staff who are being sent the bill. One can only hope that the Italians, justly famous for their penchant to strike and protest, find some will to do so now. Otherwise, they'll have to watch as their economy sinks while Berlusconi screws the daughters of their poorest citizens and raises a toast with the American ratings agencies.

Italian senate approves austerity package - Europe - Al Jazeera English

Greece: Bigger Than Lehman Brothers

What a frigging disaster. Back in 2008, the US Federal Reserve let the Lehman Brothers investment bank - which held more than a bellyful of toxic debt, go to the wall. It was meant to bring "calm" to increasingly panicked financial markets. That will probably go down in the books as one of the more stupid decisions of the first decade of the new millenium. Rather than calming anyone, it caused the global financial system to lock up as banks lost trust in each other and in the solvency of large borrowers more generally. Everyone was potentially tainted and unstable. Business literally couldn't run because there was a money strike. It was a concrete example of how much the global system had come to depend upon credit for its basic functioning.

Global capitalism seemed to hang in the balance for days and weeks. Ben Bernanke went to the US Congress and told them they had two days to sign off on a $700 billion bailout package or it was game over. Then AIG went to wall - it provided insurance for the toxic debt that turned out to have no value - and the government had to bail them out, to the tune of close to $100 billion. By the time the panic was over, the US debt had doubled.

The extent of the Lehman Brothers bad debt is unclear - in fact, part of the problem that led to the lockdown of the credit system was that the whole derivative structure of the shadow banking system was completely opaque, mixing good and bad debts together in "collateralized debt obligation" packages. However, prior to the bankruptcy declaration, Lehman's had about $65 billion in commercial and residential real estate debt, much of it toxic. They'd also recently borrowed $138 billion from JP Morgan - a debt that the US government dutifully covered for them.

The Greek government has significantly more debt than that, about $470 billion. And if Greece goes, it raises questions about Italy, Spain, Ireland, and Portugal, which involves trillions of dollars. This is mammoth and unprecedented. In Italy, the newest country to be put under severe borrowing pressure, the immediate response of the right wing government of Silvio Berlusconi is to propose an austerity package to slash the budget deficit.

But the rush to austerity is to throw gas on a fire - as Greece has discovered. Massive cuts to government expenditure have an impact upon the real economy, depressing consumption as workers are laid off and business contracts. And when the economy contracts, fewer tax dollars make their way into government coffers, which increases the debt, leading to further pressures for austerity.

It is also to blame the wrong people for the crisis. Workers haven't created this debt load, it has been the greed of the wealthy who have benefited from deregulation and tax cuts over the past three decades, leading to greater debt and greater instability. It has also been a product of the imbalances built into the European Union, which tries to mimic a unified state but is still riven by rival nation-states that compete with each other. It also suffers from imbalances in levels of development. Germany is a manufacturing powerhouse with significant trade surpluses to its European neighbours. Greece, Spain, Ireland buy German goods but could only pay for them as a result of the asset bubbles that saw property prices go through the roof for the better part of a decade. But when those bubbles burst back in 2008, governments were saddled with debt.

...budget deficits were the result of the policies implemented by states with the aim of preventing the economic crisis from morphing into a depression as well as the result of the reduced fiscal revenues and increased social spending provoked by the 2008-9 recession. The overall result has been to transfer the bulk of the bad debts that were threatening the banks onto the states that bailed them out, thus simply displacing the problem. The euro crisis of spring 2010 was the practical demonstration of this. Speculation over whether the banks were insolvent was transformed into speculation about the solvency of sovereign entities. And while every state is subject to pressures coming from the financial markets rapidly to reduce its exposure to debt, this pressure is much stronger on small and weak states, like Greece for example. What is more, the fact that the huge deficits brought to the centre of attention the capacity of each state to pay back its debts exposed the flawed nature of EMU.

What will happen now? It is likely that panic will continue to spread as European leaders remain deadlocked about what to do about the spreading default hysteria. Germany may well use its clout to attempt to force through a solution more aggressively than it has up till now. Certainly, any solution from the political and business leadership of Europe will involve pain for the working class. What is also certain is that combined with some serious inflation problems in China and a moribund US economy, we are headed back into recession.

The real question is whether workers, so soon after accepting a kick in the teeth to "do their part" in the "last" recession in 2008 (did it really end?), will accept for austerity and rollbacks. We've some magnificent fightbacks in the past year - from Greece to Madison, Wisconsin and even to Hamilton, Ontario, where Steelworkers have been fighting against attacks on pensions. But none have broken through. Sooner or later, workers struggle will have to break through or political leaders in Europe and North America will austerity us into the ground and the economy will continue to fail. The real problem is not that workers earn too much or work too little or have pensions that are too fat. The real problem is a system based upon insane and uncontrolled greed, where the priorities are increasingly based upon financial gambling of the most craven sort. 

Greece set to default on massive debt burden, European leaders concede | Business | The Guardian

The Economic Recovery, Part 1: The Myths Of China

ARE WE IN A RECOVERY? Well, there’s certainly lots of talk of “green shoots” and the head of the IMF said on Saturday that “just now we see the beginning of the end of the crisis, predicting that the world will return to growth this year and by next year global growth will be around 3 percent. Is it true?
Any talk of global recovery needs to start by looking at two key places – China and the USA. The two countries are locked together in an unwilling but interdependent dance from which neither can escape. The USA is China’s largest trading partner with 21 percent of China’s exports going to the US and almost eight percent of its imports coming from there. In the US, China is now the USA’s number 1 trading partner, representing up to 19 percent of total trade vs Canada’s 14.5 percent. Until last year Canada was the biggest trading partner.
This is significant for a few reasons. First, because exports are still key to China’s growth, with its balance of payments surplus accounting for 10 percent of China’s GDP. In real terms that means that China sells $300 billion per year more than it buys on the world market. It is a key component of China’s growth rates, which have hovered around the 10 percent mark.
Having such a high balance of payments surplus has meant that China can invest heavily in growing its economy. It’s rate of investment is a whopping 43 percent of GDP, compared to about 16.5 percent in the United States and 23.1 percent in the EU.
But it’s also meant that China can buy up American debt – it holds close to $800 billion in US debt – in a process of debt cycling that helped fund the 2003-2007 boom. It was as though the US borrowed money from China to pay for stuff that it was buying from China. And China lent money to the US that it had made by selling the US goods from its factories. Right wing historian Niall Ferguson labeled this cycle “Chimerica”. What was really happening, of course, was that by continuing to buy up US government securities they simultaneously kept US interest rates low – thus helping to fund the consumer debt boom – and also kept the US dollar high, making Chinese exports cheap.
It was a virtuous cycle until the bubble got too big. It is now in the process of becoming a negatively reinforcing cycle: the collapse in US imports is driving down China’s trade surplus, and the massive quantity of US debt is driving down the US dollar, which is making it less attractive as a reserve currency and threatens to push up US interest rates. The Chinese have stated on a number of occasions that they are concerned by US debt levels, levels that they were happy with in the past when it meant the sales of Chinese goods. In March, Premier Wen Jiabao made some very bald statements at the end of the closing of China’s legislative session:

“We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried... I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

But the Chinese can do little more than express concern. They know that ending the present round of massive stimulus spending in either country would be a disaster, since it is all that is propping up the anemic growth in the US and accounts for perhaps half of the growth in China. At a joint two-day conference between China and the US in July, China made the ritual noises about getting the deficit under control but then re-emphasized that now is not the time to stop deficit spending to stimulate the economy. As Peterson Institute economist, Ted Truman, put it:

“They don't want the U.S. economy to collapse because they are highly dependent on the U.S. economy in terms of economic activity and ... because they have a lot of their financial eggs in this basket.”

The result of the present crisis and the interdependent negative effect it has had on China and the US is leading to a number of processes. China is desperately trying to avoid a slowdown in growth. Anything below about 8 percent will cause a rise in unemployment and, it is feared, a growth in unrest – already in good supply. But with China pumping cash both directly through state investment and indirectly through a rapid expansion of lending – at 34 percent, or four times the rate of GDP growth – there is a serious danger of both an asset bubble and massive over capacity as plant comes online with insufficient global markets to absorb the increase in supply. With US retail sales stagnant and GDP in the European Union expected to shrink this year by four percent, the only hope for China beyond government stimulus that is expected to end after 2010 is to develop domestic consumption. Recent statistics, for instance showing a 16.5 percent growth in retail sales and a whopping 34 percent growth in auto sales, seem to suggest that this is happening. However, these stats are largely for foreign consumption and for the central state paymasters of regional bureaucrats. In other words they are, at best, manipulated and are often outright fabrications. But even where there has been a growth in domestic demand, much of it either includes increased government expenditure or one-off incentives as part of the government stimulus package. The real problem is that rather than rising, household consumption in China is falling – from 47 percent in 2000 to around 30 percent today, a massive decline.
What this suggests is that in the medium term shifting China’s economic priorities to develop domestic demand looks like an unlikely proposition for a number of reasons laid out in an article by Michael Pettis in Nouriel Roubini’s Global Economic Monitor. As he notes there are a number of structural and policy limitations to the growth of Chinese consumption:

“• An undervalued currency, which reduces real household wages by raising the cost of imports while subsidizing producers in the tradable goods sector.

“• Excessively low interest rates, which force households, who are mostly depositors, to subsidize the borrowing costs of borrowers, who are mostly manufacturers and include very few households, service industry companies or other net consumers.

“• A large spread between the deposit rate and the lending rate, which forces households to pay for the recapitalization of banks suffering from non-performing loans made to large manufacturers and state-owned enterprises.

“• Sluggish wage growth, perhaps caused in part by restrictions on the ability of workers to organize, which directly subsidizes employers at the cost of households.

“• Unraveling social safety nets and weak environmental restrictions, which effectively allow corporations to pass on the social cost to workers and households.

“• Other direct manufacturing subsidies, including controlled land and energy prices, which are also indirectly paid for by households

“By transferring wealth from households to boost the profitability of producers, China’s ability to grow consumption in line with growth in the nation’s GDP was severely hampered.”

While Pettis hits the producerist nail on the head, he fails to mention the contradictions that prevent the Chinese state from truly shifting towards a consumerist model. As I discussed above, the Chinese state is deadly terrified of a rise in unemployment and believe that an eight percent growth rate is necessary to absorb migration from the countryside to the cities. Shifting economic priorities towards developing domestic consumption necessarily means reducing the very high rate of investment and providing an increase in wages, social services, etc. For instance it was reported at the end of October that investment accounted for nearly 88 percent of GDP growth. Cutting back investment and redirecting that money to consumption would, at least in the short term, lead to a substantial increase in unemployment.
However, the export-led model has its own drawbacks, not least of which is that the Chinese economy is vulnerable to drops in external demand. And the Chinese state can’t provide any direct stimulus to counteract such a pullback. The result of that vulnerability has been made clear in the present recession.

“Between January and September, China's exports fell by 21.3 percent compared with the same period in 2008. The country's total trade with the European Union dropped 19.4 percent while trade with the US and Japan declined 15.8 percent and 20 percent respectively, according to the General Administration of Customs.”

There is also great pressure from the Americans – and others - for China to increase domestic consumption because the USA can’t continue forever to be the repository for Chinese exports. The American ruling class is increasingly nervous about Chinese control of the US debt, which implies a vulnerability to Chinese pressure of US policy. That means that there must be reversal in US indebtedness – and thus an increase in exports and saving. Barbara Hackman Franklin, Bush Sr.’s former Director of Commerce, summarized the viewpoint recently, stating that:

"The US must increase savings and be less consumption-led and that China must become more consumption oriented and less dependent on exports”

But, if anything, China is doing the opposite. Its policy of pegging the Yuan to the US dollar means that as the dollar has declined to more normal pre-crisis levels, China’s currency has also declined. This is, in effect, a devaluation that hinders the US, desperate to overcome its trade deficits, from doing so. As Paul Krugman noted in the New York Times on October 23:

“By pursuing a weak-currency policy, China is siphoning some of… [the already deeply depressed] demand away from other nations, which is hurting growth almost everywhere.”

Yet, in the face of this policy the US administration is, if anything, becoming more conservative in confronting China on its currency. Back in January during hearings on his nomination as Treasury Secretary, Tim Geithner accused China of currency manipulation – a very big accusation that would have meant (if it was sustained after his confirmation) that the US would have to take action against China including, possibly, sanctions. But by October 15 the Treasury Dept under Geithner was singing a different tune in its report to Congress, saying that, while China’s currency was undervalued, it was not being manipulated. Krugman’s response was, “they’re kidding, right?”
But the Obama Administration is not kidding and for very good reasons. If China were to start selling it’s US dollar reserves in a big way it would lead to a much more dramatic decline in the dollar. That would put serious upward pressure on interest rates as the US government found it more difficult to raise funds in bond markets. While a lower dollar would make US exports more attractive, the combination of higher interests rates and higher import costs – particularly energy – would choke off the feeble recovery and likely lead to stagflation. It would also prick the asset-bubble that is the New York stock market, awash in bailout cash, further depressing the economy. So, expect explicit discussion of currency manipulation to remain taboo. And while the Chinese aren’t happy about all their dollar holdings being worth less every day as the US dollar slides, they aren’t unhappy about their currency devaluing along with it, making their exports cheaper.
However, doing nothing – which seems to be the better part of both countries’ present strategy – has a price. For China, it means a continuing decline in the buying power of the Chinese consumer as the cost of imports rise from everywhere but the US. This will make China further dependent upon exports to keep the economy growing, which will also make it vulnerable to factors beyond its borders and thus beyond its control. And as it buys less and sells more it not only has the effect of slowing growth elsewhere, thus undermining its market, it raises the possibility of protectionism. In its trade with the European Union, China had a trade surplus of €170 billion in 2008. The US, by contrast, had a trade deficit of €80 billion. It will be more politically palatable for recession-bound Europe to accept a decline in trade surplus than to see its deficit with China increase. One wonders if America’s weak dollar strategy isn’t, in part, to get Europe to put pressure on China to revalue its currency.
By looking at come of the contradictions faced by the Chinese economy, it begins to look less unassailable than the media is prone to represent it. And it is less the case that China is obstinately refusing to revalue the renminbi than that China has grown itself into a corner, so to speak. With asset-prices rising and the risk of a housing bubble on one side, along with a major crisis of overproduction looming on the other, China must navigate between the rocks of multiple economic dangers and the charybdis of urban and rural revolt that could destabilize the carefully built edifice of Chinese capitalism. It's not hyperbolic to say that the future of the world will be dramatically affected by whatever happens there.

JPMorgan Profits Soar On Wall Street, Housing Defaults Soar On Main Street

I SUPPOSE IT SHOULDN'T COME AS A SURPRISE that the biggest of the big banks in America that sucked up tens of billions in government aid are now rolling in profits. That’s how this game works. So, it was announced today that JPMorgan reported a 580% profit increase over last year to a whopping $3.6 billion third-quarter profit.
The reasons is pure and simple – the money that the US government pumped into the banking and financial sector has created a new Wall St. bubble – with stock prices rising by nearly 50% to top the psychological benchmark of 10,000.
The actual meaning of that number is a mystery to most of us not initiated into the occult world of the stock market. But the basic gist is that there’s a lot of cash floating around and people are doing to the stock market what they did to the housing market – bidding it up, out of relation to the value of the assets that they represent.
The trouble is, in the real world, the shithouse is still burning. Community banks in the US, which make their profit by loaning money to people to buy houses, finance small businesses, other consumer loans, etc. are tanking badly. The 7,000 banks have collectively lost about $2.7 billion. And many are outright failing:
“Ninety-eight banks, mostly small, have failed so far this year, and regulators predict the harvest from the current recession is less than halfway complete.”
The reasons why are straightforward, with loan delinquencies sitting at a record 4.35 percent and climbing – and real estate development loans have rocketed to 16 percent. Amongst homeowners, 7.35 percent were delinquent – another record. In previously frothy markets like south Florida the freefall is continuing. According to one real estate agent foreclosures have risen by 25 percent compared to last year and the trend is higher.
It is certainly possible that the present round of profit reporting – including a positive report from Intel Corp. boosting share earnings and projecting an extra $1 billion in revenue for the fourth quarter could in fact herald a recovery. But it’s also the case that, like previous recessions – going back to the Reagan arms boom – this one will have been ended by laying the basis for the next one.
In particular, what we have seen in recent decades is a game of debt ping pong, with debts being shunted back and forth between governments, private individuals and the corporate sector (including banks). Until that debt can be dealt with it will act as a drag upon the economy and create other problems that will increasingly limit the ability of governments (in particular the US government) to act.
My own view is that in the short to medium term, once the present round of “irrational exuberance” wears off – and I don’t think it will last long once stockbrokers remember that there’s a real world – will see us return to an extended period of stagnation. Some of the weaker centres of the system – droopy old Britain, for instance – may experience Icelandic types of crashes. As Nouriel Roubini might say, this ride ain’t half over yet.

Making Big Bucks Make Sense

Know how all those billions and trillions of dollars can sometimes just seem like abstractions way beyond the comprehension of the ordinary person trying to pay their stupid overdue $150 phone bill? Well this graphic from the billion dollar gram puts it in perspective.

Newsflash: Shithouse Goes Up In Flames

When the US Federal Reserve Bank decides to cut interest rates by three-quarters of a percentage point, between meetings, that’s what you call the smoke that tells you there’s a fire.
This is the first time that the Fed has cut rates at an emergency meeting since September 2001, after the World Trade Center attacks. And it’s the biggest single cut in interest rates since 1982.
And word is that there will be another half percentage point cut by the end of the month if this adrenaline shot to the heart attack patient doesn’t revive it. But a lot of folks are worried it’s too little too late and that the economy is already in a self-reinforcing downward spiral.
A look at the numbers certainly would indicate that things are not good :
“U.S. payrolls rose by 18,000 in December, capping the worst year for job creation since 2003, and unemployment jumped to a two-year high of 5 percent, according to Labor Department figures released Jan. 4.
“The housing slump also deepened last month, with home construction falling 14 percent. Starts were down 25 percent for all of last year, concluding the worst year for the industry since Jimmy Carter was president. Sales of previously owned homes also slid in December, as single-family property prices posted their first annual decline since the Great Depression, the National Association of Realtors said today.”
Claims that the US isn’t already in recession are belied by these kinds of numbers and the panic that’s setting in on stock markets and in government. The degree of slowdown isn’t known yet but what is known is that it is greater than they’re saying.
The stats for the third quarter in the US indicated that growth had “rebounded” to 3.9% but once inflation and population were factored in, it was actually closer to 1.5%. The fourth quarter numbers haven’t been released yet but don’t be surprised if we’re already in a contraction.
In the face of this unfolding debacle the US government has also stepped in with its own $150 billion economic stimulus package. However, that package is entirely in the form of tax rebates of up to $600 per head, plus $300 per child. In other words a family of four that earns a household income of less than $75,000 would get a cheque for $1,800.
Now, $1,800 is nothing to sneeze at and it shows what bogus are the claims of from politicians and economists that the market should rule. $150 billion dollars is a big interference in the market.
But the package specifically doesn’t include extending unemployment benefits or granting more food stamps. US rulers live in fear that workers in the US will get uppity or decide that the poverty of unemployment insurance is better than their shitty, soul-destroying and/or dangerous job.
There’s a problem here though and it is two-fold.
The basis for restoring the US economy is consumer spending, which makes up 70% of GDP. But the trouble is that consumers have no more cash. In fact, they are drowning in debt, which has been increasing at a rate of 7.5% per year since 1997. In that time the amount of household debt has increased from $8 to $14 trillion dollars. In other words household debt as a percentage of GDP has rocketed from 66% to around 95%.
And not surprisingly, debt servicing payments are now at record highs.
I haven’t even gotten into the massive and ballooning US government debt, which is headed towards $10 trillion.
The point of all this is that the $1,800 that family of four is about to get in the mail is probably going to go on paying down the credit card to ease the interest burden. This is especially the case since some see house prices declining by 20 to 30 percent, which means that any further credit against home value will have dried up for a lot of Americans.
And credit card payments are not an economic stimulus – that’s just paying for old growth, not creating new growth. So, the layoffs will continue, which will reduce demand and create more layoffs.
Giving out money is also stupid economics.
$150 billion dollars that is dedicated towards specific employment projects, such as they had in the 1930s is a much more efficient way to spend money than to just throw it in the air.
Economic enterprises have multiplier effects on the economy – building the Hoover dam gave jobs to thousands of workers, those workers spent money, the project bought equipment and raw materials, those materials had to be shipped, etc.
Of course, other than in the field of military spending, this doesn’t fit with the neo-liberal consensus. What does that mean – the shithouse is going up in flames and they’ve locked us inside.