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by Tomasz Konicz
Sunday, Apr. 17, 2011 at 7:48 AM
Deficit economies were organized mainly by finance capital. The expansion of this credit-financed mass demand went along with the expansion of the financial sector. Trillions of dollars and Euros were pumped in the stabilization of financial markets.
THE U.S. IS “MORE GREEK THAN GREECE”
Will the US debt crisis enter an acute stage?
By Tomasz Konicz
[This article published on: www.streitzuege.org, April 2011 is translated from the German on the Internet, http://www.streifzuege.org/2011/usa-griechischer-als-griechenland/print/.]
“The biggest bond investor in the world recently sold all American government bonds. Bill Gross rated them as “having only trifling value.” As a reason, he named state social programs. The fund manager predicts a massive loss in purchasing power for the dollar,” the Financial Times of Germany (FTD) recently reported. In the text “Everything on Credit” that I will reproduce below, I explain the systemic background of this indebtedness dynamic that now hits its limits.
WORLDWIDE DEFICIT CYCLES
The fact that the capitalist world system was marked by many increasing deficit cycles up to the outbreak of the crisis is rarely a theme of the left. The “Southern European” deficit cycle in the Euro zone between Germany and the southern European Euro-countries is by no means unique or event he greatest of its kind. Even in Eastern Europe a deficit economy flourished up to the eruption of the worldwide economic crisis. Western banks that have a dominant position on eastern European financial markets are engaged with .5 trillion (1.25 trillion euro) between the Baltic and the Black Sea. These enormous deficits also acted as a kind of fuel that kept alive the economic motor in Eastern Europe and drove the balance of payments deficits in several Eastern European economies into double-digit percentages (Baltic, Rumania and Ukraine). Just before the outbreak of the crisis, Eastern Europe also functioned as a lucrative sales market for the German export industry while huge debt mountains of eastern Europeans with western credit institutes grew.
The impact of the recession was very severe in Eastern Europe. Greece was not the first victim of this crisis of state finances. In the eruption of the crisis several countries of Eastern Europe were preserved from state bankruptcy by interventions of the International Monetary Fund and the World Bank – that included the most brutal austerity programs. The crisis process spreads from the periphery to the center of the capitalist world system. The blows come ever nearer. With Greece – and soon also with Spain and Portugal – a country of the Euro-zone was for the first time at the edge of state bankruptcy.
The gap between the increasingly indebted US and the People’s Republic of China represents the “mother of all deficit cycles.” Like Greece and Spain, the US developed a trade deficit that reached a gigantic dimension. At the peak of its deficit economy between 2006 and 2008, the United States posted a trade deficit of nearly 0 billion annually. In 2010 the state debts surpassed the trillion mark; the total debts of the country at the end of 2009 amounted to over trillion. Thus the US is like a black hole of the world economy which previously took over a large part of the surplus production of the world and had a stabilizing effect on the whole capitalist world system.
PERPETUAL MOBILE OF GLOBAL CAPITALISM
This US trade deficit acting as a perpetual mobile of global capitalism was – and still is – financed by borrowing. In the United States the total indebtedness (state, private economy and consumers) was more than 350 percent of the gross domestic product in March 2008. In the meantime the United States stands in the red at 400 percent of its annual economic output. On account of the size of its economy, the excessive debt economy of the US plays a central role worldwide. The United States was the most important economic locomotive in the past years.
On the basis of this historically unparalleled indebtedness orgy of the United States, an enormous global crisis potential forms as the crisis prophet Nouriel Roubini recently remarked: “Today the markets are worried about Greece but Greece is only the tip of the iceberg, the canary in the coal mine, one of many fiscal problems. (…) The fiscal problems of the US will finally move to the foreground. (…) The risk that something serious will happen in the next two or three years in the US is considerable.”
The US served as the global economic motor because of its excessive indebtedness dynamic of the last years. However a broad tendency to debt formation can be recognized in almost all developed capitalist economies. Several industrial nations – like Japan, Great Britain, Spain and France – show a total indebtedness of more than three times their annual economic output. In the final analysis, it does not make a difference whether the state, the private economy or consumers become indebted. This credit-generated demand stimulates the economy and leads to further economic growth. Whether the US government now orders new aircraft, builds new vacation homes in Spain for speculative ends or awards consumer credits in Eastern Europe, all these actions generate demand and revive the corresponding industrial branches.
The relatively good global economic development in the last decades was largely made possible through these indebtedness processes. These deficit economies were organized mainly by finance capital. The expansion of this credit-financed mass demand went along with the expansion of the financial sector in several industrial states. This demand was generated by the banks for which awarding credits was their most important “commodity.” For the financial institutes, expansion of indebtedness equals expansion of their markets. Thus the proliferating financial markets since the 1980s allow speculative bubbles to rise and expand their own markets by excessively awarding credits. Asked about the causes of the current economic crisis, the Nobel Prize winner Paul Krugman named the degenerate awarding of credit as the most important factor: “We in America have enormous problems as on the real estate market with its trillions in losses. The global credit bubble moves from the US to Europe.” Thus the economic crisis appears as a debt crisis.
STATE ASSUMES DEFICIT
What happened when this debt-financed Tower of Babel collapsed on the financial markets? The financial crisis changed into an economic crisis as soon as the financial markets passed over into a rigid paralysis after the bankruptcy of Lehmann Brothers and awarding credit collapsed globally. The breakdown of the credit-financed snowball system brought demand and industrial production to collapse. This resulted in the first mass dismissals of workers. Industrial production in the Euro-zone fell around 20 percent in 2009.
The capitalist reaction to this breakdown consisted mostly in a nationalization of this deficit economy. Most industrial countries concocted enormous economic packages. Trillions of dollars and Euros were pumped in the “stabilization of financial markets.” The state economic programs reached incredible dimensions on the global plane. The Kiel Institute for the World Economy estimates the worldwide extent of state assistance at around three trillion dollars. According to the Kiel Institute, this gigantic state demand infusion is equivalent to 4.7 percent of world income. This process of nationalization escalates the crisis of state finances. These state economic programs cannot continue to the end of time. The economic packages equal a state indebtedness of 4.7 percent of world income. The far higher costs to stabilize the world financial system coming to taxpayers in the train of the financial crisis must be added.
This crisis passed through a specific form change. Its development described first as a crisis of the financial markets later changed into an unparalleled economic collapse and now seems to have mutated into a crisis of state finances. The causes for this form change of the economic crisis are clear on the basis of the above statements. “Father State” simply leaped into the breach with its economic programs when the deficit economy organized by the financial markets broke down. The outlines of the global trade structure characterized by deficit cycles can now be drawn. Export-oriented economies sell their production surpluses in increasingly indebted targeted countries. This cycle increased in intensity up to the eruption of the crisis – in the US, Southern Europe, Great Britain and Eastern Europe. In the case of the US this was a long-term process over decades. As explained, these deficit cycles only functioned on account of a constantly increased indebtedness in the countries that took over the surpluses of the export-oriented economies.
CONSTANT 40-YEAR CRISIS
The price-question that is seldom raised in leftist contexts is: How can the capitalist economic system no longer reproduce itself without indebtedness? Why did the deficit cycles constantly increase in extent and dynamic up to the outbreak of the crisis? As soon as the – private or public – debt-generated demand falls, an intensified downward spiral starts after the eruption of the crisis in which overproduction leads to mass dismissals that lower demand and cause more waves of terminations. Capitalism only seems to function on credit. The more intelligent exponents of the ruling class consider this fact at least implicitly. So Lawrence Summers, active as an economic advisor of Barack Obama, urged the US Congress to approve another economic package, this time of 0 billion. “The White House made a tactical concession since the economy already loses buoyancy and could stagnate later in the year” since the stimulating effects of the first economic package of 0 billion have already faded,” the British Telegraph commented.
Since when has state or private debt contraction had to guarantee the reproduction of the capitalist system? The rapid rise of the debt rate in the United States began with the epoch of finance-market-driven neoliberalism in the 1980s. This was carried out globally because it seemed to offer an apparent way out of the fundamental economic crisis – the so-called stagflation – in the 1970s. With increased inflation, fast rising unemployment and falling economic growth, the Golden Age of capitalism in which high growth rates and nearly full employment could be achieved in almost all industrial nations end3ed in the early 1970s.
This crisis of the 1970s had its causes in the exhaustion of the economic structure dominant at that time which was based on highly efficient mass use of workers in industry (Taylor system) and auto-making as a leading economic sector. Firstly, the new markets – arising after the Second World War – experienced a certain satiation so that competition between enterprises intensified. Secondly, constantly increasing automation in production prevented new production branches from accommodating workers made superfluous by rationalization. Alongside stagflation, the capitalist maximum credible accident (GAU) started in the 1970s when the profit rate massively collapsed. As everybody knows, the highest possible exploitation of invested capital is the ultimate goal of the capitalist economic mode, not the satisfaction of needs. As long as gaining profits remains at a high level, the system reproduces itself in a stable way even with increasing impoverishment or increasing mass unemployment.
Neoliberalism first gained acceptance on account of the falling profit rate in the US. It prevailed because it solved the problems simply by a stagnation of wage levels. Since the 1970s real wages in the US stagnated which contributed to the increased profit rates from the 1980s. As a rule this would trigger an overproduction crisis. On account of competitive innovations in production methods, workers become increasingly productive. However they no longer have money at their disposal to consume the ever-larger quantity of goods that they produce themselves. Stagnating wages, higher productivity and rising profit rates occur simultaneously.
The puzzle’s solution lies in the financial markets and the debt-financed deficit economy that they fueled. The potential overproduction crisis that had to break out because of rising productivity with stagnating wages was simply delayed until 2007 by a degenerate indebtedness. After this long incubation time of 40 years, this crisis process over decades has now entered a blatant stage for about three years. The longer this global debt-financed snowball system was maintained, the more intensely the systemic latent overproduction crisis developed.
At the end, capitalism was simply too productive for itself. This system hits an inner limit of its development. The rationalization and automation spreading ever faster leads to producing more and more goods in less and less time by fewer and fewer workers. New industrial branches like microelectronics and information technology accelerate this tendency. These new technologies created far fewer jobs than were rationalized away through their aggregate economic application.
Capitalist economies developed in two different directions to counter this systemic overproduction crisis. They either became indebted to form deficit economies like Greece, Spain and the US or they tried to “export” the contradictions of the late capitalist mode of production like Germany, China (in relation to the US), South Korea and Japan. The former “export world master” Germany lived through considerable de-industrialization waves. The tendency to economic stagnation that fortified in the last decades in all industrial countries that did not develop a deficit economy is also characteristic.
This objective crisis process of capitalist goods production intensifies the class contradictions in the individual capitalist states. The neoliberal offensive against the social achievements of wage-earners - that peaked in the Hartz legislation in Germany (welfare reform that combined unemployment assistance and income support while drastically reducing the duration of benefits) – resulted from this crisis process. The intensification of the exploitation of the “commodity labor” and the export of the contradictions of the capitalist goods production were the answers of German capital to the crisis.
The answer of the left, wage-earners and the marginalized to this radicalizing crisis process – and the crisis offensive of capital – can only be radical. It must tackle the problem at its root. Under conscious breach of the coercive capitalist logic, the needs of people must be put in the center and a broad discussion initiated on ways to an alternative formation of society where basic needs are satisfied and capital accumulation and private ownership of the means of production become only bad memories of a dark barbaric prehistoric era of humanity. We can leave financial market regulations and economic programs – that only continue the deficit economy in state direction up to state bankruptcy – to the CDU and SPD (German centrist parties).
Hirsch, Joachim, “Causes and Consequences of the Financial Crisis,” June 2010
Lessig, Lawrence, Video: How to Get Our Democracy Back”
Stiglitz, Joseph, Video on “Freefall,” BookTV
Video: Joseph Stiglitz Discusses the Elite 1% on Democracy Now!
No one has so effectively and lucidly explained the staggering inequality of wealth that exists in America like Nobel laureate economist Joseph Stiglitz, as he did in “Of the 1%, By the 1%, for the 1%”—his piece in Vanity Fair’s May issue. As Stiglitz observes, the elite few not only rake in nearly a quarter of the nation’s wealth (and have seen their paychecks and McMansions grow as a result), but they also control 40 percent of it—and while most of Americans are actually doing worse, year after year. Watch above as Dr. Stiglitz sits with Democracy Now! to discuss his article, and how the divide will only continue to grow. (For part two of the interview, go here).
Video: ForaTV Joseph Stiglitz Problems with the GOP
It's interesting how different the conversation is with actual economists than politicians. Stiglitz may or may not have ideological, partisan opinions, but he is at least is able to offer an occasional sentence without cliches, talking points and pseudo-religious, patronising baby talk.
@SimplyGimpy Stiglitz is forgetting the fact that putting people to work is not the whole story. Those people need to work in productive jobs, so first you have to cut spending and fire people and only then you are able to invest and hire them in new, viable businesses.
But you're right. It's much better to speak to an economist than to talk to politician. With economist there is a chance for working out a good solution.
Politicians do not want solutions, all they want to do is talk.
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Obama lost me.
I won't be voting for him. But why didn't Obama get Joseph Stiglitz on his advisory team? Joseph Stiglitz's one of the few who sound in the right direction.
overseachininadoll 4 days ago
Joseph Stiglitz Stimulus Fraud 1-2 Democracy Now! 12 min
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2/22/10 I hr 6 minutes
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