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Debts and a New Beginning

by Fred Schmid Wednesday, Jul. 27, 2011 at 3:47 AM

Problems don't disappear when they are ignored. Through deregulation, the law of profit maximization and government failure, the financial sector was expanded and made independent of the real economy. 14 million jobs could be created through the Internet.


Theses on the Debt Crisis of Global Capitalism

By Fred Schmid

[These theses published in: ISW – Institute for Social-Ecological Economic Research, July 1, 2011 are translated from the German on the Internet,]


Metropolis capitalism is bankrupt. Debts were never so massive. When the heads of government of the “leading industrial countries” met at their annual G7 summit in French Deauville at the end of May 2011, they were in conference on a huge debt mountain of trillion (35,000 billion) in state debts.

In the meantime the whole system is a single debt economy. In 2011 all the debts – state debts, debts of private households and debts of businesses – in the capitalist centers US, Euro zone and Japan add up to around 0 trillion, 2.5 times their aggregate annual GDP.


State debts rose strongly in and with the financial- and worldwide economic crisis – around 50 percent on average in all the capitalist centers from 2007 to 2011, several times the annual tax revenues. For example, Germany must spend all its tax revenues of four years to pay off its federal, state and local community debts.

The states have totally overspent through bank bailout umbrellas and economic packages in the trillions. The tax revenues, particularly the profits tax, largely dwindled in the crisis years. Trillions for rearmament and wars (Iraq and Afghanistan) are devastating. The growing holes in state budgets were stuffed with ever larger amounts of government bonds issued and traded by banks. The banks and financial institutes bailed out yesterday, make money today in the debts that must be taken over by the states for their bailout actions.


The counterpart to the huge global debt mountain is the money treasure of the rich that also pile up sky-high. Fund managers worldwide administer financial assets of 1.8 trillion (Boston Consulting Group). Unlike the debts, the money treasures are very concentrated in the hands of a few billionaires. 12.5 million billionaires – 0.9% of all households with appreciable financial assets – own 39% ( trillion) of the total global money wealth. The financial assets of the rich today are trillion more than before the financial crisis. The rich do not know crises; they earn money from them.

The growing indebtedness of the states is a popular and expanding field of investment and speculation since profitable investment possibilities in the real economy are minimized due to capped mass purchasing power and indebted public and private budgets. An investment emergency opens up in the financial sphere from overflowing masses of mountains.


In the past business with government bonds was a rather tedious and hardly profitable business for banks and financial investors. A profit of two to three percent with government bonds was the norm. This is different today. With the increased money-glut on one side and the growing debt pressure on the other side, it is possible to force up interests and profits and speculate against key currencies or on the bankruptcy of whole states today.

The three private rating agencies – Moody’s, Standard & Poors and Fitch – play a central role in forcing up the interests and profits of government bonds. Together with speculators and investment banks, they rate risks. Their downgrading of the creditworthiness of states forces up interests and profits. If the states are then compelled to take credits at a higher interest rate, that is another reason for downgrading. It is a kind of double-pass game with rating agencies and speculators that drives states into the debt trap more and more. The first victims are the small and no longer competitive countries at the “periphery” of the Euro-zone. Medium- size Euro countries like Spain and even the G7-country Italy fall increasingly in the crosshairs of the global speculators. The US as an economic and debt superpower hits its indebtedness limit (.3 trillion) and already made a down-payment with the rating agencies. This explains the great interest spread for government bonds (10-year running time) in the individual countries of the Euro union: for example in March 2011: Greece 12.44%, Ireland 9.67%, Portugal 7%, Spain 5.25%, Italy 4.88%, France 3.61% and Germany 3.21%.

Speculation with government bonds is largely risk-free. The risks are shifted to the public authority, for example in the form of the Euro bailout umbrella. With a haircut, tax payers and small savers are bled white while mammoth creditor banks and their shareholders from Germany, France and Great Britain are rated as “systemic risks” and carved ou98t with tax funds. Politics has definitional power with regard to “systemic risks,” risks that could lead to a financial chain reaction with the danger of a core meltdown.


European Union and Euro crisis strategists want to avoid the state bankruptcy of “problem countries.” They fear a breaking apart of the currency union and an implosion of the Euro. The hardliners of the “Troika” from the International Monetary Fund (IMF), the European Central Bank and the EU commission try to force crisis countries to debt cancellation and make them more competitive with so-called structural adjustment programs so they “can repay their debts” (Merkel). According to the doctrine of the Washington Consensus, rigorous budget discipline and savings, cutting public services and public necessities, capping social benefits and pensions, wage cuts and raising the mass taxes are counted in these austerity- and adjustment programs. The conditions on serving state debts that are hard-as-nails lead to savings-to-ruin and bleeding white of the affected states and drag them even more into the crisis whirlpool owing to cuts in purchasing power and demand, as the growth collapse in these countries shows. What use is competitiveness for a world market characterized by over-capacities and missing demand whose niches and cheap segments are filled by threshold countries and Eastern European EU countries?

In addition debtor countries are forced to privatization of public property in new dimensions. “Everything must go.” Even cultural goods are no longer taboo. “Acropolis for sale,” the Suddeutsche Zeitung newspaper titled its commentary on Greece. The Bild Zeitung newspaper’s chauvinistic title was “Sell your islands, you bankrupt Greeks.” The Papandreou government has co9mmitted itself to privatizing state assets worth 50 billion Euros. The IMF calculates that 300 billion Euros in state real estate could be sold off cheap. This would be 27,000 Euros for every Greek person. An unparalleled plundering and dispossession of the people and assets-redistribution to the rich is envisioned. There would be no escape from the debt trap but at best a delay in the debt problematic.


The horrendous debts lead to increasing interest burdens and social cuts even in the capitalist industrial countries that have not yet immediately fallen into the downward suction of the crisis whirlpool and face state bankruptcy. Calculated roughly, the total debts (state, private households, businesses) of the G7 countries has the consequence that 10 to 15 percent of their GDP must be paid out annually in interests for the owners of financial assets. This is a third redistribution-round in favor of capital and the rich. In the primary distribution between capital and labor, the proportions shifted continuously since 2000 to the disadvantage of the wage rate and to the benefit of the profit rate. In the second fiscal distribution through taxes, the share of profit taxes in tax revenue declined because of the anti-social tax policy. Corporations and the rich bid farewell to financing the community. The interest tribute to the money capitalists is the third form of redistribution from bottom to top. The interests for state debts must be paid by the taxpayers, ultimately by the wage taxpayers and consumers or through privatization. Private debts directly reduce the budget revenue. Businesses often pass on the costs in prices or through savings in wage costs.


An unparalleled money-glut, the return of highly speculative funds and financial levers, speculation against whole states and key currencies conceals the danger of new financial chain reactions and financial crises. The madness on the financial markets accelerates incredibly. Possible regulations on the financial markets that cannot be carried out against the power of financial capital will not solve the problem. The enormous money torrents will hollow out or tear down every form of control. The mass of speculative financial transactions occur “over-the-counter” and no longer over the financial markets. The problem is not the dam; the problem is the flood. The danger of new financial catastrophes threatens as long as the flood is not exhausted.

The crisis susceptibility of the whole system increases. With the described redistributions, the danger grows of a new over-accumulation- or under-consumption-crisis in the real economy. The demand boom in and ou9t of the threshold countries may only bring a temporary delay.

A new moment will occur if a financial- and economic crisis crops up. A state economic policy with Keynesian instruments is hardly in sight. A deficit-spending with economic- and bailout-packages as in the 2007-2009 crisis is flogged to death. Keynesianism says goodbye with a last “hurrah.” Deficit-spending temporarily pulled capitalist industrial countries out of crisis at the cost of a total debt overload. A new state intervention is only possible at the price of a hyper-inflation bound with the dispossession of small savers, pensioners and others who cannot flee in tangible assets and stocks.


Keynesianism is dead. Neoliberalism has proven to be a cul-de-sac. The answer of the rulers is ultra-neoliberalism. Social cuts and amputations become more brutal. Wage-dumping and precarious working conditions are pushed to the limit. The welfare state is completely starved out. An extreme polarization of society in poverty and wealth is accepted. All this happens with the battle cry “strengthen competitiveness” and prevention of an indebtedness spiral as in the periphery countries. All this implies the dismantling of democratic rights and development of forms of authoritarian rule.

In the course of the financial crisis, democracy was restricted and the points set for a financial dictatorship. The service of financial assets gains a constitutional rank with adoption of the “debt brake” in Germany’s basic law. This should also be forced on the other Euro countries. Sovereignty and the creative possibilities of parliaments are minimized. For example, the Bundestag (German parliament) exercised the right to debate for weeks a three Euro increase of the Hartz IV benefit rate while the big financial decisions are made by other groups. Bailout packages of billions upon billions of Euros for the banks are resolved in night and fog actions by an exclusive circle of the German chancellor, the minister of finance, two private bankers, the president of the German Central Bank and the head of banking oversight. The parliament has incapacitated itself and largely talked itself out of its central function, the budget law. The sovereigns of politics today are the banks and “judgments of the financial markets.” They raise or lower their thumbs over national economies, not to mention those of the “problem countries within the Euro-zone. The EU commission, IMF, the European Central Bank and “system-relevant” banks decide today over their economic and fiscal policy. These countries stand under the total control (Kuratel) of money.


Elich, Gregory: “Class Ware without Mercy,” July 23, 2011

Vast wealth for those at the top, unemployment and poverty for the rest of society

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