Politics in the Crisis Trap

POLITICS IN THE CRISIS TRAP

Why neither Washington nor Brussels can overcome the worldwide economic crisis through political measures

By Tomasz Konicz

[This article published in the German-English cyber journal Telepolis 8/13/2011 is translated from the German on the Internet, http://www.heise.de/tp/druck/mb/artikel/35/35303/1.html.]

The public consensus in researching the causes of the latest crisis eruption seems nearly unanimous. Politics bears the main responsibility for the latest stock market trembling which may represent a new crisis phase in which the world economy may drift into recession. There are only passionate arguments [1] about the concrete political mistakes that led to the disaster.

On one side, politics is increasingly criticized for being too wasteful in the last years or decades and thus triggered the present crisis of state finances. In the rightwing populist corner [2] and also in the leading liberal media [3], the statement is repeated that “the US, many European countries and some Asian countries have long lived above their means and now rightly receive the bill from the rating agencies.” The remarks of chancellor Merkel are notorious who summoned Greece to more frugality by referring to the household discipline of the “Schwabian housewife” [4]. Representatives of this line of argumentation plead for severe and “painful” austerity measures and austerity programs to reduce state debts. Consequently the latest stock market trembling was apparently triggered by the fear of “markets” before unbearable state indebtedness fomented on account of the continuing disintegration processes in the Euro-zone and encouraged by the credit-downgrading of the US.

The other great camp of political critics is made up of personalities like the economist Paul Krugman [5] who reproach politics for remaining too passive and not offering enough massive economic programs. The austerity measures now resolved in the United States will completely strangle the economy because of the power of state demand [6] and make recession likely. These opponents of harsh austerity programs argue the other way around. The stock market collapse was triggered by economic fears of the “markets” since the debt conflict in the US was first settled after the extreme rightwing of the republicans carried out mammoth budget cuts [From Debt Showdown into Recession (7)]. “Growth fear” [8] is strengthened by the budget cuts in the US and drives important stocks downhill.

Should politics force the state indebtedness to support the economy through further economic measures or must the political class cut spending and trigger deflation? National economies are driven to the verge of state bankruptcy on account of increasing debt burdens. This disunion represents the central point of controversy in the economic and financial-political conflicts in nearly all western industrial states. The conflicts around the concrete capitalist crisis policy enflame tempers because both sides in this dispute fear the disastrous consequences of the opposite side’s policy. The fact is several countries could no longer refinance their budget deficits because of degenerate state indebtedness and had to flee under the “Euro bailout umbrella.” While speculators fueled the crisis with attacks against particular national economies, this was only possible because the indebtedness level of the affected countries was already intolerably high. Populist polemics against “speculators full of intrigue” misses the core of the problem. The capitalist system is in a debt crisis and the prohibitions on short-selling [9] in the EU will not change this.

CRISIS POLICY INA PHILOSOPHICAL PARADOX

It is also a fact that a discontinuance of debt-financed economic programs leads to a slack period resulting in stagnation and recession. The example of the economic development of the US illustrates this process very well. When most measures of the American economic package of 0 billion ended in the middle of 2010, the Los Angeles Times warned [10] that the “only reliable source of fuel of the US economy fizzles away with the dwindling state spending. The statistical data [11] already shows a clear economic cooling to 2.5 percent in the third quarter of 2010 compared to 3.8 percent in the previous quarter. In the fourth quarter of 2010, the American economy slowed to 2.3 percent and entered a continuing stagnation phase in which the economy hardly grows any more.

Thus both sides in the financial-political conflict around future crisis policy are actually right in their diagnoses. More state indebtedness will inevitably lead to state bankruptcy or to hyper-inflation. Ending state indebtedness will result in recession. But both parties are on the wrong way when they assume that their “therapies” and political concepts could solve the fundamental crisis of the world economy that was only prolonged since 2007 through escalating state indebtedness.

Therefore crisis policy finds itself in a philosophical paradox, in an insoluble self-contradiction where it can only choose between two different ways into crisis. In a system-imminent way, the political class can only choose between more indebtedness up to state bankruptcy (together with possible hyper-inflation) or take the way of harsh austerity programs leading to deflation spirals in recession as the Greek example illustrates. The economic collapse triggered by drastic aust4erity measures allows the indebtedness to swell again in Greece since collapsing state revenues and rising social expenditures exceed the realized savings [12]. The dramatic development in Hellas impressively refutes the populist bleating in political and press enterprises that tells of “living beyond their means” likes to equate national economics with private households of “Schwabian housewives” and demand with sadistic delight dismantling programs for countries threatened with bankruptcy. How can heavily indebted national economies be saved in the state bankruptcy?

This philosophical paradox of capitalist crisis policy – which must carry out budget revitalization and economic programs – is reflected in a “double misery” of the world economy, as DIE WELT explained [13]:

“It is a double misery. The signs multiply worldwide that the economy could skid into a downswing. At the same time the states hardly have possibilities for countermeasures. The states have burnt out in the financial crisis.”

It is no accident that the financial exhaustion of the states coincides with a global economic slack period. The credit-financed state expenditures were the most important economic support after the collapse of the real estate bubble in 2007/2008. The global economic programs amounted to nearly five percent of the world economic output [14]. In addition fiscal-political measures like flooding the markets with “cheap money” occurred in the framework of an historically unique phase of zero-interest policy. In teamwork with inflation, negative interests were created that promoted a massive return of capital to the financial markets. This contributed decisively to the formation of the liquidity rally [15] on the stock markets that now hits its limits and can only be prolonged with constantly new promises of a dollar flood [16].

After the boom or bull market over high tech stocks at the beginning of the century and the housing bubble, the world financial markets are now in the third global speculation bubble [17] within only two decades. The speculation bubble was initiated by the crisis policy and contributed to the short-lived stabilization of the whole system. Here is an illustration of the stabilizing character of the current liquidity bubble. On account of the state-initiated bubble formation, US banks could pay back the state “bailouts’ [18] that had to be granted them at the peak of the financial crisis. Moreover a part of the capital-covered social system is also financed by financial market activities, e.g. through pension funds.

Many central banks turned into “waste dumps” [19] of crisis capitalism in which toxic mortgages and government bonds were deposited. This “sweeping-under-the-carpet” of debt titles also stabilizes the system in the short-term. In the leading industrial countries, state and financial capital merge in a crisis-symbiosis that chains the two poles of the capitalist social order to each other. Politics spent billions to stabilize the financial system and parked enormous quantities of toxic “securities” of the financial sector on the balance sheets of the central bank while the financial sector financed these costly measures by continuing to buy government bonds. If the states fall, the banks also fall. Therefore German financial institutes try to reduce their exposition in Italy [20]. The rumors [21] about a strong exposition of French banks in Southern Europe were also an important driving force of the recent stock market turbulences.

CONTINUITY OF THE INDEBTEDNESS DYNAMIC ONLY PASSED FROM THE FINANCIAL SECTOR TO THE STATE

Unlike 1929, the political class of industrial countries actually mitigated the course of the crisis and for a long while prevented a catastrophic collapse. Thus the “Keynesian” policy of economic programs and expansive monetary policy were very successful in the scope of their possibilities. Still the world economy only purchased a reprieve of a few years. The degenerate and costly state crisis measures in which billions were spent to stabilize the financial markets along with the economic packages led to a formal change of the crisis where the financial crisis became a state debt crisis. This was also clear to the chief economist of Deutsche Bank [22]:

“It is still the same crisis. In the beginning there was the crisis of American housing credits. Then the money market crisis occurred in the summer of 2007 that expanded to a banking crisis. After the Lehman bankruptcy, the states assumed a large part of the private debts and resisted the erupting economic crisis with huge economic packages. So – after a short interim recovery – we stand in the middle of a state debt crisis.”

We face a continuity of the indebtedness dynamic that passed from the financial sector to the state, not only a continuity of crisis. The chief economist of Deutsche Bank told readers of the Frankfurter Allgemeinen Zeitung newspaper that the states perpetuated a debt-financed economic growth by means of “enormous economic packages” that previously were generated by the financial markets with massive “American housing credits.” Similar to the speculations in Spain, Ireland, Great Britain and Eastern Europe, the American housing bubble had a stimulating effect on the aggregate economy. After the bursting of this bubble, the states leaped in the breach and built new expressway bridges or detour roads instead of new homes.

Capitalism cannot function any more without heavy debts. As soon as the credit-financed (state or private) demand collapses, a downward economic spiral begins that leads to stagnation and recession. The deficit economy previously organized by the financial markets [23] in which the accumulation of debts animating the economy was nationalized after the eruption of the crisis [24] until the states struck their financial limits. In the past decades, credit kept a capitalist system going that had become too productive for itself. The demand indispensable for a highly efficient production machine turns out every greater mountains of goods with fewer and fewer workers.

This crisis of the work society of industrial states – which is also marked out on the horizon for China [25] – produced on one side ever greater mountains of goods that could only be sold thanks to massive indebtedness and at the same time a class of the “expelled” of the goods society, of “superfluous persons” who are of no use any more in goods production. It is this class of the “excluded of the modern age” (Zygmunt Bauman) who locked up in social exclusion recently expressed their blind rage in Great Britain [26].

It is only a question of time until the crisis of the work society scorches the middle class. The global debt Tower of Babel cannot continue for ever. Originally credit was an advance payment on future income and increased even more through skilful investment of credits – whether multiplied corporate profits or state tax revenues. Now most credits function only as mere consumer-credits, as a “life-saving measure” for a system in agony. With the stock exchange turbulences breaking out ever more frequently, the “market” gives a sign that capitalism has used up its credit.

Capitalism only functions “on credit.” This debt-financed “pseudo-life” of the capitalist zombie economy was first made possible by the expansion of the financial sector since the 1980s [The End of the “Golden Age” of Capitalism and the Rise of Neoliberalism (27)]. Therefore all calls for an efficient regulation of financial markets die away unheard. The philosophical paradox of capitalist crisis policy results from this system pressure to continuous indebtedness. That policy must accept and reduce debts simultaneously. As a result, the states form the last pool of players of capitalism collapsing in its hyper-productivity [28]. There cannot be a nothingness that could delay the crisis dynamic.

LINKS:

[1]

http://www.ftd.de/politik/international/:finanzkrise-warum-die-oekonomen-die-welt-nicht-verstehen/60090275.html

[2]

http://www.spiegel.de/politik/deutschland/0,1518,778966,00.html

[3]

http://www.nzz.ch/nachrichten/wirtschaft/aktuell/hoechste_zeit_fuer_echte_loesungen_1.11819221.html

[4]

http://www.tagesanzeiger.ch/wirtschaft/konjunktur/Das-Sparrezept-der-schwaebischen-Hausfrau/story/14243948

[5]

http://krugman.blogs.nytimes.com/

[6]

http://www.nytimes.com/2011/08/01/opinion/the-president-surrenders-on-debt-ceiling.html

[7]

http://www.heise.de/tp/artikel/35/35229/1.html

[8]

http://krugman.blogs.nytimes.com/2011/08/08/its-a-growth-scare/

[9]

http://www.heise.de/tp/blogs/8/150301

[10]

http://articles.latimes.com/2010/jun/30/business/la-fi-0630-stimulus-20100630

[11]

http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf

[12]

http://www.querschuesse.de/griechische-staatshaushaltsdefizit-steigt/

[13]

http://www.welt.de/wirtschaft/article13530242/Die-Angst-vor-dem-weltweiten-Kollaps.html

[14]

http://www.ifw-kiel.de/medien/medieninformationen/2009/pm1-04-09

[15]

http://www.ftd.de/finanzen/maerkte/marktberichte/:liquiditaetsrally-bernanke-treibt-dax-auf-dreijahreshoch/60044609.html

[16]

http://www.ftd.de/politik/konjunktur/:fed-zinsentscheid-bernanke-behaelt-sich-neue-dollar-flut-vor/60089418.html

[17]

http://www.querschuesse.de/allzeittief-bei-den-new-home-sales/1a-865/

[18]

http://www.heise.de/tp/artikel/31/31777/1.html

[19]

http://www.exit-online.org/textanz1.php?tabelle=aktuelles&index=0&posnr=527

[20]

http://www.sueddeutsche.de/geld/wegen-der-schuldenkrise-deutsche-bank-misstraut-italien-1.1124730

[21]

http://www.ftd.de/unternehmen/finanzdienstleister/:kursrutsch-societe-generale-nennt-geldsorgen-geruechte-muell/60090204.html

[22]

http://www.faz.net/artikel/C30350/deutsche-bank-chefvolkswirt-mayer-an-der-boerse-tobt-ein-perfekter-sturm-30480515.html

[23]

http://www.heise.de/tp/artikel/29/29356/1.html

[24]

http://www.heise.de/tp/artikel/30/30415/1.html

[25]

http://www.heise.de/tp/artikel/35/35245/1.html

[26]

http://www.heise.de/tp/artikel/35/35274/1.html

[27]

http://www.heise.de/tp/artikel/29/29184/1.html

[28]

http://www.heise.de/tp/artikel/32/32551/1.html

RELATED LINKS:

Bruns, Tissy, “The World is Out of Joint,” August 22, 2011

http://portland.indymedia.org/en/2011/09/410113.shtml

www.therealnews.com

http://kickitover.org