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Collapsing Debt Towers

by Thomas Konicz Wednesday, Oct. 12, 2011 at 2:38 AM

The crisis is 30 years old, not three years old. The causes of the crisis should be tracked down in the real goods-producing economy, not in the financial markets. The financial markets were keep alive up to the collapse of the speculative bubble by credit-financed demand.


By Thomas Konicz

[This article published in September 2011 is translated abridged from the German on the Internet, Readers should click on the original German to see the charts on balance of payments deficits, monthly balance of US trade deficit, foreign trade volumes, credit market debts, US budget deficits and Dow Jones averages.]

…Chart 12. Balance of Payments

Global imbalances formed similar to the deficit cycles within the European Union. On the global plane, the US ran into debt and drives the world economy. The dimensions are obviously several times greater than with the imbalances in Europe. China, Germany and Japan are the countries with massive surpluses in their balance of payments up to 2009. The chart below illustrates the gigantic balance of payments deficit of the United States of America. This deficit in the balance of payments consists above all in a trade deficit.

Chart 13: US Balance of Trade Deficit

Similar to the debt-financed boom in Europe’s deficit-economies, the American indebtedness dynamic has an animating effect on the world economy. At the peak of its deficit economy, the United States posted a trade deficit of nearly 0 billion. Debt-financed demand was created that benefited above all export-oriented national economies. Thus the US was like a black hole of the world economy that took up a large part of the world’s surplus production through its trade deficit and as a result had a stabilizing effect on the whole capitalist world system. The economic imbalances between Germany and the indebted southern countries of the Euro-zone fade compared to these dimensions. Through good management, Germany gained export surpluses of 0 billion Euros annually over against the Euro-zone.

In 2009 the American trade deficit fell but rose steeply in the meantime. This chart shows how the monthly trade deficit of the United States has grown again since 2010. Thus there can be no talk of a reduction of the “global imbalances”! A large part of this American deficit in the balance of trade falls to China. A deficit cycle developed between the great powers that also exists in the Euro-zone between Germany and the southern periphery. As with the Euro, this enormous imbalance is possible through the firm bond of the Chinese currency to the US dollar.

Chart 14: Trade Balance of US and China

Let us look at China’s absurdly high trade surplus in relation to the US. China’s growth still depends greatly on exports to the United States. The United States still plays a central role as the economic support of the capitalist world system.

The outlines of the global trade structure can now be drawn that was and is characterized by deficit-cycles. Export-oriented national economies send their production surpluses to indebted target countries. These deficit cycles increased in intensity up to the outbreak of crises in the US, southern Europe, Great Britain and Eastern Europe. A long-term process over decades is involved here – above all in the case of the US. As explained, these deficit cycles only functioned on account of a constantly increasing indebtedness in the countries that accepted the surpluses of export-oriented national economies. A central role comes to the indebtedness dynamic in the United States.

Chart 15: US Indebtedness

It is well-known that the US is heavily indebted at a historically unique indebtedness level. Chart 15 shows the long-term development of the total indebtedness of the US in relation to its gross domestic product between 1920 and 2008. The current debt state is far higher than in the worldwide economic crisis of the 1930s. This is a historically unparalleled indebtedness level of the USA. The US did not pile up such debt mountains during the depression of the 1930s. We should keep in the back of our minds that this debt explosion began in the 1980s simultaneous with the acceptance of neoliberalism. Once again, this unparalleled deficit economy in the United States acted as the central global economic locomotive of the last years. The good economic development of the last two decades was fueled in large part by this indebtedness and the formation of a credit-financed mass demand.

In the US a “nationalization” of this gigantic deficit economy took place from 2009 which led to an explosive increase of American state indebtedness as represented in this chart:

Chart 16: US State Indebtedness

This indebtedness dynamic can obviously not be maintained in the long term. The worldwide crisis carried out a change in form. The crisis process first appeared as a financial crisis and afterwards turned into an economic collapse that ultimately was superseded by the subsequent crisis of state finances. The step stepped into the breach with economic programs when the deficit-economy collapsed. That deficit-economy was organized by the financial markets. Capitalism only seems able to function on credit. Whether the debt-making is now undertaken publically or privately is indifferent.

The sixty-four-thousand dollar question is now: Why can not the late capitalist economic system reproduce itself without indebtedness? As long as the – private or public – debt-generated demand breaks down, a self-strengthening downward spiral begins in which over-production results in mass terminations that reduce demand again and cause more waves of dismissals. This is now happening. Most economic programs ran out in the middle or end of 2010. Once again, we now face a worldwide recession.

Graph 17: Dow Jones

When this dynamic of debt-reception really pick up speed? As mentioned, the indebtedness dynamic in the US started in the 1980s. The process of debt explosion began simultaneous with the epoch of financial market-driven capitalism. For many, the long-term development of the American Dow Jones stock index is one example of many for the financial explosion since the 1980s.

The Dow Jones index rose strongly since the 1980s. This stock exchange upswing had excessive characteristics after the 1990s. The breakdowns in the train of the burst speculation bubble with high tech stocks in 2000 and the new rise in the course of real estate speculation are also recognizable. This bubble collapsed in 2008. In the meantime a new bubble formation occurred that was promoted by the low interest policy of the Federal Reserve. A liquidity bubble was promoted by an excess of “cheap money.” For three decades, we have been in a financial bubble economy. Seen historically, this is an absolutely unique process in the five hundred year history of the capitalist world system.

My thesis is that this neoliberal financial-market-driven capitalism could only prevail globally because it seemed to offer an apparent way out of the fundamental economic crisis in the 1970s. This crisis period in the 1970s that is described as stagflation went along with inflation, increased unemployment and stagnating economic growth.

This crisis of the 1970s had its causes in the exhaustion of the growth potential of the dominant economic structure. This was based on the highly efficient use of mass labor in industry in industry (Taylor system) and auto-manufacturing as a key economic sector. This accumulation regime – that gave relative stability to capitalism from the 1950s to the 1970s – is commonly described as Fordism. The auto-manufacturer Henry Ford was the first to apply this system.

What happened after the 1970s so that this Fordism fell into crisis? On one hand, markets that largely arose after the Second World War experienced a certain satiation for the first time leading to intensified competition between individual firms. On the other hand, increasing automation in production led for the first time to new production branches no longer being able to accept workers made superfluous by rationalization.

The crisis of the capitalist work society started when the nearly forgotten mass unemployment returned in the core capitalist countries in the 1980s. However the expansion of the financial markets delayed this crisis process. Thus the indebtedness dynamic of the last decades was necessary to supply the industrial sector with sufficient demand! The potential over-production crisis that had to break ou9t on account of the increased productivity was simply postponed up to 2008 by a degenerate indebtedness. After this long incubation time, the crisis process latent for decades has now entered its manifest stage for three years. The longer this global debt-financed snowball system was maintained on the financial markets, the more strongly the systemic, latent over-production crisis formed.

In 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 resulted in more and more goods produced in ever-shorter time by fewer and fewer workers. New industrial branches like micro-electronics and information technology further accelerated this tendency. These new technologies created far fewer jobs than were rationalized away by their overall economic application. The effects of the rationalization pushes can be read very well in the job cuts in American industry.

Graph 21: US employees in manufacturing

Capitalist national economies developed in two different directions in countering this systemic over-production crisis. Countries either became indebted to develop the deficit-economy like Greece, Spain, Ireland and the US or tried to “export” the contradictions of the late capitalist mode of production like Germany, China, South Korea and Japan. The aggressive German export policy is a reactionary reaction to this objective crisis process. Germany’s export capital did not cause the crisis but “exports” its contradictions – to the disadvantage of the southern periphery of the Euro-zone. Once again, this objective crisis process of capitalist goods production intensified the class oppositions in the individual capitalist states and escalated the interstate conflicts in the Euro-zone.

The neoliberal offensive against the social achievements of wage-earners – which peaked earlier in Germany in the Hartz legislation (radical welfare reform combining income support and unemployment and drastically reducing duration of benefits) – resulted from this crisis process. The intensification of the exploitation of the “commodity labor” and the export of the contradictions of capitalist goods production were the answers of German capital to the crisis.

In conclusion, I will try to define more exactly this class character following the middle class theme of “structural change.” The formation of a gigantic financial sector and the corresponding huge debt mountain on a global scale could also be interpreted as a system-reaction to a structural change in the industrial countries. In the history of capitalism, there was always a structural change in which old industries disappeared and new industries came along and opened fields for capital utilization and paid labor. For a time, certain industrial sectors had the role of key sectors before these were replaced by other new industrial branches. Thus we have experienced a structural change since the beginning of industrialization in the 18th century in which the textile branch, the electronic industry, auto-manufacturing and so forth served as key sectors utilizing paid labor in masses. But this does not function any more after paid labor was made scarce on account of the rationalization pushes of the microelectronic revolution within goods production.

Graph 22: Stagnation in Germany

In summary, the crisis is 30 years old, not three years old. The causes of the crisis should be tracked down in the real goods-producing economy, not in the financial markets. The wildly proliferating financial markets did not drag goods-producing industry to the abyss. Rather these financial markets were kept alive up to the collapse of the speculative bubble by credit-financed demand – as the states did after the nationalization of this deficit-economy. The capitalist system had its own dynamic to constantly revolutionize its production and undermine its own economic foundation with permanent advances in productivity. Freely formulated according to Marx, the productive forces break the chains of relations of production. In the end, the current crisis is a crisis of capitalist paid labor that is lost to capitalism. Only the enormous indebtedness-dynamic of the last decades prevented the outbreak of a disastrous over-production crisis.

What does this mean for us? This means the full eruption of the crisis dynamic is still ahead for us. As soon as states are no longer able to keep capitalism going by means of more economic programs, a depression threatens on the global plane as it led Greece to the brink of social collapse. The present crisis policy can only delay this crisis breakthrough through additional economic measures which in the end could result in state bankruptcy. Politics must carry out budget revitalization and economic programs. Thus crisis policy is in a philosophical paradox, a self-contradiction that cannot be solved in which it can only choose between two different ways into crisis. In a system-imminent way, the political class can only choose between further indebtedness up to state bankruptcy or the way of harsh austerity programs leading into recession together with endogenous deflationary spirals.

The “debt towers” in the US and the Euro-zone represent a systemic necessity arising ou9t of the crisis of capitalist goods production. Capitalism only functions on credit. As soon as the indebtedness-dynamic slackens, the capitalist system suffocating in its own hyper-productivity threatens to collapse.


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Greive, Martin: The Economy Sinks in a Deep Crisis of Meaning, August 2011

Jessen, Jens: Underway to Plutocracy: Financial Crisis, September 2011

Marcks, Holger: We Pay for Their Crisis, September 2001

Reuter, Norbert: Stagnation as a Trend – Life with Satiated Markets, Stagnating Economies and Reduced Working Hours, 2009

Schaefer, Ulrich: Learning Nothing in 80 Years, August 2011

"Is Capitalism Devouring Its Children?

"The Capitalism of Hopelessness"

"The Tax System is Out of Control"

"Our Economic System Has No Future"

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