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by Ingo Schmidt and Thomas Fricke
Wednesday, Apr. 17, 2013 at 9:14 AM
For around three decades, a Troika from Wall Street, the US Treasury Department and the Federal Reserve pushed global (capital) investments with a mixture of tax cuts, cheap credits and overrated securities.
FISCAL CLIFF AS NONSENSE WORD
Can Obama wobble through a second term in office?
By Ingo Schmidt
[This article published in December 2012 is translated from the German on the Internet, http://www.sozonline.de/2012/12/fiskalpakt-auf-amerikanisch/#more-6857.]
The votes were not even counted when the nonsense word “fiscal cliff” raced through the US media. To keep the budget policy out of the election campaign, republicans and democrats united on a pact raising the debt ceiling of the federal government so much that incisive spending cuts or tax hikes could be postponed until after the election.
However there was a snag. If the parties in Congress fail to agree on a budget by the end of the year, spending will be automatically cut across all departments and the tax relief granted in the past years by Bush and Obama will be canceled.
In the last months economists have brooded over models and data to estimate the effects of this fiscal pact on the US- and the world economy. Their nearly unanimous judgment is that stepping on the debt brake would lead directly into the next worldwide economic crisis. Losses in taxes, state support of the unemployed and needy private credits will tear new holes in the public budgets. The debt brake could become the debt accelerator.
Worried about the economic and social stability in their own countries, governments and economic leaders around the globe hope Obama may reach a compromise between the republican-dominated House of Representatives and the democratic majority in the Senate making possible both growth and budgetary revitalization. The Chinese export boom will not continue and the debt crisis in the Euro-zone will not be contained without the US as the economic locomotive.
SOURCES OF CAPITAL ACCUMULATION
The 2008/09 worldwide economic crisis started from the US. But whoever believed this would lead to the rise of new dominant powers in Europe or Asia is very much mistaken. The heart of the world economy still beats in America – but its pulse is weak.
For around three decades, a Troika from Wall Street, the US Treasury Department and the Federal Reserve pushed global (capital) investments with a mixture of tax cuts, cheap credits and overrated securities. This financial cocktail caused fiscal- and debt-crises in many parts of the world and thereby created new fields of investment for private capital. The privatization of social institutions and vital services in the West, state development projects in the South, integration of the shipwrecked Soviet empire and neo-capitalist Sino-communism in the capitalist world market were the most important sources of capital accumulation since the 1980s. In addition investments in global production – and transportation networks allowed industrial capital to play off workers in different locations to reduce costs and fulfill the profit goals of money capital.
A trail of financial market-driven capital accumulation raced around the globe from the western European fiscal crises in the 1970s, the debt crisis in Latin America at the beginning of the 1980s and the Asian crisis at the end of the 1990s and returned to the center of world capital with the 2001 Wall Street crash. Afterwards global accumulation was supported by the real estate boom in the US, not by outward expansion. The German-Chinese competition over the export world championship would have been inconceivable without the indebtedness of private American households. But financial crises that previously played an important role in opening new markets reverted to the center starting from 2008. In the course of the subsequent financial- and economic crisis, the US state indebtedness reached levels that matched the crisis states of the European periphery. If the US was seen as the unloved but irreplaceable center of world capitalism, the Euro-Troika long ago arranged an austerity package instead of setting hopes for growth in the US.
PROBLEM CASE – HUGE DEBT MOUNTAIN
The policy that long favored the teamwork of crisis and accumulation has become dysfunctional in the new worldwide economic crisis. Private profit demands and debts could no longer be serviced as in the past three decades by expansion outwards. As a result, they are threatened by writing off or depreciation. Rotten credits are shifted from private balances to public budgets. Private creditors increasingly ask whether the public authority can get hold of the necessary funds to service their demands or whether the Federal Reserve could print money of diminishing value and thus indirectly carry out a devaluation of overdue demands. Therefore the world economy is plagued by a surplus of noncollectable debts as well as over-capacities and demand weakness. Is there a political way out of these calamities?
Spending cuts could redirect the always scarce public funds into debt reduction. Higher taxes could spill additional money in the public treasury. That is the fiscal cliff about which economists warn. Unlike the sales tax, a high taxation of property and uni invested profits doesn't remove demand from the economic circulation and therefore could contribute to dismantling debts or financing state spending creating demand. However this Keynesian thought-experiment fails in the political resistance of the propertied classes who regard tax cuts an established right...
The reelected US president shares the dilemma with his European government colleagues of needing to revitalize the state budget without being able to collect the necessary taxes. If the Europeans still believe the euro-crisis can be solved through a political union, they should look across the Atlantic. The US is a union in which the states are responsible for one another and anti-state activists of the Tea Party urge excluding debt-heavy states from the Union. Obama faces the problem that the propertied classes call simultaneously for tax cuts and debt reduction but that policy would intensify the crisis and increase the debts. Thus he is caught in the same tight spot as the popular Ms. Merkel. Obama could be tempted to wobble (merkel) through his second term in office: spend money to prevent a recession and save enough to maintain confidence in American government bonds. If this goes well, he could survive a whole term in office without overcoming any crisis.
by Thomas Fricke
Before the financial markets were deregulated, the economy functioned very well. It is high time to cut the banks down to their old size.
[This article published on 3/25/2013 is translated from the German on the Internet, http://www.capital.de/finanzen/:Thomas-Fricke-Glueckliche-Zeiten/100050377.html?mode=print.]
[His Friday-columns in the Financial Times of Germany have kindled debates again and again. Thomas Fricke, 47, is an economist and directs the Internet portal Wirtschaftswunder (neuewirtschaftswunder.de). This essay is from Thomas Fricke's book “How Much Bank Does a Person Need?” published by Westend publishers.]
Thirty years ago the world started financial globalization. Giant money machines gradually arose out of modest banks. The consequences are shattering. Banks suddenly face collapse; people stand in lines before closed counters. States must accept enormous debts to bailout financial institutes – money that otherwise could have financed entire social budgets. There is mass unemployment in many countries for the first time in decades. The causal agents of the disaster suddenly drive the governing rescuers. Some time or other the money will run out and a state debt crisis will emerge out of the banking crisis.
Seldom has a big political-economic idea failed as massively as this one. This is not because of a few black sheep or that bankers are per se immoral. That is a lot of rubbish. Rather the assumption that wise speculators keep the system from collapse by stopping bad trends out of their own self-interest has proven to be nonsense.
The past three decades have produced unique personnel types like uncontrolled financial actors who are humanly strained with the new money world and trigger ever more absurd waves of euphoria and panic. This didn't seem so terrible as long as the prosperity of the uninvolved was not endangered. Now others must pay for the damage: with higher debt burdens, more unemployment or less economic growth. It is time to stop this nonsense.
The world is far more unstable today than in the time before Ronald Reagan and Margaret Thatcher began telling the fairy tale of the beautiful multiplication of money. Since then one financial crisis has followed another in a nearly yearly rhythm. Economists have given up predicting currency- and raw material prices because the ups and downs of sheer herd instincts are unpredictable and fundamentally unexplainable. The asset-illusion has engendered a debt-wave. Everyone who multiplies his assets needs someone to bear the liability.
Incomes and assets have never drifted apart so dramatically as in the time when everyone supposedly became rich. The US and Great Britain where the financial excess began have strikingly higher sickness rates, more school dropouts, teenage pregnancies and murders. What an absurdly high price for an idea that once came to nothing: with the crash of 1929! In March 1933, Franklin D. Roosevelt began to turn back the madness, 80 years ago.
Such disasters cannot be stopped by tightening laws a little. Separating savings- from investment businesses as the government and opposition propose in Berlin (see essay in Capital 03/2013) is also not enough. This can repair the consequential damage of crises but doesn't change the logic that leads to crises. Whoever only wants to limit bonuses cures symptoms. This does not remove the reason that the banking world can conjure up such incomprehensible sums.
The problem is that financial jugglers can speculate with virtual assets in ever higher spheres and all actors feel richer until it crashes. No bread- or auto-manufacturer does this because he/she has real products. As long as financial markets function this way, it is rewarding to invest with rising prices because the prices will rise again. The hoped-for stabilizing speculation doesn't occur since the next crisis is looming. This happens in an era when the states have already accumulated enormous debts on account of the crisis.
The next catastrophe could be prevented. The courage to change, to more radical reforms and to the insight that the economy functioned better than today before the spectacular financial globalization is necessary. When markets were regulated more strictly, the economy grew more vigorously than today. Why not tackle the problem with similar consistency as the German chancellor did when she announced the great energy turn in 2011 – the exodus from nuclear energy? Both themes complement each other. Bank play money and financial fees should flow into the rescue of the climate.
Bankers can still threaten that the latent credit crisis could become the new economic crisis with too much leading by the nose. While plausible, this =cannot and may not be an excuse in the long run. AS radical turn is needed after the mastery of acute problems. A model with five pillars is possible: with taxes on financial transactions, controlled raw material markets and a crash-protection on state bond markets. In addition, a system of stable but regularly adjusted exchange rates and an anti-crisis mechanism through higher capital holding rates for banks. These rates must rise when credit expansion threatens to become mad excess again.
This is not an illusion. Taxes on financial transactions are socially acceptable again in many countries. It could be said, a few years ago, timid capital may not be taxed because it otherwise flees. This was also learned from postwar time when fixed exchange rates insured planning security and stability. Prices only need to be automatically adjusted in a new financial system as soon as countries drift off course in an inflationary way. This demand is not unrealistic. Europeans already have their united currency to protect them from currency pranks. The Chinese could also be won for a “pegging” since they have had good experiences with stable prices – like Germans after 1949.
It cannot be good when markets play with public debts and food. Resistance is possible. In most large countries, there are creditors of last resort to ward off self-fulfilling speculations on state bankruptcies. Traditionally central banks assumed this role. A corrective already works on the raw material markets. Under the pressure of criticism, some banks voluntarily withdraw from trading with agricultural funds.
Obligating banks to hold more of their own capital and even increase this in times of high spirits would be the best guarantee against debt escapades. This lever starts in the primal evil of pro-cyclical waves that make the financial drives so explosive and crisis-prone. The chances for realization are not bad. In Switzerland dependent on banks, the rates should rise to almost 20 percent. The new Basel agreement provides that the buffer should fluctuate with the degree of euphoria or panic.
The calls for much more radical reforms have been louder every year since the crisis escalation in 2008. Why not take the old times as a model? Before the financial globalization, Germans even financed their economic miracle – entirely without derivatives, hedge-funds and daily turnovers on currency markets. That is entirely suited as a model.
The described mix of corrections in the logic of the financial system would end the madness that began 30 years ago. On a large part of the markets speculatively intensifying the herd instinct and producing more insecurity than stability would not be possible any more. Then bank transactions would be reduced to financing real projects and giving credits for very promising investments in cleaner cars, better medicines, faster trains, climate-friendly houses and more reliable machines. A bank would again be what a bank should be. That is how much bank a person needs.
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