Friday 14 September 2012

Ben and the Flood

The slump was nearly six years old before the flood of waters was upon the earth. And Ben went in, and his sons, and his wife, and his sons' wives with him, into the room, to discuss the waters of the flood. Of clean beasts, and of beasts that are not clean, and of fowls, and of every thing that creepeth upon the earth, there went in two and two unto Ben into the room, the male and the female, as Finance Capital had commanded them. And it came to pass on the very same day that the waters of the flood were to come upon the earth. In the 59th year of Ben's life, at the end of the ninth month exactly, were all the fountains of the great deep broken up, and the windows of heaven were opened. And the rain was upon the earth: purchases of an additional $40bn per month of mortgage-backed securities and zero interest rates until God knows when.

(with due apologies to the King James translation of Genesis)

Tony Norfield, 14 September 2012

Wednesday 12 September 2012

Imperial Balances

This article reviews the balance of payments data for the main imperialist countries to highlight their economic relationships with the rest of the world. Such data will not cover everything about these relationships, for example, the way in which the UK acts as a bolt-hole for criminal money.[1] However, a close examination of the data does reveal some important aspects of the imperialist world economy today. I begin by examining the US balance of payments, and then look at two of the other powers, the UK and Germany.

1. The US: a boatload of goods for a book entry in dollars

The US may be concerned about the challenge of China as a major power in the world, but a closer look at the economic relationships between the two countries shows who is really in charge. At first sight, the huge trade surplus that China has with the US might seem to put China on top: it reached $295bn in 2011, or 40% of the total US deficit. However, when US importers buy Chinese commodities, they pay for these goods in US dollars, not in renminbi, because most international trade is priced in dollars. The Chinese exporters receiving dollars then exchange these for renminbi at China’s central bank, given China’s exchange controls. Then the central bank uses these dollars to pay for imports, and, until recent years, any surplus of dollars was added to China’s foreign exchange reserve holdings.[2] Hence the US deficit with China found its expression in a rising level of US indebtedness, though the debt is denominated in dollars - the currency over which the US has control.[3] The dollar-based pricing regime, based on US economic power, is complemented by a dollar financial regime, another consequence of this power. This enables the US to import trillions of dollars worth of goods in exchange for low yielding financial securities!

The US balance of payments is characterised by deficits in traded goods and (usually) a net outflow of funds on the foreign direct investment account. These potentially negative flows for the US dollar are offset by a surplus on services trade and investment income, and by a large volume of foreign purchases of US securities. In 2011, for example, the goods deficit was nearly $740bn, but the services surplus was nearly $180bn and the investment income surplus was another $235bn. The latter item has grown dramatically in recent years as the collapse of US interest rates reduced its payments to foreign creditors. The remaining gap in US payments was largely filled by around $250bn of net foreign purchases of US securities and short-term money flows.

The US current account deficit has now shrunk to some 3% of GDP, down from 6% in 2006, helped by stagnant growth in US demand and a decline of the US dollar. Alongside the reduction of the deficit, there has also been a reduction of the funding that came from central bank purchases of dollars for their foreign exchange reserves. This volume of dollar securities buying fell from $488bn in 2006 to ‘only’ $212bn in 2011. While the volume of US foreign debt continues to climb, the US government has benefited immensely from the near-zero level of yields. It is now paying less in total interest to foreign creditors than it did six years ago, when the volume of debt was much lower.

Such data reveal the huge financial power that the US exerts in the world economy, a power reflected in its privilege of being able to draw on global resources cheaply, essentially by selling securities that it issues on its own terms in exchange for goods and services produced by other countries. This happens on a persistent basis, and is not a function of the past few years. If anything, US economic power has increased in the more recent years of crisis as US banks have easier access to the dollar funding that is critical for international trade.[4]

2 The UK: broker and rentier

There are some similarities between the US and UK balance of payments. Each country has a large trading deficit and regular outflows of foreign direct investment that are funded by other inflows. The UK also has a surplus in services trade and investment income despite being, like the US, a large net debtor country. However, whereas the US has benefited from the role of the US dollar in the global monetary system and funding from central bank dollar purchases, the UK has a different means of using the financial system to gain economic advantage. As explained in detail elsewhere,[5] the UK has specialised in financial services. This enables it to take a cut of global financial deals, based on its role as home to the world’s biggest international money market.

In 2011, while the UK visible trade deficit was £100.3bn (6.6% of GDP), the services surplus amounted to £76.4bn, which helped lower the current account deficit to 1.9% of GDP. By far the largest component of the services figure was a £38.7bn surplus due to financial services. These items, together with a surplus on investment income – a net £17.3bn in 2011, which was more than accounted for by the £48.9bn net earnings on foreign direct investment – are stable elements of the UK balance of payments that fund the other deficits. Other items, such as portfolio investment and banking flows tend to be more erratic, but there are many and varied sources through which the UK can obtain the funds to finance its persistent trade deficit and regular purchases of foreign companies without bringing about the collapse of the sterling exchange rate.

3. Germany: Vorsprung durch Technik?

Germany’s balance of payments show a country with a more ‘productivist’ bias, compared to the financial inflows that loom large in the Anglo-American data. Germany usually registers a large visible trade surplus (€158bn in 2011), with a small deficit on services trade. With the country’s large net foreign asset position, there is a sizeable net inflow of investment income (€47bn in 2011) and these figures finance the steady outflow of funds for direct investment and bank lending. Thus Germany’s international financial strength is based much more on its productive capabilities than is the case for the US and the UK.[6]

The crisis has brought some acute problems for German imperialism, however. It is widely known that Germany has been the main paymaster for the European Union and later for the euro currency area, contributing by far the most to ‘structural funds’ and the like. These arrangements have been to its advantage, creating for it a profitable trading and economic zone. But in the recent years of crisis the bills to ‘save the euro’ have grown immensely. Apart from Germany’s large commitments to fund various rescue packages, there is also a far less widely recognised huge effective loan to the euro banking system. In 2006 the figure was minimal, but by the end of 2011 the Bundesbank reported that its outstanding claims on the European Central Bank’s TARGET2 payments system had risen to an astonishing €463bn.[7] By mid-2012, this figure had grown to more than €700bn!

This rise in claims is a function of the way the euro payments system works, reflecting net monetary flows between member countries that occur as a result of transactions in goods, services and financial assets. It comes about automatically, rather than being a deliberate loan from Germany’s central bank, and with the collapse of private interbank payments in Europe, central banks have become much more prominent. Effectively what is happening now is that the central banks in euro countries crushed by debt are the only supports for their national banking systems. They can just about provide credits to local banks (and then on to companies and individuals) because they are part of the euro payments system that operates with the ECB as the go-between. These countries still have big trading deficits, but the national central banks are continuing to finance these deficits by running up official debts with the ECB. The ECB’s accounts then record huge assets owed to it by the debtor countries - and most of its liabilities are with the Bundesbank on the other side of the balance.

Another way of expressing this point is that Germany has seen its current account surplus with many other euro countries paid for by credits at the ECB in the TARGET2 payments system. Well, it looks like something is not quite right with the populist view that Germany is to blame for having exported the goods to the debtor countries, especially when there is little sign that the country is even getting paid!

Regarding the debts now owed to Germany by other euro countries, one report has suggested that these ‘may be the largest threat keeping Germany within the Eurozone and prompting it to accept generous rescue operations such as those agreed on in October 2011’.[8] This is because Germany would bear more than 25% of the costs of a default impacting the ECB, based on its share of the ECB’s equity, quite apart from the broader economic damage that would be done to Germany’s economy and finances.

Germany, in the opposite mode to the US and the UK, has lent to export rather than borrowed to import. Its creditor position gives the country important influence and power, but it is having difficulty in deciding how to use that power because the scale of the economic trouble in Europe (and elsewhere) is so big. Yet all the indications are that Germany will come down on the side of sustaining the euro system. This is not simply because it is a political and economic project on which Germany’s (and France’s) long-term strategy of building a counter-weight to the US has been based.[9] It is also because now the more immediate financial costs of any attempt to get out have risen so dramatically.

Tony Norfield, 12 September 2012

[1] See, for example, ‘London’s Dirty Laundry’, a Special Report in Private Eye, 10-23 August 2012. The Tax Justice Network and other groups have also done some useful work on this question with their coverage of tax havens and the links these have to major countries.
[2] China’s trade surplus has shrunk in recent years, and so has its accumulation of FX reserves, which nevertheless amount to some $3 trillion (around 60% of which is believed to be held in terms of US dollars). Surplus dollars not used for reserves include hundreds of billions to buy other currencies instead, to recapitalise Chinese banks, to finance the purchase of foreign assets and to provide finance for overseas projects. These latter items boost China’s influence and are the main factors worrying the US government.
[3] The Chinese authorities accumulated holdings of dollar-denominated assets (principally government securities) as a means of preventing, or limiting, the appreciation of their currency. To this extent China’s build up of US dollar holdings was its own policy decision, not one forced on it by the US. However, it was a policy enacted in the wake of the 1997-98 Asian financial crisis that led countries to accumulate FX reserves rather risk being subjected (again) to the dictates of the IMF and imperialist capital.
[4] See for example: ‘Citigroup sails into European bank waters’, Financial Times, 5 September 2012.
[5] See ‘The Economics of British Imperialism’ on this blog, 22 May 2011.
[6] I don’t want to go too far here! As Guglielmo Carchedi points out in his book, For Another Europe: A Class Analysis of European Economic Integration (London 2001, especially Chapter 4 on Economic and Monetary Union), Germany has used the EU and EMU to secure the position of its monopolistic companies.
[7] Deutsche Bundesbank, Monthly Report, ‘Germany’s balance of payments in 2011’, March 2012, p33.
[8] H-W Sinn and T Wollmershaeuser, ‘Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility’, NBER Working Paper No. 17626, November 2011, p6. On page 25 of this valuable report, the authors note that in the three years from 2008 to 2010, 91% of Greece’s current account deficit and 94% of Portugal’s was financed with credits from the TARGET system.
[9] See ‘Cameron, Merkozy and Europe’ on this blog 12 December 2011,for a fuller discussion of this issue.

Monday 3 September 2012

Idealism and Debt

This is a response to some brief comments David Graeber made on my review of his book, Debt: the First 5000 Years, published on this blog on 27 August. I cover two points: the issue of an idealist conception of history and the debt the US owes to China and Asia.

Firstly, my criticism that the book is based on an ‘idealist’ conception of history. History, as Marx and Engels noted, has been a ‘history of class struggles’, but in their examination of history they showed, as Marx put it, that ‘the existence of classes is only bound up with the particular, historical phases in the development of production’.[1] Your analysis does look at class struggles through the ages, but pays little attention to their economic foundation, and it is on this basis that you can elevate concepts such as debt to an ahistorical level. Hence, in the conclusion of your chapter on ‘The age of the great capitalist empires’ you argue that the notion that capitalism would be around forever was the reason behind the credit bubble: ‘Presented with the prospect of its own eternity, capitalism – or anyway, financial capitalism – simply explodes’ (p360). Your analysis puts the evolution of the crisis down to psychology and fails to examine the underlying causes of the credit bubble, which resulted from problems of capital accumulation and profitability.[2]

I am not criticising the book for failing to explain the universe and everything in it, and, of course, I accept that the book aims to cover the issue of debt. However, it is a legitimate criticism to point out mistakes in the analysis. Another example on this topic is where you cover the setting up of the Bank of England in 1694, when a consortium of English bankers loaned £1.2m to the King and in return received a monopoly of banknote issuance and other privileges. You make the absurd claim that if the loan were ever paid back, ‘the entire monetary system of Great Britain would cease to exist’ (p49). This is just ridiculous, not least because the Bank of England is a nationalised entity. It is not a private corporation that could be wound up if the privileges establishing its position were annulled with the repayment of the loan. In any event, a country’s monetary system is not dependent on a particular institution staying in place.

Secondly, on debts the US owes to China and Asia. I did not claim that ‘most money owed in the world today is owed to China or other Asian creditors’. My point was that you argued in your book for a debt ‘Jubilee’ that ‘would affect both international debt and consumer debt’. You raised the issue of cancelling international debt, and I do claim that a large chunk of the US international debt is owed to China and other Asian countries. The total of US debt, including that owed to other US citizens/companies, is far bigger than the international, so that any other country’s proportion of that total is bound to be relatively small. But, if we focus on the international debt, the numbers are far from negligible.

The following figures, which I calculate from the US Treasury website, leave out Japan, an imperialist power, in order to focus on the debt to poor Asian countries. Total US Treasury and government agency (including Fannie Mae and Freddie Mac) debt owned by all foreign countries in June 2011 was $5,781bn, of which China (including Hong Kong) owned $1,785bn and the rest of poor Asia another $529bn. The total Asia figure of $2,315bn is 40% of the Treasury and agency debt owned by other countries.

China may not own any student loan debt, but the book did not specify only cancelling this type of debt. China and other poor Asian countries would certainly get hit pretty badly on any broad debt cancellation. The US owns less than $100bn of debt securities in Asian countries outside Japan.

There are many ways to measure debt, and the comments above refer only to official debt securities. They do not include corporate debt, nor equity holdings, nor the assets and liabilities represented by direct investment. If ‘everything’ is included, at least as measured in published statistics, then the data for 2011 show that the US economy has a net debt position with the rest of the world amounting to $4,157bn. In other words, foreign investors own this amount more of all kinds of assets in the US than the US owns in other countries.[3] Nevertheless, because of its privileged imperial position, with the role of the US dollar in particular, it was still able to earn a net revenue on this debt position of $235bn in 2011![4]

Tony Norfield, 3 September 2012

Here is a copy of David Graeber’s comments:

Just a couple notes:

I do not actually say that changes in the nature of money are the driving force of history; you just seem to conclude this because I do not provide a theory of the "motor of history" at all, but mainly describe what happened, and since the book is about money and debt, money and debt are what I focus on. However when I do suggest specific you will find, if look carefully, that it's always based in class struggle of some sort or another. Coinage comes about through the rise of professional armies and slave systems. The ban on usury in Islam comes from a shift in class alliances. Etc. Sometimes I note ironic results, such as the disaster that certain forms of debt resistance in the ancient Middle East had on the status of women, or the way that successful popular resistance in Ming China set the stage for the elite counter-offensive in 16-17C Europe. But it's always class struggle ultimately. Skim the book again with that in mind and you'll see it.

The idea that most money owed in the world today is owed to China or other Asian creditors is simply untrue. They just hold a lot of US treasury bonds, which are losing propositions economically anyway. About 74% of the US public for instance, are in debt, and 1 in 7 are currently being pursued by collection agencies, and the amount of student loan debt at all is over a trillion dollars. Close to none of that is owed to China.

[1] Marx, Letter to Weydemeyer, 5 March 1852.
[2] These topics have been analysed on this blog in various articles, see for example ‘Anti-Bank Populism in the Imperial Heartland’, 5 July 2011.
[3] See US Bureau of Economic Affairs, ‘The International Investment Position of the United States at Yearend 2011’, July 2012.
[4] For further details of how this works, see ‘Dimensions of Dollar Imperialism’ 5 October 2011, on this blog.