Hard Road

An old song just came to mind, sung by Georgia Brown as the introduction theme to a 1970s UK TV series 'Roads to Freedom', based on work by Sartre.

Here are the (French) words of the song, at least all that were sung and stayed in my memory:

"La route est dure, mais je suis fort,
Mon âme est sûr, la peur est mort,
Je sais quoi faire avec la vie,
Quand toute la terre est endurcie."

It was sung with passion, and with the French (singing) emphasis on the 'e' in 'dure', 'faire' and 'terre', and also an 'e' inflected on the end of 'sûr', to complete the rhymes. Unfortunately, not available on YouTube, or anywhere else, as far as I can see.

I hope I remember my unused French correctly, for it was a rousing, defiant song, one that is fondly remembered, despite my antipathy to existentialism.

One lesson to draw from it is that you do not have to buckle to reactionary politics, as so many do. Witness the way that the chronic capitalist crisis has fuelled anti-Moslem and anti-immigration politics. This reflects the entrenched, pro-imperialist views of the mass of people in richer countries. Pro-welfare 'socialists' and liberals, ever so progressive when times are good, bend so easily in this wind.

Tony Norfield, 28 October 2014

Moribund Capitalism

The credit market works like this: one person's debt to another is the other person's asset. As long as the debtor can pay, then the creditor feels fine, if a little anxious when the weather changes. Now consider what happens in the wake of a credit-fuelled economic boom and its subsequent collapse. What if the mountain of debt is also a deep well of crap? That is the situation today.

This is the basic reason behind the never-ending policy from the world economy's major central banks to keep interest rates at close to zero. Every time there is a suggestion of raising interest rates (some time in the current century ...) from zero point nothing percent to zero point something, financial markets threaten to implode. Despite data in some countries recording improved profitability of capitalist companies, this is the more tangible reality of capitalist prospects.

News has not been good, in any case: from falling equity markets, to ever more desperate measures from governments and central banks, especially in Europe and the US. Below is a striking picture given for the US, by the Federal Reserve Bank of St Louis.

The chart shows the asset holdings of the US central bank, the Federal Reserve, since 2007 (the annotations are mine). In the initial phase of the crisis, the Fed boosted its lending to financial companies dramatically and did a series of rescue operations. These have now diminished to negligible proportions, as what remained of the US financial system was put back on its feet by zero interest rates and financial bail outs. However, there are two measures that have not been reversed. In fact, they have increased, even though the crisis was meant to be over: an increase in Fed holdings of US Treasury (government) securities, now totalling $2,457bn (data up to 22 October 2014), and mortgage backed securities of $1,417bn. Consider these figures against the US GDP in 2013 of $16,800bn, and also remember that the latter is just private debt to the state, not private debt to others, which is even bigger.

Many American citizens paying their mortgage interest will no doubt be somewhat surprised to learn that the recipient is actually the US government. Still, you can't keep an innovative, private capitalist system down, can you. As for the US Treasury paying interest on its bonds and notes to the US Fed, well they manage to find a way to get the money back again. The wonders of finance!

These numbers show more fully than monthly changes in business activity what is really going on, and the intractable nature of the crisis that imperialist countries face. Unfortunately, I have no such telling pictures of the European Central Bank's dodgy assets which, in any case, will soon be boosted by its new purchases of 'covered bonds'; nor of the Bank of England's activities. The Bank of England has up to now had a more conservative approach of hardly buying anything other than UK government securities in the secondary markets in its 'quantitative easing' (it has £375bn of gilts on this book and nothing else). However, the Bank of England has extended what it will accept as collateral, with the relevant 'haircuts', and also increased the ways in which it will offer 'liquidity' to the financial system in a crisis.

In summary, Lenin's description of imperialism as 'moribund capitalism' comes to mind. The astonishing application of extraordinary measures can only produce such mediocre results, ones that leave many millions in crisis.

Tony Norfield, 26 October 2014

Conference on 'How Capitalism Survives'

The journal Historical Materialism is holding its eleventh annual conference, 'How Capitalism Survives', in central London on Thursday 6 to Sunday 9 November 2014.

The venue is the School of Oriental and African Studies, the Vernon Square Campus, Penton Rise, London, WC1X 9EW. Further details regarding the conference, accommodation, etc, are found here.

It is a big conference, covering a wide range of topics! There are 13 sessions over the 4 days, each with up to 12 different discussions, usually including 3 or more speakers.

For those interested, I will be presenting in a session on 'Finance Capital, Corporations and Class'. My presentation is based on part of the research I did for my recently completed PhD and it is on 'Capitalist Power: Fictitious Capital, Corporations and Finance'. Other speakers at this particular session are Francois Chesnais, Dick Bryan, Michael Rafferty and Sune Sandbeck.

The session  on 'Finance Capital, Corporations and Class' is scheduled for Friday 7 November, from 14.15 - 16.00. *** The Room for this session has been changed, and it is now Room 221.

Tony Norfield, 17 October 2014

Absolute Airheads

I'm the first to admit that there are better things to rage about in the world today. But I find it difficult not to get agitated when people are asked by the British media to respond to an interviewer's point, or to say what they think about what has just been said, and they reply: 'Absolutely!'

What can this exclamation possibly mean? Do they completely agree with everything that has been said, with no reservations? Do they think that anything further could only shine a light upon the pinnacle of knowledge already revealed? Or is the word just usefully long, with all of four syllables, enabling a slow-witted respondent time to gather his or her thoughts? Probably they do not think we should disregard whether something is positive or negative, and simply pay attention to its absolute value.

In the good old days, the best stock answer to a media question was: 'There may be something in what you say'. That was of inestimable value. It allowed the respondent to (perhaps) sort of agree and please the interviewer. But it also gave the impression that other things were going on that had not been considered. After all, the world is a complicated place.

Such is the dissolution of critical culture today that this absolutely fad has absolutely taken flight, absolutely. Idiots ask idiots questions and get idiotic answers. That has been true for a long time, but the shameless revelation of this truth is now becoming an embarrassment.

What can a responsible citizen do?

I would recommend that you pay no attention to anything anyone says in a media interview after they have uttered the word 'absolutely'. More than this, disregard anything they have ever said or written. They need to be taught a lesson, and I fear that this may not be confined to the UK media.

Tony Norfield, 14 October 2014

Financial Trouble

The economic impact of the 2007-08 financial collapse was mitigated in some countries by state policies, especially from central banks. In the US, the UK and a few other major countries, there was thereafter a recovery of sorts, but even this appears now to be fading. A recovery did not even really start in some other countries. In this note, I want to draw attention to some background financial data that do not get as much attention as the data for economic activity, although they are often more important indicators of what is going on.

Firstly, consider the information contained in a recent IMF report on the scale of direct government support for the financial system after 2007 in Europe and the US. The data shown next include the cost of direct bailouts, including nationalisation. But they do not show central bank purchases of private (bank) assets, such as mortgage-backed securities (MBS) which, they hope, will end up being worth more than they paid for them. For example, the US Federal Reserve owns around $1,700bn of MBS, equivalent to about 10% of US GDP. Nor do these figures include the huge amounts of government securities bought by the US Fed, the Bank of England and the European Central Bank and others in their 'quantitative easing' programmes.

Table: Financial Sector Support (% of 2013 GDP)

The previous table shows that most states have managed to claw back some 'recovery' of their initial support money (these data are for the period to June-2014), for example by selling back shares in previously nationalised banks. So far, the US can even claim to have made a modest profit on its support operations, but that ignores the Fed's MBS purchases and other implicit guarantees. At the other end of the spectrum, Cyprus, Greece and Ireland have borne a sharp rise in their gross public debt, one little reduced by the recovery of funds. For all countries, except the US (though with the previous caveats), the situation in 2014, some six years after the crisis hit, is a worse public debt position.

Public debt is, of course, the fount of all evil from the perspective of the IMF, despite the recent rise being a function of the collapse of private sector capitalism. So, it is worth noting two charts of what is presumably 'good' debt: leveraged loans and margin borrowing to purchase equities on the New York Stock Exchange. These charts are taken from a Canadian financial research foundation, IOSCO, in a report released earlier in October.

Here is the picture for leveraged loans, broken down by region:

The blue bars in the chart are the total of leveraged loans, measured in billions of US dollars. In 2014, the outstanding volume of such loans was just below $2,000bn, higher than in 2007 (the peak bubble year for all such data), and it is expected to fall only modestly in 2014. The main source of the rise has been in the US. With central bank interest rates at zero, such loans do not incur much interest cost. This encourages enterprising parasites to 'invest', commonly advancing only a tiny proportion of their own capital compared to what they have borrowed from banks. They make use of tax laws on debt and 'special purpose vehicles' to avoid inconvenient personal liability, either to tax or to troublesome losses.

By comparison, the rise in leveraged loans in Europe has been more limited, and remains below previous peaks. In the Asia-Pacific region, such loans have risen to new peaks, but the scale of the number - around $250bn - may cause less potential trouble.

One clear source of likely financial trouble, however, is the rise in a different kind of US financial leverage. The US equity market is the biggest in the world, and moves in these prices play a key role in driving all other equity markets. So have a look at how much money speculators on the New York Stock Exchange have borrowed to invest in equities:

Data up to end-August 2014 show that 'margin debt' (borrowed funds to invest in stocks) had risen to $463bn on the NYSE, a little higher than indicated by final data in the previous chart. Each of the strong accelerations in borrowing, shown by the deviation from the trend line, were followed a short time afterwards by a stockmarket slide. This was true for the dotcom bubble in 2000-2001 and the slump in 2008-09. Downward momentum is driven by the fact that the borrowed funds have still to be paid back, even if the equities those funds bought have dropped in value. And the S&P500 index has dropped more than 5% in the past four weeks.

Our politicians are already in a quandary over Syria, Iraq, Ukraine, ebola and a range of other issues. These items of financial data, let alone the weaker economic statistics for almost all countries, indicate that the dynamic of capitalist markets could become a further source of anguish.


Tony Norfield, 11 October 2014

The Wages of Sinn and the Euro Crisis

Today I went to the launch meeting in the City of London for the latest book from Hans-Werner Sinn, entitled Euro Trap: On Bursting Bubbles, Budgets and Beliefs. Sinn is probably best known as the President of Germany's Ifo Institute, as a well-informed, critical commentator on the European Central Bank and as someone who delivers withering critiques of economic and financial policies in the euro area. I have read some of his papers on the ECB's TARGET payments system - ones that explain the economic disaster of the euro project more clearly than one might expect - and have seen a video of an earlier speech on the euro crisis. So, I was intrigued to attend this meeting. The comments here are from my notes of his presentation. They will lack some detail, although they should nevertheless give the gist of what was said. I have ordered his new book, and will correct any misrepresentations once I have read it.

Professor Sinn's skill is in expressing his views very clearly, and with an abundance of supporting empirical evidence. Those who disagree with him may claim that he has got it wrong, but often they will be addressing a different question and not confronting the essence of what he is saying. This is certainly the impression I have had reading 'expert' spokesmen for the euro elite who criticise Sinn. Radicals, who consider him part of the reactionary establishment arguing for austerity, do not usually attempt to address his views at all.

Sinn's view of the (euro economic) world is straightforward. He admitted that he was initially a supporter of the euro project, with some reservations, and that he did not anticipate how badly it would turn out. He then focused on the facts that cannot be denied: most, if not all, of the crisis-hit euro countries went through a decade or more of falling competitiveness before the global turmoil (for the richer countries) began in 2007-08.

This falling competitiveness was based upon a growth of real incomes, consumer demand and public spending that outran the productive capacity of the individual countries. It was fed by falling interest rates that encouraged borrowing and, for the weaker countries, by a euro system that appeared to make lending to borrowers (Greece, Spain, etc) with much weaker economies have more or less the same risk as lending to those in the richer, stronger euro countries. The 'irrevocable exchange rate' of the euro, and the denial that any individual state would ever exit the system, covered up the gap in the euro project's construction: there was no agreed mechanism for rescuing insolvent states, in particular there was no unified fiscal policy, something that would have to have depended upon a political union of member countries, not simply a monetary union.

So, the euro system had no mechanism for dealing with the economic effects of divergent competitiveness reflected in the mounting levels of external debt (via current account deficits) for weaker countries. What happened instead was that the TARGET payments system for interbank transfers within the system simply led to ever-increasing liabilities of the uncompetitive and ever-increasing assets of the competitive, with the ultimate risk being put on the relevant national central banks. In practice, Germany's central bank has taken on the asset risk that German companies have in Spain, Greece, etc. The German companies get paid, but via a credit issued by the German central bank to its central bank counterparts in Spain, Greece, etc. This means that the German central bank, the Bundesbank, has questionable assets in its lending to the central banks of Spain, Greece, etc, while the Spanish and Greek central banks have liabilities to the Bundesbank offset by questionable assets from securities (and promises) delivered to them by their own domestic banks and companies.

That is bad enough, but things got worse. In recent years, the credit quality of collateral accepted by central banks from private banks in the euro system was reduced, the ECB embarked upon a series of measures to buy government and private sector securities and, in the latest measures, the ECB will also buy junk assets to 'rescue' private banks from their ownership of rubbish. Six crisis countries, claimed Sinn, have received more than €1,300bn of credit in this way, of which more than 80% has come from the ECB.

These points should make one ponder a while.

For all the protests about austerity, the euro system has invented new funds for crisis-struck countries in a way that has clearly transgressed the supposed neoliberal policy regime. Sinn noted that the US Fed, for example, would never have bought Californian state bonds. Instead, he complains, the risks of the economic disaster have been transferred to euro states and, hence, to the (German?) taxpayer.

Radicals will complain that the banks have been bailed out and rescued, while austerity continues. However, the real point is that Europe is an economic disaster area and there has been, so far, great reluctance by governments to force a market reckoning upon the mass of the population. Sinn is more conciliatory on this issue than one might think. He fears that mass unemployment, especially youth unemployment above 25% in several countries, will lead to political turmoil and extremism. He worries that 'productivity' is only rising in some countries because jobs are being shed, not because there is any productive investment. If one were to argue that yes, there has already been enough austerity, he will present statistics to show that there is another 10% to go in Italy, 20% in France and 30-35% in Spain and Greece before competitiveness is restored.

I do not necessarily agree with Sinn's numbers, but his case is clear and a few percentage points here or there make little difference to his main argument: the economics of (euro) capitalism demands austerity. All this, of course, raises bigger questions.

Sinn, despite appearances to the contrary, hopes that the euro system will survive, but he argues that it can only do so if it recognises its fundamental flaws. He proposes a 'temporary' exit of crisis-hit countries, who will then devalue their currencies and later re-enter the euro system, as of right. His solution is quaintly optimistic, but one should recognise that he favours European integration and political stability. The only problem here is that he insists that this must be on sustainable terms if it is to work. Critics of his position often focus upon Germany's benefits from the system, but he correctly notes that Germany itself had a long phase of labour market austerity in the 2000s, which is why the country has become very competitive. Above all, he wants a viable capitalist system, although with European capitalist stability high on his list of priorities.

Questions confronting those who are less concerned with saving the capitalist system, in the euro area, or elsewhere, are as follows. Firstly, it does not make sense to argue against austerity by making this an anti-German argument, as if German workers did not also have their own phase of austerity before. Secondly, an attack on 'austerity' must recognise the privileges of those in the EU/euro area who have benefited from their own countries' domination of international markets, through the control of trade links, patents or owning many of the key monopolistic companies. Fighting austerity at home is hypocritical if it does not recognise the way that the economic system subordinates others.

Thirdly, recognise that Sinn's arguments are the logical consequence of a clear-sighted capitalist perspective, and one that is also ameliorated by a concern for social stability. He has much better arguments about what is needed by capitalism today in Europe than the nonsense of 'alternative policies'. The proponents of the latter know they are dead in the water, but they might still attract some external funding, whether in advocating wind farms or whatever else. Sinn's position is to advance a policy that he recognises is a 'dismal option' - and one that he does not really expect to succeed, still less to make people happy - but he hopes it would be better than the current euro political decision to do nothing and instead to hope something will turn up.

It is unlikely that his policy recommendations will be followed, partly because euro politicians correctly see the barriers to any proposal that highlights what is really going on. Confronting an intractable capitalist crisis is something that the current generation of politicians cannot manage. The crisis has blown their legs off, yet they still dream of strolling down the road as in the good old days. Even if Professor Hans-Werner Sinn were to become the new arbiter of euro policy, that would still leave the system he seeks to sustain in question.

Tony Norfield, 9 October 2014