Sputnik

On Thursday, 11 August I was interviewed by George Galloway on RT’s regular ‘Sputnik’ programme. The 15-minute discussion covered some topics in my book, The City, plus finance and government policy in the economic crisis. The video link is here.

Tony Norfield, 14 August 2016

Merkel's Money

Don’t take the rally in Europe’s financial markets as a sign that the euro crisis is over. The 4.3% jump in Germany’s Dax index today and the rise in the euro’s exchange rate are more a reaction to hopes for further flows of ‘free money’ and relief at a crisis postponed once more. The surprise was genuine enough, after German chancellor Merkel’s former hard line on the need for austerity and ‘reform’ among indebted euro countries Spain and Italy, and in the context of widespread German political opposition to further bailouts.

A report on Merkel’s rationale for dropping the position Germany had before the latest Euro meeting, and making big concessions to Spain and Italy (hence, also to France, given French banks’ massive exposure to these countries!), highlights the following issues.

Merkel seems to think that high interest rate on Spanish and Italian debt are the problem, not the mess those countries are in which is leading to the high interest rates! Plus she thinks (or at least said in her statement to the Bundestag) that the EU Commission monitoring of their economic policies is still 'tough', so they did not need any additional terms applied to extra loans.

The end result is that there is a further extension of a 'euro country' general bail out for Spain and Italy, via the European Stability Mechanism, one of the newly invented funds. Merkel did not mention Germany's dominant share in paying for these, nor being liable for these, nor was she impolite enough to note the limited prospects for 'reform' in either country.

She won the Bundestag vote. But there will be further political trouble for her in Germany, and also many more disputes over terms and conditions of the new loans between Germany and other countries, when eventually they are due to be paid out.

Partly, this episode reflects the intractable debt situation in Europe and a desire to postpone confronting problems that cannot be solved. Partly, it is one of the wonders of the credit markets that you can always appear to have more money than you really have, if you only pay attention to the interest payments and not to the accumulation of debt. This is especially when it seems possible to drive the interest rate on borrowing down through state-credit backed bond purchases!

That neat solution of using someone else's money and credit rating to extend further debt begins to unravel when their credit rating is called into question. This is probably still some way off for Germany, which recently has had very low bond yields (even negative yields for 1-2 year bonds!). However, the first sign that the game is up will be when Germany loses its triple-A rating.

In the meantime, this episode also highlights the nonsense that it is German imperialism that is strangling Europe's economy. Yes, Germany is an imperialist power, but it is desperately trying to keep together a system – at growing cost to itself – that has guaranteed both its economic privileges and those that accrue to other members of the euro group. As a policy, this is like delaying an amputation until the last minute, just in case something else, less drastic, comes up. While these matters fester, just consider: how many tens, or hundreds, of billions in cheap credits have been extended to those outside the rich club?

Tony Norfield, 29 June 2012

Bankiarupt

The Financial Times reports the latest financial trick to emerge from the euro crisis. The Spanish government, which cannot sell its bonds at less than disastrous yields, has decided to bail out one of its major banks, Bankia, by directly giving it Spanish government debt securities that it would then exchange with the European Central Bank (ECB) for much-needed euro cash. This will help the Spanish state find the funds – reported as €19bn – to manage the overall bank bail out. Apparently, Cyprus will follow suit.

My view has been that the euro project is such a longstanding and important construct for the major European powers – Germany and France – that they will move heaven and earth to defend it. Earlier plans attempted to create a firewall around Greece, though still to keep it within the euro system. I admit to some reconsideration now.

It is not simply the possible rejection of austerity measures in Greece that creates for Germany and other creditor countries the prospect of unending, unproductive subsidies that they are likely to reject. The scale of the problems in Spain, and other countries too, means that the numbers have simply become too large. When it comes to hundreds of billions of euros, then Germany and other creditor countries in Europe will begin to ask questions: can this money be better spent than on bailing out recalcitrant bankrupts? Especially when their actions, as with Spain’s latest move, only add to the burgeoning liabilities of the ECB. Spain is essentially saying that ‘We cannot pay for the bail out, so we are passing the ball to Europe’ – ie the creditor countries who will back up the ECB.

This is such a big crisis that the resolution is not something to be sorted out over a policy weekend, as many previous weekends have shown. It is also more than facile to expect anything progressive from Hollande, who will simply act to protect France’s interests in the troubles ahead – essentially by making Germany pay more, if possible. A long, hot summer is ahead in Europe.

Tony Norfield, 27 May 2012

The Number of the Beast

Andrew Kliman, The Failure of Capitalist Production: Underlying Causes of the Great Recession, London: Pluto Press, 2012, 240 pages

Andrew Kliman’s book is a valuable addition to the many things written on the crisis, and well worth reading. It is probably the most detailed, and effective, assessment of the economic statistics behind what happened that is available, with his analysis interpreting the data from the perspective of Marx’s theory of value and capital accumulation. He makes very clear what he is arguing and gives full references for anyone who may wish to check his sources. This can make the book a little hard going in places, but this is a text for those who want to explore the real origins of the crisis, not one for those who are satisfied with populist attacks on corrupt politicians or greedy bankers. My principal criticism of his book is that it does not address the question of US imperialism, but first I will note the book’s strengths.

The Failure of Capitalist Production has two main theses. Firstly, it argues that the major post-war crisis of the 1970s did not result in enough destruction of capital values to provide the basis for sustained accumulation thereafter. This meant that profitability showed little, if any, sign of recovery and economic growth remained weak. This, in turn, set the stage for credit-driven, speculative bubbles, not least the biggest and most recent one that has burst with such intractable consequences. Secondly, and following from this analysis, it argues that the common radical arguments about the nature of the crisis are myths. ‘Neoliberal’ economic policies did not cut real wages and did not divert resources into finance and away from production. A close look at the data for the US finds no evidence for these assertions. Instead, the slow growth of incomes and investment is shown to be a consequence of problems with capital accumulation, problems that resulted from inadequate profitability.

In order to substantiate his points, Kliman conducts a thorough review of how to measure the rate of profit on capital investment. He focuses on the US, not only because America is the biggest capitalist power, but also because US data are the most comprehensive. However, he does not claim to come up with the ‘Marxist rate of profit’ for the US, thinking that there is no unambiguous way in which to derive such a thing from official statistics. Instead, he builds a clear case for using a number of profitability measures that reflect the pressures capitalist business is under. He makes a strong point about how commonly used measures of profit rates (using ‘current cost accounting’) give the impression that the US profit rate rose, but that these are not meaningful reflections of the rate of return earned by capitalist businesses.

Kliman notes that almost all measures of profit rates ‘rose sharply in the years immediately preceding the latest crisis’. Yet while a fall in the rate of profit may not have been a proximate cause of the crisis, it was a key indirect cause:

‘The rate of profit was low at the start of the 1980s and it never recovered in a sustained fashion. This led to a marked decline in the rates of capital accumulation and economic growth. Government policies kept this problem from getting out of hand, but also prolonged and exacerbated it.’ (p14)

His case is well made, and is convincing. These are critical points for an attack on the notion that mistaken government policies – or a ‘neoliberal coup’, as some writers suggest - are the root cause of the crisis. Kliman shows that the deterioration in profitability, investment, growth, etc, began in the late 1960s or in the 1970s, prior to the beginnings of the ‘neoliberal’ era that is usually dated from 1979-81 with the Reagan (US) and Thatcher (UK) political regimes.

He also argues that there has been no rise in the share of US national income going to corporations (pp124-128), a measure that he uses as a proxy for the rate of exploitation. The counterpart to this is that the share of workers’ incomes has not fallen, contrary to many reports. Kliman shows that although the wage share did decline, this was offset by a rise in medical, retirement and unemployment benefits, so that the total compensation of workers as a share of national income has not fallen (pp152-160). Real wage growth (including benefits) for US workers has also been positive. While this growth was slow, this was based on the slowdown of accumulation deriving from the low rate of profit (a chart illustrates this relationship on p91).

Weak profits and sluggish accumulation of capital were also the reasons behind the low interest rate regime that the US Fed implemented from the early 2000s. The Fed feared a ‘lost decade’ of growth (pages 38-47) as had already happened in Japan. These developments set the scene for the rise in consumer credit, subprime mortgages, the boom in derivatives trading and so forth. ‘Neoliberalism’ played no part in these events. Alongside this analysis, Kliman gives a critique of ‘under-consumption’ theories of crisis (Chapter 8) that divert attention away from profitability as the cause of the crisis and promote government spending plans as a solution.

In Chapter 7, Kliman demonstrates that a rising ‘organic composition of capital’ was the main driver of the downtrend in profitability. I would agree with this point, except that Kliman’s explanation looks odd. His argument is that the organic composition was very low in 1945, resulting in a high rate of profit. After 1945, the organic composition for new capital investments was much higher, and the rate of profit on new investments was much lower. But he claims that the organic composition did not rise on these new investments after 1945. Instead, in his view, the overall rate of profit fell because, over time, the total stock of capital was made up by a higher proportion of the newer, higher organic composition, lower profit rate investments (pages 134-137). This argument is made in a chapter that is full of technical detail, and is one of the few in his book that I find implausible. Although it is difficult to find a good proxy for the organic composition of capital with official statistics, my reading of reports on business investments would suggest that there has indeed been a rise in the organic composition on new investments in the post-war period.[1]

Kliman’s book is a detailed discussion of the causes behind the current crisis, with the specific aim of focusing on US data and countering some common beliefs about trends in the US economy. To that extent, it is perhaps unfair to ask for a wider perspective. However, I think that his analysis is weakened by the absence of any discussion of imperialism, or even the key features of US imperialism.

His book has nothing on the role of the dollar, nor on the global domination of US finance that acts as a support for US capital.[2] Neither does he take account of the benefits the US has gained from its exploitation of other countries in trade and investment. His argument, made to me in response to my questions on these points, and in this book, is that such benefits would have appeared in the figures for US corporate profitability. His conclusion remains that the US corporate rate of profit fell despite whatever the size of these benefits may have been.

However, while that is a fair point, to ignore America’s status as an imperialist power means that some important countervailing tendencies to declining profitability are set aside. It would have been a stronger point for him to argue that, despite US imperialism’s attempts to appropriate profits from other countries, and despite its success in doing so, this did not avert the crisis.

Kliman dismisses the impact of the earnings on US foreign direct investment by noting that the rate of return on these investments has also fallen over time (pages 78-80). This is true, but it ignores the fact that the rates of return on investment in oppressed countries are several times the rate earned in other imperialist powers! It is also worth recognising that in recent decades a large share of productive investments has been in oppressed, low wage countries, despite the fact that recorded FDI figures show the bulk of total assets and new investments as being in rich countries. Furthermore, in addition to FDI, many low wage countries, not least China, have been brought into imperialist companies’ value chains via trade relationships. This allows the benefits of cheap supplies of goods to be enjoyed by consumers, governments and businesses in the imperialist countries.[3]

It would be tricky to put a value on these imperial benefits, and Kliman understandably focuses on data that he can more readily incorporate into his analysis. However, these points still deserve recognition. I would suspect that an important reason why US working class living standards have risen in recent decades, despite the onslaught of a capitalist class that has had a free hand to attack workers, is due to such benefits.[4]

The absence of imperialism from Kliman’s analysis also leads him to conceive of the crisis as setting the ground for a struggle between capitalists and workers (Chapter 9). In the abstract this is true, but the more important reality is that workers in the imperialist powers usually support their states in any international conflict over economic privileges, and especially in war. Even opposition to the Iraq war in 2003, a war that was widely seen as criminal aggression, basically stopped once the troops had been sent in. Kliman’s book is a valuable attack on mistaken views of the crisis, and on calls for state regulation or spending as the solution. However, it elucidates neither the economics nor the politics of imperialism.

Tony Norfield, 13 March 2012

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[1] For a recent example, see the article ‘Foxconn and the Organic Composition of Capital’ on this blog, 2 August 2011.

[2] See ‘Dimensions of Dollar Imperialism’ on this blog, 5 October 2011.

[3] For these points, see John Smith’s analysis in a PhD thesis entitled ‘Imperialism & the Globalisation of Production’. The pdf (1.5MB) can be downloaded here.

[4] See ‘What the “China Price” Really Means’ on this blog (4 June 2011) for data on wage and compensation levels of workers showing a dramatic gap between wages earned by workers in imperialist and in oppressed countries. This article spells out the benefits of cheap imports for the general population in imperialist countries.

Dimensions of Dollar Imperialism

The US has long been thought to enjoy an ‘exorbitant privilege’ based on the dollar’s role as the major global currency.[1] This article looks at the different elements of the dollar privilege and how these work, not only in ‘normal’ times but, especially, in the current crisis.

1. Global role of the dollar

All paper currencies are so-called ‘fiat’ currencies, with a value set by the governments that issue them, not by their intrinsic value. Currency notes cost a few cents each to produce, so their much higher nominal value and buying power of $1, $5, $20, $100, etc, is based upon an established system of commercial law that means they can be exchanged for goods up to the same price. As long as the power of the state is unquestioned, at least in this regard, then there is no need to waste resources producing currency that has an intrinsic value in line with its nominal value. In other words, there is no need to have a $20 bill that actually costs $20 to make. This works well within the national boundaries of the state, which are usually the limits for the national fiat currency being legal tender.

But why then should a European, Asian, Latin American or African country accept dollar payments for their products when they are outside the national territory of the US? The dollar payments will not even necessarily be in the form of paper bills, and may only be a credit registered in a bank account. The reason for the dollar’s acceptability is US economic and political power. The US established a system of global finance after 1945 that was dollar-based, and the US was, and still is, the largest economy in the world. [2]

US pre-eminence is diminishing, but the institutions of US power remain in place and have so far faced little challenge. In foreign exchange trading, for example, the US dollar was on one side of 85% of all global currency deals in 2010, despite the alternative of the euro.[3] Important commodity prices are quoted, and contracts are set, in terms of US dollars, from oil to agricultural products and metals, and this phenomenon also applies to major industrial goods such as aircraft, components for electronics products, military equipment and the products of other many other industries traded internationally.[4] In financial securities markets, the US also stands out as the biggest in the world. The New York Stock Exchange is the largest equity market, by market capitalisation, and the US is also home to the world’s largest bond market.[5]

So the US currency has a global role based on US power. The sections below spell out what advantages the US gains from this.

2. Dollar seigniorage

The simplest form of advantage for the US, and also the least important, is that of ‘seigniorage’. The term describes the profit that a government can make by printing money with an exchange value higher than its cost of production, as in the printing of denominations of dollar bills mentioned above. All governments printing money that will be accepted within their national boundaries have this advantage, but the US has a particular advantage because the dollar is also accepted in many foreign countries. Especially when the local currency is seen as being unstable, for example when there is a risk of very high inflation rates, then companies and ordinary people may hold US dollars as their ‘store of value’. They are holding bits of paper that cost a few cents each to produce but which may have a legal tender value of many thousands of dollars. If the dollars have entered circulation in the country through the cash payment for that country’s exports, then the US has exchanged its green bits of paper for that country’s resources.

It is obviously difficult to measure with any precision the value to the US of international seigniorage, and estimates vary widely, but it is thought that a stock of perhaps $300-600bn of US currency is circulating overseas, an amount that rises every year.[6] A proportion of this will be money used in drug deals and other illegal activities, but the effect is to deliver the US economy a sizeable benefit. In some manner, foreigners have delivered the US the goods that it wants, whatever these may be, and many of the providers have held onto the cash.

3. Cheaper dollar finance

Seigniorage is nevertheless only a very narrow conception of the advantages that the US gains from the role of the dollar. Most users of the dollar in international trade and finance do not hold the cash in their hands, but in a bank account or in the form of US dollar financial securities (titles of ownership to US assets, such as equities or bonds). With these, the holders receive interest or dividend payments, so the US does not receive the funds for free. But a key benefit of the global role of the US dollar is to get cheap, low risk finance. This comes about in two ways.

Firstly, through the fact that the US can draw upon the financial resources of the world economy, so it has much easier access to funds than do other countries. One important aspect of this has been the dollar’s high share – around two-thirds - of official foreign exchange reserves. After the Asian financial crisis of 1997-98, many countries in the region – and elsewhere – built up their currency reserves as a means of economic insurance against renewed trouble.[7] The US dollar was the currency of choice for these reserves, as the major means of payment for international goods and global finance. So it was that through the 2000s, a growing US current account deficit was funded by huge inflows of finance, especially from Asian central banks that bought US Treasury securities and other US dollar-denominated assets. One study suggested that the impact of these purchases of dollar securities was to reduce the borrowing costs of the US government by as much as 150 basis points (or 1.5%) for 10-year debt, compared to what the cost might otherwise have been.[8]

Secondly, by issuing debt in terms of dollars, the US can avoid taking on foreign currency risk. In a US-centred crisis, the value of the dollar might fall against other major currencies, but that does not matter if the US has little or no debt denominated in euros, yen or sterling. Countries that do not have such a privileged position in global finance – those that are not imperialist powers - are usually forced to borrow in the major foreign currencies and suffer the full consequences when a crisis hits.

This cheap, low risk finance cuts the cost of funding the large US trade deficit. It also enables the US to generate more earnings on its foreign investments than foreigners do on their investments in the US. This is despite the fact that the value of US overseas assets is far less than the value of assets that foreign investors own in the US. In 2010, US net foreign investment income amounted to a massive $171bn.[9]

4. US benefits in a crisis

The US government controls the world’s major currency with by far the biggest impact on international trading and financial transactions, even if these deals do not involve the US economy or US companies. Deals that are made in US dollars need to be settled in US dollars. This is not necessarily done by getting hold of the cash bills. Much more frequently it is done by getting access to dollar finance through a banking relationship. It is here that US financial power is supreme.

A crisis disrupts business, making companies and people more vulnerable to changes in financial relationships. Perhaps a buyer cannot get access to the loan required, or a producer may not be able to finance the output that was planned. Market prices may also be pushed too low or too high by dramatic currency or commodity price moves. As doubts grow regarding who can survive the crisis, having access to credit is indispensable. The Federal Reserve, the US central bank, is in charge of this for much of the world economy given the role of the dollar, and access to financial support from the Fed counts.

In recent years, many central bank authorities have had to bail out their domestic banking systems, but the Fed has played a much bigger role. It has provided extra funds, for a fee, to foreign banks in the US – especially the European ones. It has also provided extra dollar liquidity, also for a premium fee, to the European Central Bank to distribute to euro-based banks, the latest in mid-September. The New York Times reported on why this move was in US interests:

“In recent days some European banks have faced difficulties in borrowing dollars, whether from other banks or from money market funds in the United States. There was fear that if they could not borrow dollars, they would be forced to cut off loans to American companies or sell dollar-denominated assets, perhaps forcing prices down in already unsteady markets.”[10]

This vulnerability of European banks – despite the protection they get from the ECB – is based on the fact that much of their business is conducted in dollars, a currency that only the US can print, and of which the US controls the supply. So far, the fear of economic collapse and the contagion from it has led to cooperation between the major powers. But the role of the dollar in pricing aerospace products and other international commodities means that it is critical for non-US banks to be able to access dollar funds, and the cooperation seen so far from the US need not be as easily available in future. Le Monde has already complained that the US Fed was making non-US banks in America file non-US assets as security, even if they were not actually borrowing any dollar funds from the Fed. [11] The complaint was rather confused, but reflects the fact that, even in a crisis, the US is in a privileged position to set the rules when it comes to finance.

5. Imperial power and the dollar

Declining US economic power is offset to an important extent by the continued prominence of the US in global finance. As has been shown, the US is able to borrow in its own currency at low interest rates, and it can readily attract funds based on the huge size and liquidity of dollar financial markets, given the global role of the US dollar. Even the US credit rating downgrade in August did not dent this. It is the dollar’s global role based on the continuing power of US imperialism that makes the US a ‘safe haven’ for financial markets, even when the American economy is in crisis.

Of course, US financial institutions have also been hit by the economic crisis. The US government has organised shotgun marriages of several major banks and many smaller banks have gone bust in recent years. But the US financial system remains in a privileged position in the world economy, as a purveyor of the major currency, backed by the world’s principal central banking authority - the one that controls the tap of global credit and liquidity.[12]

Despite the attacks currently taking place on the living standards of the broad population in the US, it is suffering far less than the countries that were overwhelmed by major financial and economic crises in the past couple of decades, from Mexico, Brazil and Argentina to South Korea, Indonesia and Thailand. The record levels of US debt and borrowing have seen no imposition of austerity policies by the IMF, and the US has faced no sudden halt in its access to foreign capital as many other countries have, not least Ireland and Greece.[13] Such are the benefits of being the major imperialist power in the global economy. This is why the US will struggle to ensure that its dominant position, and that of the dollar, remains unchallenged.

Tony Norfield, 5 October 2011

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[1] The term dates back to the 1960s and was coined by Valéry Giscard d'Estaing, when he was a France’s minister of finance. A useful recent book on this question is Barry Eichengreen’s Exorbitant Privilege: The Rise and Fall of the Dollar, Oxford University Press, 2011.

[2] China is likely within the next few years to become the world’s largest economy, overtaking the US. Note that this article only looks at some of the economic and financial aspects of US power, not the military dimension.

[3] Figures taken from BIS, Triennial Central Bank Survey, Report on global foreign exchange market activity in 2010, December 2010. The dollar share was 84.9% and the euro’s 39.1%. Note that here the total is 200%, since there are two sides to all currency trades, but the US dollar’s share was still more than twice that of the euro.

[4] The dollar is the most used currency for all kinds of international transaction, and the currency with the broadest global spread of use. Although the euro has gained acceptability since its inception in 1999, a large part of its use is in Europe and surrounding countries. The euro has been a serious challenger to the US dollar as an alternative currency in which to denominate bond issues, etc, but its market share has always remained a significant margin below that of the dollar. See The International Role of the Euro, European Central Bank, July 2011, for details.

[5] The US is second to the UK as a national base for the global foreign exchange market, but the currency trading in the UK is mainly of non-sterling currencies, and especially dollars.

[6] At the time of the opening up of Central and Eastern Europe and the former Soviet Union to capitalism after 1989, their trade with the US was minuscule, but the dollar played a major role in their economies on the black market. The Deutsche mark had, by contrast, very little penetration, despite Germany’s stronger position in trade with these countries.

[7] The 1997-98 crisis was traumatic for many countries in the Asian region. They suffered collapsing currencies, a slump in living standards and found their national economic policies dominated by the IMF, whose program for ‘reform’ included the sale of domestic assets at low prices to foreign capital. Thailand, South Korea and Indonesia were among the worst affected in this regard, and China, the major accumulator of foreign exchange reserves in the 2000s, took note.

[8] For example, the 10-year US Treasury yield was as low as 4.5%, rather than 6.0%. See Francis E Warnock and Veronica C Warnock, ‘International Capital Flows and US Interest Rates’, Board of Governors of the Federal Reserve System, International Finance Discussion Papers, Number 840, September 2005. Notably, the US restricts the foreign purchase of US corporations if this might seem to be against the national interest, but it has no qualms about taking money from whichever country wants to buy US debt (at low yields). Thus China was prevented from buying US oil major Unocal, but it has been allowed to own a mountain of US Treasuries.

[9] The US shares this advantage with the UK. See ‘The Real US Debt Problem’, 26 July 2011, and ‘The Economics of British Imperialism’, 22 May 2011, on this blog for more details.

[10] New York Times, 15 September 2011.

[11] ‘Comment la Fed assèche les banques européennes’ (‘How the Fed squeezes European banks’), Le Monde, 23 September 2011.

[12] US banks are still among the biggest in the world in terms of global coverage and influence, and US power also extends beyond purely US banks. For example, American nationals working for non-US banks outside the US are still subject to US law, so they cannot deal with any country that the US declares out of bounds. This is a factor that has strengthened the impact of US sanctions on Iran, for example.

[13] The IMF is technically an international body, but runs largely according to US dictates. The US does not need to own it all. It accounts for a significant minority of the votes (17%), well ahead of the second largest country, Japan, with just 6%, and has enough influence over other members to ensure that IMF policies suit its interests.

It Can Always Get Worse …

The IMF recently issued its World Economic Outlook, a document that has the advantage of comparing trends across the global economy. Although the text is written in international policy bureaucrat newspeak, luckily the charts and tables more or less speak for themselves. Below I have copied some of the more salient figures to illustrate how the crisis has recently intensified in the major capitalist economies. In addition, I note some points from recent press reports that illustrate how trouble is also brewing below the surface.

Economic stagnation after the failure of stimulus policies

The first chart shows the economic cycle based on data from purchasing manager surveys. These surveys track the broad economy closely, and the reports are released more promptly than official GDP statistics. The 50 level for the index in the chart means no change in output; above 50 means growth, below means contraction. After collapsing in 2008, global output growth resumed from mid-2009, but now economies have dropped back towards stagnation. In general, the ‘advanced’ economies are doing worse than the ‘emerging’ economies, partly because the latter did not take on as much crippling debt.[1]

The basic message from this chart is that all the extreme policy measures enacted since 2008 to boost the global economy – huge budget deficits, the public sector taking on private sector liabilities, zero interest rates, etc - have failed to restore conditions for profitable capital accumulation and growth.

The latest policy innovation from the US Federal Reserve has not changed anything, and global equity prices dropped by 3-5% today.[2] The IMF itself is left asking governments that have low borrowing rates to borrow more and spend more to boost demand in the global economy. But these same countries are afraid that more borrowing may find them also on the road to financial ruin.

The view from the end of the road

That road does not look attractive. This is shown in another chart from the IMF report, depicting the extra amount of interest over Germany’s that governments in the euro area pay to borrow for two years. As can be seen from the left hand section of the chart, the curve for Greece moved towards 8000. This means the market was demanding it paid an astonishing 80% per annum more than Germany! (Today it was much lower, a mere 65% premium!) Less extreme are Portugal and Ireland, but an extra 10-15% is still catastrophic, even if it is not as surreal. On the right hand section of the chart, the scale of premium borrowing rates is far less for the stronger countries (an extra 0-5%), but Italy, Spain and Belgium stand out as under pressure from credit markets.

Germany clearly remains in the best position: the German government can borrow for 10 years at a rate of just 1.7%. However, it will be wary of spending to try and boost the global economy when it is widely seen as liable for bailing out indebted euro members.

Behind the scenes

All this looks bad, but behind the startling pictures things are actually worse. Take for example, Siemens. Last year the German industrial group set up its own bank, partly because it would then have more financial flexibility and partly because it was worried about the other (mainly European) banks with which it dealt. A few weeks ago it withdrew €500m from a French bank and added to the €4-6bn deposits that it holds directly with the European Central Bank.[3] This company’s concern is not exceptional, in fact European banks face serious problems getting cash from their counterparts in the money markets.

This is shown by the wider ‘spreads’ that European banks are paying for funds. The credit risk of lending to them has risen, so that if they can get any cash at all, they have to pay more to borrow. French banks are seen as the most at risk among the major European countries, given their exposure to Greece and other indebted countries, although they are far from being the only ones. Senior executives from BNP Paribas are currently on their way to tour the Middle East to try and drum up friendly investments from local potentates.

Safe havens?

In the latest phase of the crisis, the US dollar has strengthened against most other major currencies. This is not because the US is a ‘safe haven’ in troubled times, even though it has more weapons than anybody else, but because, for now, it may look in better shape than crisis-stricken Europe. The definition of safety in capitalist economic terms is a movable feast, depending on where next the focus of panic falls. This is difficult to forecast, especially because the cracks in the system are manifold.

Another recent IMF publication, its Global Financial Stability Report, has a useful colour-coded review of the crumbling structure of the major capitalist economies. This is shown in the next chart (you may have to increase the viewing size to see the numbers clearly) . Red means bad; amber means not good, green means OK, and possibly good, or at least better (white means no data available).

The data are percentages of 2011 GDP, except for bank leverage that is the ratio of bank assets to bank equity.[4] Most of the red boxes are on the European side, showing high levels of debt and bank leverage, principally in the suspected countries. However, disturbingly for those who think Germany is completely safe, its banks have the highest leverage in the world at 32! The US gets off relatively lightly on this assessment, with a few green boxes. But it is not clear how far the IMF ignores the huge loss potential to the government of the US Fed owning nearly a trillion dollars of mortgage assets, and its other implicit financial guarantees. Overall Germany and Canada seem to do best (though there are some gaps in the Canada assessment). Interestingly, the euro area as a whole is not so dreadful, but this is an average of a range from very bad to not bad. The UK has a mixed picture that makes it reluctant to boost spending and raise its risk level.

So, there are plenty of pressure points ready to explode as the crisis enters another phase. As the movie Airplane! might have noted, this is a bad year for capitalist policy makers to quit smoking.

Tony Norfield, 22 September 2011

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[1] See the chart of the debt levels in different countries in my article ‘Debt and Austerity’, 8 August 2011, on this blog.

[2] See my article ‘Operation Twist’, 21 September 2011.

[3] See ‘Siemens shelters up to €6bn at ECB’, Financial Times, 19 September 2011.

[4] See my article ‘Bank Profits & Leverage’, 25 August 2011, for more on detail this.