Loving Lehmans

The following quotation is taken from a Lehman Brothers press release in April 2004. This was the occasion when Gordon Brown, then UK Chancellor, officially opened the new Lehmans European HQ in London.

Brown's remarks on the event are quoted next. They are nauseating on so many levels that I will leave them for you to ponder:

"I would like to pay tribute to the contribution you and your company make to the prosperity of Britain. During its one hundred and fifty year history, Lehman Brothers has always been an innovator, financing new ideas and inventions before many others even began to realise their potential. And it is part of the greatness not just of Lehman Brothers but of the City of London, that as the world economy has opened up, you have succeeded not by sheltering your share of a small protected national market but always by striving for a greater and greater share of the growing global market."

I had forgotten about this particular event until a recent press report reminded me. However, the sentiments expressed by Brown about the wonders of the financial markets reflected the appreciation shown by all spokesmen (and women) of British imperialism. Today it is embarrassing for them to be reminded of what they said in the years when the financial bubble was still being inflated. Yet the economic interests of British imperialism are closely bound up with the fortunes of the City of London, as articles on this blog have explained. So, while today's UK politicians will hesitate to be so fulsome in praise of finance, they will continue to protect the status of the City of London.


Tony Norfield, 19 July 2012

Fixing LIBOR

Last week Barclays Bank was fined close to $450m (£290m) by three government agencies for manipulating the benchmark level of market interest rates. This is a record fine for such a misdemeanour, although still very small in relation to the bank’s financial resources.[1] The affair has caused a furore in British media politics, adding to the populist anti-bank sentiment that ignores what is really going on. By manipulating the interest rates, Barclays was not ripping off consumers, it was questioning the ‘integrity’ of British-based international financial markets. That is a mortal sin, and that is why Prime Minister David Cameron and Bank of England governor Mervyn King are concerned.

The interest rates at issue were the London interbank offered rate (LIBOR) and the euro interbank offered rate (EURIBOR). The former is far more important, since it covers not only US dollars but also a range of other important international currencies, from UK sterling to the Japanese yen to Swiss francs, and also the euro. LIBOR measures the prevailing level of interest rates to borrow funds of different maturities from banks operating in London; EURIBOR is a comparable rate for euros only, and is set by banks operating throughout the euro area. While this may seem a technicality, it reflects the fact that the London international money market is the biggest in the world, and the location for the largest concentration of international banks. As noted before on this blog, this provides many important advantages for British imperialism, from the provision of cheap funds to a variety of revenues derived from surplus value produced in the global economy.[2]

For the British government, it is bad enough having to fight off the latest euro area plans for Europe-wide banking supervision and regulation, plans which threaten to cramp Britain’s room for manoeuvre and which could even raise barriers to London’s ability to penetrate European financial markets. Having the British-based financial system undermined internally is even worse. ‘Light regulation’ makes London attractive for global finance, but if it looks like the market is dishonest that undermines its status. In this game, the big players can, and do, act like monopolists, using their power to influence market prices. That is part of the game of being in imperialist finance. But they are not allowed to lie about the market prices that have been determined.

Barclays’ crime was therefore against principle. In terms of quantitative impact, the crime was nevertheless trivial. The FSA's report documents what happened, complete with hilarious citations from emails and internal communications that only serve to confirm that most traders are greedy, arrogant, irresponsible juveniles, rather than ‘masters of the universe’. However, it also makes clear that Barclays’ actions of pitching its rate above or below the market could have shifted interest rate settings by, at most, only one or two basis points (one basis point is one-hundredth of a percentage point). This is because the LIBOR setting was made from input from a panel of 16 banks. The official rate setting agency discarded the top four and bottom four rates received by banks, and then averaged the remaining eight.[3]

A couple of basis points higher or lower for the interest rate makes a measurable difference to the absolute level of interest payments on debt securities, on interest rate swaps, or to the net gain/loss on a futures or options position, when the value of these payments is already huge. Even then, for an interest rate level of, say, 5%, two basis points up or down will only change the annual interest paid by 0.4%. It is not a matter of concern for normal human beings, certainly not when compared to other issues in the economy. It is an issue for wholesale financial markets, where data for the first half of 2011 show that the notional amount outstanding of OTC interest rate derivatives contracts was $554 trillion, and that the total value of short term interest rate contracts traded on LIFFE in London in 2011 was 477 trillion euros, including over 241 trillion related to the three month EURIBOR futures contract. But even then, a higher or lower interest rate represents a gain for one party at the expense of another. Not everyone is a loser. In the case of Barclays, the evidence suggests that they were more often in the business of understating interest rate levels, both to benefit their own trading book and to give the impression that they were not finding it as difficult to secure funds as in reality they were. Hence, it is absurd to use this case as an example of banks exploiting mortgage holders. That is innumerate populism, not real analysis.

This case highlights an interesting feature of British critiques of the banking system. UK politicians, banking officials, journalists and media pundits can attack the greed of banks and the damage caused to the economy (usually meaning the national economy) by their actions. Some even think that the financial sector is, perhaps, a little too large, given that UK bank assets are five times UK GDP! But nobody wants to question the role of Britain’s own giant vampire squid in the global economy. People who get worked up about the Barclays interest rate scam are usually those who want imperialism’s financial system to work ‘properly’.

Tony Norfield, 2 July 2012

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[1] The UK Financial Services Authority (FSA) levied the lowest fine of £59.5m, a trivial amount for Barclays. The US regulator, the Commodity Futures Trading Commission (CFTC), levied a fine of $200m, the biggest it has ever issued and the fraud department of the US Justice Department's Criminal Division fined the bank $160m.

[2] See ‘The Economics of British Imperialism’, 22 May 2012. The latest data show the City gained net foreign revenues on financial services of £35bn in 2011.

[3] Even if Barclays’ low (high) quotations were discarded, this would still tend to have the effect of biasing the average for the remainder of the sample down (up). If a number of other banks also gave low (high) rate inputs, then there would be a bigger effect, but overall the banks would usually have offsetting positions and would not all be quoting with the same bias.

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

Finance, the Rate of Profit and Imperialism

In recent months, I have been working on a tricky topic for Marxist analysis: how to understand the role of finance in contemporary imperialism. Most coverage of this topic in Marxist and other radical literature gives more or less journalistic details of creditor-debtor rip offs and financial crises. There has been little serious attempt to develop Marx’s law of value in a way that can explain the underlying role of the financial system for the two major financial powers: the US and the UK.

I believe that I have made good progress in explaining this, and I will present some results of my latest analysis at a conference of the AHE/FAPE//IIPPE in Paris on Saturday 7 July - THE TIME HAS NOW BEEN CHANGED TO 11.30 - 1.30pm, Room C1306.

The full conference is scheduled from 5 to 7 July. If you are going too (it is a big conference, so this is not as ridiculous a question as it may seem!), then I look forward to discussing with and meeting some of the readers of this blog.

Tony Norfield, 26 June 2012

The Geometry of Imperialism

I have a globe on my desk. One of the tell-tale signs on such maps of the world is not the pink colour of colonies of the British Empire. That is so passé, and these maps are no longer published. Instead, the significant feature is the number of lengthy straight lines on the parts of the global map covering Africa and the Middle East. While there are straight lines elsewhere, these are the ones that stand out, the ones relating most clearly to the division of colonies in this region by the main European imperial powers.[1]

The straight lines are the product of colonial power that divided areas of influence, irrespective of the different ethnic and social groups that lived in them. The ruling groups in Arab countries were then determined by their relationship with the influential imperialist powers; Israel was, in a more complex way, established as a tool of imperialism to overlook the potentially less obedient Arabs. This means that political issues in these regions cannot be solved within the ‘countries’ concerned. A stable political deal between the different groups has not been established by agreement between them; rather the ascendancy of a particular group has been supported by imperialist influence. This is the basis for civil war, especially when the interests of imperialism change and the formerly leading group no longer has its previous power and support. Then a fragile peace, or a just-acceptable degree of terror or oppression, is no longer sustainable.

In this context, I recommend that you read the linked article/interview that gives an excellent account of the current situation in Syria. This shows, although implicitly, how solutions to the problems in a particular country cannot be resolved within that country, especially when these affect the balance of forces in the region and the interests of the imperialist powers.

Tony Norfield, 13 June 2012

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[1] Just look on Wikipedia for the histories of the formation of African and Middle Eastern states. Britain and France are the main players, with a small role played by Italy, though many decisions on the continent were taken to limit German influence before World War 1. A topic not covered in these otherwise useful details is the way in which Britain’s colonial policy exacerbated ethnic and religious tensions, often with the classic policy of backing the minority faction in a country because they would be more dependent on the external power for support. One would not expect Wikipedia to be able to give a decent account of the role of Israel as a tool of imperialism.

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

Stubborn Facts

Lenin was fond of the English saying: ‘Facts are stubborn things’. The accuracy of many so-called facts may be disputable, but it can be instructive to report on the facts published by official institutions of imperialism, ones that nevertheless throw a not very flattering light on today’s realities. This article is a complement to the ‘Imperialism by Numbers’ article I published on this blog on 1 May. It is also an update to, and an extension of, some data I reported in ‘What the “China Price” Really Means’, published on 4 June last year.

The first set of facts is shown in Chart 1. These are data that cover average hourly compensation costs, where ‘compensation’ means not only wages paid, but also the additional employer payments for social benefits such as unemployment insurance, medical insurance, and old-age pensions. The source is the US Bureau of Labor Statistics (BLS), which carried out this analysis to calculate for US corporations the total costs of employing workers in a range of different countries. The details show that it is not only wages paid that are higher in the richer countries; employee benefit costs are much higher too. Chart 1 gives index numbers based on 100 equalling $34.74, the BLS figure for the average hourly compensation paid to US manufacturing workers in 2010. Countries’ labour costs are shown as bigger or smaller bars, with the height of each bar proportional to the 100 level compensation cost in the US.

For China, average hourly compensation costs are estimated at $1.65. This was less than 5% of the costs of US manufacturing employees in the same year! Several years earlier, China’s figure was closer to 2% of US costs, but recent sharp wage rises in China have narrowed the gap a little. India and Sri Lanka have a still smaller ratio of US compensation costs, near 4% and 2%, respectively. Labour compensation costs are higher in the Philippines and Mexico, but Poland is the first country from the low end of the chart that has compensation costs that are more than 20% of the US level.

By contrast, the US, Canada, Japan and the rich Europeans tower above all the other countries shown in the chart. This group includes the so-called G7 countries, the major powers still running the world economy. Switzerland, Belgium, Germany and France have compensation levels more than 20% higher than in the US. One factor influencing the country ranking is the value of a national currency in the international market. However, the gap between the top ranked countries and the bottom ranked ones is so large that this currency factor has little influence on the overall distribution.

Surprisingly, the BLS’s data do not include any African country. Perhaps this is a problem of getting comparable statistics. For example, this is the reason that the BLS does not include figures for China and India in its standard country comparison reports, though it gives some information separately. However, Africa has also been a less important continent for US economic expansion overseas than elsewhere, and the BLS data focus far more on Europe, Asia and Latin America.

Chart 1:          Relative International Labour Costs in Manufacturing, 2010

                        (Hourly costs, US = 100 is $34.74, including non-wage compensation)

Sources and notes: US BLS. 2010 estimates based on 2007-08 BLS data are made by the author for China, India and Sri Lanka. Note that 2-letter ISO codes are used as country identifiers, and that CH refers to Switzerland, not China (which is CN).

Even the relatively minuscule labour costs for the poorer countries exaggerate the actual earnings of millions of workers. The Indian data are boosted by including only the so-called ‘formal sector’, that is the sector made up of generally larger, more organised companies that have some form of regulation and government supervision – including being included in statistical surveys! By contrast, the ‘informal sector’ is unorganised, on a much smaller scale and may include a family ‘business’ that consists of the parents, children and dependent relatives. This sector is not included in most data surveys, but it accounts for a large share of employment at much lower wages than in the formal sector. The BLS reports that 80% of India’s manufacturing employment is in the informal sector.

For China, the BLS calculations of hourly compensation do include estimates for the ‘informal sector’. In Chinese statistics this is listed under the heading of ‘town and village enterprises’ (TVEs), whereas the larger, more regulated, sector is under the heading of ‘urban enterprises’. The TVEs accounted for 70% of the total workforce, with 79.1 million workers employed in 2006; the urban enterprises sector employed the other 30%, or 33.5 million workers. Not surprisingly, in 2008 the average hourly compensation was just 82 cents in the TVEs compared to $2.38 in the urban companies.[1]

American and other foreign corporations will tend to set up in the formal sector, and will likely be paying the ‘higher’ wages. But they will still benefit from the mass of even cheaper labour from poor families who work for them indirectly, either by providing services for the larger companies, or by being what Marx called the ‘reserve army of labour’ for the formal sector. The divergence in labour costs for countries other than China, India and Sri Lanka may be less extreme. For example, South Korean costs are just below half the US figure. But there is still a very big gap.

If we look at the broader economy, rather than just manufacturing, the same picture of relative incomes holds. In fact, there is a 95% positive correlation between the figures for manufacturing compensation and for a country’s per capita GDP.[2]

Chart 2 gives a snapshot of global income inequality, based on a rough estimate of the Lorenz curve for 183 countries comprising 6.7 billion people.[3] World Bank average GDP per capita data for each country are used as the input. This method may understate global income inequality, because it assumes that everyone in country A gets the average per capita income for country A. Nevertheless, it has the advantage for our purposes of putting the different countries in focus.

Global average GDP per capita in 2011 was $9200. Of the 183 countries included in the data, 124 countries with a population of 5.0 billion (75% of the world total) had an average income below this, while 104 countries with a population of 4.8 billion had an average income below $5000 in that year.

Chart 2:          The Global Lorenz Curve, 2011 (based on GDP per capita)

Source and notes: World Bank. Data for average GDP per capita in 2011 for 183 countries is used as the basis for calculating the cumulative income distribution curve, the Lorenz curve.

If we take a common measure of inequality, the Gini coefficient, and calculate this from the data in Chart 2, the figure shows the expected high level of inequality: close to 66%. It would be more like 70% if the inequality of component country distributions were also allowed for. In that case, this measure of income inequality on a global scale is on the same level as that in the most unequal of countries for which Gini coefficient data are available: Namibia.

To give specific examples, in 2011 the GDP per capita of Switzerland was put at just over $70,000, while the US number was around $47,000, Germany was $43,000 and the UK was $39,000. Compared to these figures, China was close to $4000 and India to $1300. The data from the World Bank, the IMF, the CIA and other organisations have some differences, and the figures get revised, but the rankings and the income gaps are very similar from all sources.

The basic, and not surprising, fact is that the world economy is very unequal. When we look at the mechanisms that underpin this fact, we find that the inequality has much less to do with differences in labour productivity than with the way that some countries get privileges in the world economy at the expense of others.

Tony Norfield, 22 May 2012

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[1] See BLS Monthly Labor Review, April 2009. The data noted here are for 2006.

[2] Using the full set of BLS data for 34 countries’ compensation costs in 2010, I found there to be a 0.951 correlation coefficient with the respective countries’ per capita GDP in 2011 as reported by the IMF. This shows that the manufacturing wage/compensation is closely related to the broader economic income of the country. This is a sign that the richer, and usually imperialist, countries can afford to pay their production workers more. As the ‘China price’ article indicated, this has more to do with imperial power than being based on higher productivity.

[3] The Lorenz curve is closely associated with the ‘Gini coefficient’ of inequality mentioned later. It is a common, summary graphical measure of inequality. The 45-degree line indicates where 10% of the population gets 10% of the total income, 20% gets 20% of the total, etc. As such, it represents a line of equality of income in the population. The divergence of the Lorenz curve from this 45-degree line shows the extent of inequality. Wikipedia has a general explanation of this statistical measure and its relationship to the Gini coefficient.