Tuesday, May 21, 2019

Is another bailout possible?


It seems that stock markets are running out of steam. The New York Stock Exchange, which mostly sets the trend, has been boosted by buybacks that were fuelled by tax cuts on returning foreign profits. And that very solvent demand is drying up. Of course, some speculators will still make gains whatever happens. But companies that have a large debt load will be in trouble, and there are many in that situation. Debts are compared to assets that insure against a possible default, and to income that insures repayment or, at least, payment of interest on debts renewed at term. A company’s assets are measured by its stock market value, and its available income is its profits minus taxes and dividends. However, some companies are not making any profit and some are even running a loss, and yet they are able to pile up huge debts because their market value is enormous (TESLA is a typical example). When their debts come to term, these companies will face serious difficulties, and many will fail and go bankrupt. But even companies that are making profits have borrowed a lot, for mergers and acquisitions and to buy back shares, taking advantage of very low interest rates. A drop in the stock market will make the renewal of those debts more costly, as the debt to assets ratio rapidly multiplies. This will present the same negative equity problem as the one that occurred ten years ago during the subprime housing bubble. But who will benefit from the bailout this time? Will it be the banks all over again, or will it be the too large to fail corporations? And do central banks have the capacity for a repeat performance?

Saturday, May 18, 2019

Re-reading the classics


From John A. Hobson's “Imperialism, a Study” (1902)

We have foreshadowed the possibility of even a larger alliance of Western States, a European federation of great Powers which, so far from forwarding the cause of world-civilisation, might introduce the gigantic peril of a Western parasitism, a group of advanced industrial nations, whose upper classes drew vast tribute from Asia and Africa, with which they supported great tame masses of retainers, no longer engaged in the staple industries of agriculture and manufacture, but kept in the performance of personal or minor industrial services under the control of a new financial aristocracy. Let those who would scout such a theory as undeserving of consideration examine the economic and social condition of districts in Southern England to-day which are already reduced to this condition, and reflect upon the vast extension of such a system which might be rendered feasible by the subjection of China to the economic control of similar groups of financiers, investors, and political and business officials, draining the greatest potential reservoir of profit the world has ever known, in order to consume it in Europe. The situation is far too complex, the play of world-forces far too incalculable, to render this or any other single interpretation of the future very probable: but the influences which govern the Imperialism of Western Europe to-day are moving in this direction, and, unless counteracted or diverted, make towards some such consummation.

If the ruling classes of the Western nations could realise their interests in such a combination (and each year sees capitalism more obviously international), and if China were unable to develop powers of forcible resistance, the opportunity of a parasitic Imperialism which should reproduce upon a vaster scale many of the main features of the later Roman Empire visibly presents itself.

Whether we regard Imperialism upon this larger scale or as confined to the policy of Great Britain, we find much that is closely analogous to the Imperialism of Rome.

The rise of a money-loaning aristocracy in Rome, composed of keen, unscrupulous men from many nations, who filled the high offices of State with their creatures, political “bosses” or military adventurers, who had come to the front as usurers, publicans, or chiefs of police in the provinces, was the most distinctive feature of later imperial Rome. This class was continually recruited from returned officials and colonial millionaires. The large incomes drawn in private official plunder, public tribute, usury and official incomes from the provinces had the following reactions upon Italy. Italians were no longer wanted for working the land or for manufactures, or even for military service. “The later campaigns on the Rhine and the Danube,” it is pointed out, “were really slavehunts on a gigantic scale.”

The Italian farmers, at first drawn from rural into military life, soon found themselves permanently ousted from agriculture by the serf labour of the latifundia, and they and their families were sucked into the dregs of town life, to be subsisted as a pauper population upon public charity. A mercenary colonial army came more and more to displace the home forces. The parasitic city life, with its lowered vitality and the growing infrequency of marriage, to which Gibbon draws attention, rapidly impaired the physique of the native population of Italy, and Rome subsisted more and more upon immigration of raw vigour from Gaul and Germany. The necessity of maintaining powerful mercenary armies to hold the provinces heightened continually the peril, already manifest in the last years of the Republic, arising from the political ambitions of great pro-consuls conspiring with a moneyed interest at Rome against the Commonwealth. As time went on, this moneyed oligarchy became an hereditary aristocracy, and withdrew from military and civil service, relying more and more upon hired foreigners: themselves sapped by luxury and idleness, and tainting by mixed servitude and licence the Roman populace, they so enfeebled the State as to destroy the physical and moral vitality required to hold in check and under government the vast repository of forces in the exploited Empire. The direct cause of Rome’s decay and fall is expressed politically by the term “over-centralisation,” which conveys in brief the real essence of Imperialism as distinguished from national growth on the one hand and colonialism upon the other. Parasitism, practised through taxation and usury, involved a constantly increasing centralisation of the instruments of government, and a growing strain upon this government, as the prey became more impoverished by the drain and showed signs of restiveness.

The evolution of this centralised society was as logical as every other work of nature. When force reached the stage where it expressed itself exclusively through money the governing class ceased to be chosen because they were valiant or eloquent, artistic, learned or devout, and were selected solely because they had the faculty of acquiring and keeping wealth. As long as the weak retained enough vitality to produce something which could be absorbed, this oligarchy was invariable; and, for very many years after the native peasantry of Gaul and Italy had perished from the land, new blood, injected from more tenacious races, kept the dying civilisation alive. The weakness of the moneyed class lay in this very power, for they not only killed the producer, but in the strength of their acquisitiveness they failed to propagate themselves.” Adams, Civilisation and Decay, p.44.

This is the largest, plainest instance history presents of the social parasitic process by which a moneyed interest within the State, usurping the reins of government, makes for imperial expansion in order to fasten economic suckers into foreign bodies so as to drain them of their wealth in order to support domestic luxury. The new Imperialism differs in no vital point from this old example. The element of political tribute is now absent or quite subsidiary, and the crudest forms of slavery have disappeared: some elements of more genuine and disinterested government serve to qualify and mask the distinctively parasitic nature of the later sort. But nature is not mocked: the laws which, operative throughout nature, doom the parasite to atrophy, decay, and final extinction, are not evaded by nations any more than by individual organisms. The greater complexity of the modern process, the endeavour to escape the parasitic reaction by rendering some real but quite unequal and inadequate services to “the host,” may retard but cannot finally avert the natural consequences of living upon others. The claim that an imperial State forcibly subjugating other peoples and their lands does so for the purpose of rendering services to the conquered equal to those which she exacts is notoriously false: she neither intends equivalent services nor is capable of rendering them, and the pretence that such benefits to the governed form a leading motive or result of Imperialism implies a degree of moral or intellectual obliquity so grave as itself to form a new peril for any nation fostering so false a notion of the nature of its conduct.” Let the motive be in the deed, not in the event,” says a Persian proverb.

Imperialism is a depraved choice of national life, imposed by self-seeking interests which appeal to the lusts of quantitative acquisitiveness and of forceful domination surviving in a nation from early centuries of animal struggle for existence. Its adoption as a policy implies a deliberate renunciation of that cultivation of the higher inner qualities which for a nation as for an individual constitutes the ascendency of reason over brute impulse. It is the besetting sin of all successful States, and its penalty is unalterable in the order of nature.

See also Lenin's “Imperialism: the highest stage of capitalism”, for a later, similar approche.

Sunday, May 05, 2019

Ultimate capitalism


Exchanges between money and commodities (goods, services or labour) can have two different forms. There can be selling to buy and buying to sell. In the first case commodities (C) are exchanged for money (M), and that money is exchanged for other commodities (C’): C-M-C’. Money is the intermediary measure of value that insures an exchange of equal value. The commodities sold have the same value as those bought. In the second case, money (M) is exchanged for commodities (C), and those commodities are exchanged for more money (M’): M-C-M’. Commodities are the intermediaries that increase in value between the two exchanges. The money paid for them is less than the money obtained from their sale. This extra money acquired by those who buy to sell comes from those who sell to buy. And it is capital that buys to sell, whereas labour must sell to buy. Capital buys labour, in some form or another, and sells it back at a higher price. This is problematic, as labour does not possess that extra money and it must come from elsewhere.

Ever since land began to lose its common ownership, proprietors have taken a share of the produce. For most of that long period of history the expropriated part of production was consumed, as such or after exchanges for something else. Landlords lived off the labour of their tenants. The value produced was simply shared with the landowner. This stable situation was irremediably disturbed by mass production of consumer goods and foreign trade. When people have to buy their necessities instead of producing them, they pay more than they get. So the surplus is exchanged abroad, but what comes back has an even higher price because it takes a profit. These early disruptions occurred in Antiquity, notably in Athens, where accumulated debts were a constant cause of social upheavals. Later Rome experienced a similar pauperisation, and resolved it for a while with “Bread and Games” paid by the plunder of conquest.

The transformation of heat into a driving force by steam power brought about mass production on an unprecedented scale. By the end of the 19th century, most of humanity had become dependent on industrial production of everyday necessities. The transition of common wealth to private wealth, through the ownership of the machines of production, accentuated the unbalance of getting more for less, and the industrial nations were subjected to periodic economic convulsions and imperialist wars. This escalated to a total war that was so destructive that the industrial centres of Europe and Asia were reduced to rubble. However, the blame for all the destruction and death was put on “war criminals” belonging to the vanquished belligerents. The incoherence of profit capitalism was not questioned and was allowed to develop unfettered. But labour was still unable to pay for the surplus value of profits. This problem had been resolved by colonial expansion (1) and by government debt during the war years, but after 1945 both were in regression. A solution was found by allowing labour to take on debt, in the forms of mortgages and consumer credit.

The profits demanded by those who buy labour to sell its produce are paid with debts. And those debts must be constantly renewed and increased to realise increasing production and profits. But debtors are obliged to pay interest, which reduces expendable income and must be compensated by more debt. As the ratio of debt to income grows, the corresponding interest takes an ever larger portion of income growth. On a national scale, when debts equal GDP, its growth rate must be higher than the rate of interest to actually effect growth in demand. However, the debt to income ratio is not only the result of more or less borrowing. It varies according to the rate of real income growth and to the rate of inflation. When prices rise, wages must follow, and outstanding debt is reduced proportionally. But, over the last few decades, inflation has been kept low and most real incomes have stagnated or shrunk. So that debt and interest burdens have grown unhindered. Capitalism’s highest stage may turn out to be debt overload, just preceding environmental collapse.

1. See Rosa Luxemburg’s description of colonial expropriation by Britain in India and by France in Algeria:
And a previous posting: