The Truth about Capitalism

 

 This is a continuation of an earlier post

The economist John Maynard Keynes, hugely influential in the 20^th century, is now seen as a sort of ghostly admonisher, berating us – or rather the elite – for the gross errors that never seem to be corrected by experience. For example, his adage that “you don’t balance a nation’s books by cutting its income” is widely seen as a pithy riposte to the circular austerity logic that we seemed destined to repeat until the end of time.

But it’s seldom noticed how wrong Keynes’ predictions could be. For example, he claimed in 1930 that in a hundred years’ time – i.e. around now – economic progress would mean that we’d all be working 15 hour weeks and three hour days, and our main dilemma would be how to spend our abundant leisure time. In reality, we are busier than ever and the major source of that immersion is the need to work to earn enough to live on, which in many cases still isn’t enough.

Similarly, he thought the major economic problem of the future would stem from the fact that increasing prosperity would lead people to save so much that they wouldn’t spend enough on consumption, thus impeding the ‘circular flow’ of money so vital for economic health. In reality, despite (or perhaps because of) mass consumerism, everyone nowadays – individuals, governments, and corporations alike – is massively in debt. The parent company of the insolvent Thames Water, Kemble, is £18 billion in the red for example. And that’s just one company. Owing money to someone else and having to make regular interest payments to them – rather than saving too much – is the defining characteristic of our age, contrary to what Keynes imagined. Although I suppose you could say that many corporations seem to bring off the counter-intuitive trick of hoarding money and being in debt at the same time.

This leads to the rather disturbing insight that virtually no-one – including followers of esteemed critics like Keynes – really knows what capitalism, as it exists now, really is. If they did, their predictions and remedies wouldn’t be so wide of the mark.

Puff the Magic Dragon

Take for example the explanation of why “capitalism is good” by German theoretical physicist and science explainer Sabine Hossenfelder. She is a world away from the conspiracy dwelling, propagandising populists who justify current economic arrangements while blaming others – usually immigrants and ‘cultural Marxists’ – for why things are going wrong. But her vindication of capitalism seems to emerge from an alternative universe.

Capitalism, she says, is all about people “sitting on a big pile of money” they “don’t know what to do with”. Seeing that other people need finance to make their business idea a reality (she gives the example of someone with thousands of apples who needs a juice press to turn them into apple juice), the capitalist lends them the money, while expecting “something on top” for the risk they are taking.

“The capitalist is a person or institution who provides capital to those who want to launch a new business, someone who’s able and willing to take the risk that this capital will never have a return on investment,” she says.

This system is “pure genius” and is responsible for the huge social progress that has occurred over the past two centuries although it needs to be set up and regulated properly.

Hossenfelder’s apologia has been justly criticised in the American socialist magazine Jacobin for being “a compendium of common arguments people make in defense of capitalism when they haven’t taken the time to actually hear out any of the system’s critics.” The writer, Ben Burgis, says that in reality capitalism is a system of exploitation “disguised by the legal form of a voluntary agreement between equal parties”.

Social Regress

I completely agree, I’ve even written a book about how the voluntariness of capitalism is a mask that shields its essential compulsion. However, I also think that Hossenfelder’s defence of capitalism ignores something else rather important – that modern capitalism is largely nothing to do with providing finance so that people’s business ideas can be transformed into reality. It is simply a system of using money to make more money in ways that are entirely unrelated to improving production or enabling social progress, and are in fact often harmful to these processes.

The economist Michael Hudson, for example, has pointed out that since the mid-eighties in the USA – the archetypal ‘free market’ system – the number of company shares “retired” has exceeded those created. What this means in plainer English is that companies have bought back more shares than they have issued. The purpose of buying back shares is to raise their price while reducing their overall quantity so that dividends increase for the existing shareholders. The point of issuing new shares is to raise capital investment to expand your business. Companies have been pressured by their shareholders to amass huge debts (IBM is the classic example) in order to buy back (or retire) their shares, thus sacrificing the capital investment that capitalism is supposed to be all about.

So in the heartland of the ‘free market’ over the past 30 years there’s actually been a net reduction in capital funding new business ideas or just plain business expansion. The Dragons’ Den image of capitalism that Hossenfelder takes for reality – and most people share – is revealed to be just propaganda. Although it’s a fascinating insight into the nature of propaganda that this fiction has achieved mass penetration just as the reality it hides has definitively effaced the fantasy.

There are many ways in which really existing capitalism – the compulsion to make more money from the investment of money – is actually detrimental to the creation of wealth and social progress. The 2008 Financial Crisis, the after-effects of which we are still experiencing, was based on capital flooding into pooled mortgages and related ‘insurance’ schemes, which exploded after the real-world US housing market nosedived. This resulted in a huge destruction of wealth and productive capacity, exacerbated by an austerity mania that shows no sign of abating.

Twenty-first century capitalism, by virtue of the huge volume of money seeking returns, also creates shortages of the basic necessities of life where they don’t really exist. In the past 15 years there have been two global food crises, based on betting by hedge funds etc. that the amount of wheat and other foodstuffs available in the world would fall when in fact it didn’t. But the effects on prices were all too real, pushing millions into extreme poverty and even famine.

And then we have private equity, which involves taking over companies by borrowing money, dumping that debt on the company, and maximising pay-outs to investors. As shown in part one, private equity is on the march throughout the Western world despite the fact that the indebted companies it creates, such as Thames Water which may well go bankrupt soon, are incredibly vulnerable to rises in interest rates.

Nothing here involves financing new business ideas or spurring social progress, unless you have a rather strange concept of social progress which entails pumping sewage into rivers or increasing world hunger.

The Wolves of Wall Street (and the City of London and Frankfurt etc.)

The ultimate question is why is this happening? In the past the defenders of capitalism could point to the fact that despite its downsides, the system did increase overall affluence. Today, once you take China out of the equation – which pursues a very different variant of capitalism – that isn’t the case.

Some say that the problem is financialisation. Banks and asset managers, who invariably run private equity funds, aim to devour the lion’s share of society’s income by placing everyone in debt (thus compelling them to pay tribute in the form of interest payments). Their intention is to own, and thus gain a steady income from, assets like corporations, housing or privatised public infrastructure such as water or health services.

The hollowing out of formerly publicly owned health systems, like the National Health Service in Britain, can be directly attributed to the growing and malign influence of private equity ‘investors’. Similarly, the divestment of the major oil companies from fossil fuel extraction is fatally undercut by the fact that these activities are usually sold to PE groups who merrily continue them out of public view.

What these asset managers are not interested in, however, is the longer-term practice of funding capital investment in businesses because it’s too risky and doesn’t produce enough yield in the moment. Hence the term ‘financialisation’ because it involves establishing very profitable, but usually short-term, claims on companies or privatised public assets without stumping up the investment to improve them. The result is astronomic levels of inequality, increased vulnerability to economic crises, unmitigated global warming, and moribund economic growth.

Thus someone like Carolyn Sissoko, who we met in part one, can say that when capital was funnelled into projects like building railways or laying undersea cables (or in today’s world investing in renewable energy we might say), there was a tangible benefit to society. Now, however, when the dominant trend is to place companies in debt and make money from the interest payments and through soaking their customers that mutual benefit has disappeared.

The solution – evinced by people like Michael Hudson – is to radically change public policy. Tax policy needs to be overhauled to, for example, tax interest more than equity investment to return the system to its former purpose of funding growth-enhancing activity. Additionally private banks need to be replaced by publicly-owned ones which can provide basic services at minimum and support capital investment in businesses.

All this is about returning capitalism to its original purpose, much as in its infancy in the 19^th century the system needed to be prised away from the power of predatory, unproductive, landowners.

Speculate to Accumulate

However, there is an alternative explanation for our economic tribulations. This position doesn’t dispute the trends highlighted above but says they are a symptom rather than a cause. The cause is the capitalist system itself which is eternally driven by profit making opportunities and thus, given prior technological progress, is more attracted to speculation than tangible investment in making things. This gold mine has been augmented by the investment of pension funds and state sovereign wealth funds.

Heterodox economist Harry Shutt, for example, argues that there has been a drastic decline in the West in the demand for both capital and labour. This has resulted in a “chronic surplus of capital”. In 2012 private equity firm Bain Capital (co-founded by Mitt Romney) estimated that the volume of “global capital” had tripled over the previous two decades to stand at $600 trillion, nearly ten times the value of all the goods and services in the world.  They projected that by 2020, this “capital superabundance” would grow by another third to $900 trillion.

According to Brett Christophers, author of the private equity exposé Our Lives in Their Portfolios, “the simple reason why [asset managers] are so important today … is that they have so much capital at their disposal. In recent decades, the amount of surplus capital in the world has increased dramatically.” And, it might be added, the amount of surplus capital in the world will go on multiplying.

The figures are stupendous. For instance, leading asset manager Black Rock has over $9 trillion under management. Among its partners in crime, Vanguard boasts nearly $8 trillion, Blackstone around $1 trillion, and Macquarie (the former owner of Thames Water) $590 billion. This unimaginable wealth has been acquired at the same time as what in economics-speak is called  “fixed capital” investment – i.e. investment to expand businesses as opposed to simply making money – has fallen dramatically in Western countries, especially in the US.

The nature of capital, as opposed to mere money you might spend on buying groceries, is that it is on an eternal search for investment opportunities. What this means is that, with fewer outlets in things like new factories or offices, the rapidly growing mass of capital has inevitably migrated into making money from privatised assets, from speculation in bank ‘products’ or from pressuring corporations to buy back their shares rather than expand their businesses.

And this is not a process that is ever satiated. There is no golden mean of capital. As shown by the Bain Capital estimates, the amount of capital in the world is destined to increase exponentially. The one thing that could arrest this process is an economic downturn that is allowed to take its natural course but this has never actually happened since the Great Depression of the 1930s.

Feed me Seymour

Looked at another way, under this economic system, society is forced to accommodate the appetites of the monster of capital. But the more it is fed, the hungrier the monster gets.

According to Shutt, capital is now objectively “redundant”. The conditions which precipitated, and justified, the rise of the system in the 19^th century – innovations demanding “large concentrations of capital which could only be raised under a capitalist economic structure” – no longer exist. However, the compulsion to seek profit, buttressed by legal abetments like limited liability and a eulogisation of wealth creation, is, if anything, stronger than ever. Hence society seems destined to celebrate the very process that undermines its basic habitability without ever realising what the root problem is.

It follows that blaming private equity for the ills of society is like blaming clouds for rainfall. Capital will do what it is born to do. And doubtless it’s possible to interest venture capital groups in funding your nifty new business idea (though I would read the small print carefully first). But to label that process “pure genius” and misconstrue it for what capital-ism is today is just to knit yet more wool to pull over people’s eyes.

The Trouble with Wealth

Living in a World with too much capital

Inequality is usually pictured as the obscene contrast between grinding poverty and unmerited opulence, between mile-long queues at food banks and corporate CEOs buying gold wrapped steaks with their £5 million annual salaries. Hunger in the midst of unbelievable plenty.

Or, in economic terms, through the irrationality of a system that blocks the flow of money to the mass of people, thus creating a demand problem as the poor – or not wealthy – are far more likely to spend their income than the rich.

There is nothing wrong with viewing inequality in these ways but in my opinion they leave something important out. What they overlook is that great wealth is a problem in itself, not just in relation to poverty. This is because wealth is invariably transmuted into capital – money invested in order to make money which is then reinvested again in a never-ending process. And capital which is not directed to a palpable collective need, inevitably distorts society and makes solving urgent problems such as climate change all but impossible.

A Tale of Two Factors

Economists often refer to capital and labour as “factors” in production, i.e. inputs that enable goods or services to be produced and turn a profit. As shown by heterodox economist Harry Shutt, western economies hit a benign equilibrium during the post-war boom (1950-73) in that there was strong demand for both factors – capital and labour. The result was extremely low unemployment (around 3% in Britain) and buoyant growth in fixed investment (capital investment in physical assets such as factories, buildings, equipment, vehicles etc.) that actually exceeded GDP growth.

However, after stagnation set in the mid-70s, the rate of fixed investment fell below GDP and unemployment began to rise. The decline in fixed investment has continued over the ensuing decades, dropping from 20% of GDP in France, Germany, Britain, Japan and the US in 1980 to 14% in 2015. Unemployment spiked in the 1980s and ‘90s. Its subsequent official decline has much to do with compelling individuals to take any available work – Germany introduced ‘mini-jobs’, for example, and on-demand labour and self-employment have mushroomed everywhere. In Britain, if you work for one hour a week, you’re counted as employed. And in order to “make work pay” it is subsidised by the state in the form of tax credits.

In essence, intensified by technological advancement, the demand for both factors of production – capital and labour – waned significantly. However, the way they were treated could not have been more different. Labour, if organised, was denigrated as a pariah and a self-interested impediment to the production of goods and wealth. Unions were ensnared by legal restrictions and the unemployed compelled to retrain and make themselves attractive to employers.

Capital, by contrast, – despite facing, in Shutt’s words, “a demand-supply imbalance comparable to that of labour” – was fêted as the essential ingredient of wealth creation. Entrepreneurs were lauded, profitability seen as a desideratum that benefited all, and the rate of return demanded on capital was intensified. In addition, the “wall of money” at the top of society was augmented by an influx of pension funds into financial markets which naturally demanded a healthy return in order to pay their beneficiaries.

The result has been an immense surplus of capital which cannot be sated by purely physical innovation but is nonetheless perpetually in search of profitable opportunities. This state of affairs distorts society in multiple ways. One way has been a turn to debt-based speculation entirely unrelated to material assets. This path caused the 2008 financial crisis. But there are many other examples.

Gimme Shelter

The environment is one. Oil companies have responded to looming climate catastrophe by transforming their rhetoric but little else. They proclaim a commitment to a ‘green transition’ but still try to “optimise” their oil and gas portfolios and prioritise new exploration. Investment in renewable energy is so low it doesn’t warrant a distinct category in their accounts. Many institutional investors, such as pension funds, charities, and universities, under pressure from climate activists, are committed to divesting from such companies and investing in renewables. However, hedge funds – pooled investment funds patronised by extremely rich individuals that aim to beat average market returns – have stepped into the breach. They are buying large stakes in oil companies, pushing up their share price. “People don’t understand how much money you can make in things that people hate,” commented one manager.

Thus the surplus of capital is ensuring that any progress made on climate change is, under this economic system, instantly reversed.

The financialisation of housing is another way capital is perverting a basic social need. In countless cities around the world, rents have shot up after investors – invariably an unholy combination of hedge funds, private equity funds, and Real Estate Investment Funds (REITS) – have bought up whole blocks of rental properties, viewing them as lucrative income streams. Alternatively, housing is demolished to make way for luxury apartments. Berlin presents an extreme case. €42 billion was spent on large-scale real estate investment between 2007 and 2020.  According to one analyst, after the 2008 financial crisis, investors were looking for a place to put their money and set their sights on Berlin. In a city where 85% of the residents are renters, rents have increased by 70% in nine years. Despite the existence of a strong cooperative sector and state-owned housing companies, over four in 10 rental properties in the German capital are owned by either financial market investors or big, private landlords.

Unsurprisingly, given the city’s culture, there is resistance. In September, a referendum in favour of expropriating Berlin’s largest corporate landlords, who collectively own 11% of apartments in the city, was passed. Whether the result will be carried through, however, remains doubtful.

One way of looking at the frenzy for privatisation which has taken hold throughout the world since the 1980s is not just in terms of corporate capture or ideological monomania, but as an outlet for an ever-growing mass of surplus capital. Privatisation is a longing that can never be quenched. In the first stage of privatisation state-owned industries were hived off to the market in one-off sales. But that was just the appetizer. Now private capital is guaranteed an income stream by running, on a contract basis, public services funded by taxation. In Britain, railways and buses, even spy planes, are operated in this fashion, while the state-funded National Health Service is gradually being hollowed out by private provision. In 2010, the NHS spent £4.1 billion on private sector contracts. Nine years later, this figure had more than doubled.

‘Exiled’ former Labour party leader Jeremy Corbyn posed a genuine threat to these vested interests – through for example a pledge to “renationalise” the NHS. He jeopardised an extremely fruitful, and necessary, income stream and thus had to be destroyed.

Globally, a kindred process has occurred. Where public services have not been gutted, the state serves as a convenient shield behind which public funds are directed into private hands. Under the guise of attaining universal health coverage, the Kenyan government has subsidised access to private care, given private providers higher reimbursement rates and formed public-private partnerships with international companies at great expense. All this has been done at the behest of international agencies such as the World Bank and billionaire charities like the Bill and Melinda Gates Foundation.

“More and more people have been priced out of health care because of their socioeconomic situation and inability to access private care either because of the expenses involved or because the type of help they are looking for is not available, because it's not profitable”, says an author of a report on the subject.

There are numerous other instances of the pernicious effects of surplus capital scouring the globe to meet its unquenchable appetites. A partial list must include the warping of democracy and the media, the money laundering role of football, and the targeting of children by consumer giants. The problem of inequality – and thus contemporary capitalism – is apparent not just in too little money at the bottom of society, but too much at the top.

Check Your Privilege

But curiously one could argue this is contrary to the original purpose of capitalism. Defenders of the system are fond of pointing out its modernizing character in contrast to atavistic socialism. However, the myriad anti-social effects of surplus capital serve to illustrate how we in the 21^st century are living according to the dictates of a 19^th century system. Modern capitalism and its attendant institutions were born at the height of the Victorian age. Stock markets and joint-stock companies (later known as corporations) were created to facilitate outside investment – capital – in economic enterprises and limited liability laws introduced to protect investors by ensuring that if their chosen enterprise failed, they would lose nothing more than the original sum they ventured. Shutt calls “the privilege of limited liability”– which still exists – “the bedrock of capitalism”.

In the description of Canadian law professor Joel Bakan, “the modern corporation was invented in the mid-nineteenth century to help create pools in investment capital needed to finance new and growing industrial ventures, like railways, steamship lines, and factories.” Corporate law, he says, was “designed to incentivize and thereby produce the fuel, capital, that the system needs to operate.” Without it, “the whole system, not just the corporation but capitalism itself, would grind to a halt.”

Arguably, at the time, incentivizing the “fuel” did produce immense dynamism and social benefit in the form of railways, steamship lines etc. Even Karl Marx was impressed, paying tribute to the “colossal productive forces” unleashed by the bourgeoisie. But now this “fuel” is primarily engaged in a compulsive and blind search for profit, no matter whether this adds to social welfare, or more likely, degrades it. To stretch Bakan’s metaphor, the van is now full but the pump is still spewing out more petrol which is spilling all over the station forecourt and running down the street.

The capital imperative is now not merely anachronistic and anti-social but positively deadly. We now know that order to stand some chance of staying within the limit of no more than 1.5 degrees of global warming by 2050 – and thus potentially dodging catastrophic climate tipping points – the vast majority of fossil fuel reserves must remain in the ground. However, such a philosophy of abstention is utterly alien to the nature of capital which is myopically impelled to exploit short-term profit. And in a world of boundless surplus capital – with each fragment on an eternal search for profitable opportunities – such an endeavour is doomed from the start.

In 2014, geographer David Harvey estimated that capital had to find profitable opportunities worth $2 trillion in order to satisfy the requisite ‘return on investment’. By 2030, he gauges, that need will have increased to around $3 trillion. “Thereafter the numbers become astronomical,” he writes. “Imagined physically, the enormous expansions in physical infrastructures, in urbanisation, in workforces, in consumption and in production capacities that have occurred since the 1970s until now will have to be dwarfed into insignificance over the coming generation if the compound rate of capital accumulation is to be maintained.”

And we also have to imagine what non-physical – i.e. speculative – investment will do to the world in the coming years.

Bending the Knee

But, perversely, rather than face up to this literally unsustainable situation, the world’s governments have chosen to artificially turbo-charge capital creation. Through the central bank policy of Quantitative Easing, the quantity of money in the financial system has been massively expanded – by an estimated $13.9 million a minute since 2020. As a result, developed economies have largely weathered the Covid outbreak but at the cost of hugely increased inequality. The combined wealth of US billionaires has risen by 70% since the start of the pandemic, a period of a little more than 18 months. In Britain, the number of billionaires has jumped by a quarter while globally billionaire fortunes have increased by 27% in the context of an expected rise in extreme poverty for the first time this century. For reference a billion is a thousand million.

But those are merely the personal effects. QE has also instituted fake stock market booms, facilitated the lucrative practice of companies taking over their rivals (to no-one’s benefit bar senior executives and bankers), produced skyrocketing property prices in the UK, and swelled the resolutely short-termist venture capital industry. In short, rather than – heaven forbid – standing up to the immensely powerful vested interests around capital enrichment, governments have chosen to bend the knee and grant their every wish. Contrast this with the way defenceless benefit claimants are treated and you have an insight into the mentality of most politicians.

There is a current in left-wing thought that is indifferent to wealth inequality, viewing it as far less pernicious than income inequality despite the fact that it is more extreme. Before the pandemic, wealth inequality was rising in 49 countries. Its enormous increase in the brief time since Covid struck has prompted calls for a tax on wealth. But if wealth inequality has spiralled in such a short period, what will happen in the years to come when many of its causes will likely remain untouched? A wealth tax will be a mere drop in the ocean.

Great wealth is profoundly undemocratic, concentrating economic decision-making in fewer and fewer hands. But it also ensures that capital enrichment, a process which profoundly hurts and perverts society, is set in stone and will intensify year by year. The time is coming when we will find what it does intolerable.

'To every one who has, more will be given'. Can Quantitative Easing last?

Austerity and Quantitative Easing, the two signature economic policies of the second decade of the 21^st century, possess an uncanny symmetry. The former was a brutal snatching away of funding from the poorest in society such that life expectancy was diminished, while the latter, despite the free market rhetoric, was – and is – a massive unconditional subsidy to the richest.

Both are profoundly ideological. Austerity was presented as a penance for the sin of previous overspending, a rooting out of waste and inefficiency and a long overdue imposition of “tough love” on the unemployed and disabled. Quantitative Easing (QE) was framed as a vital injection of liquidity into a flagging economy, technocratic medicine that, according to the BBC, encourages “people to save less and spend a bit more”.

Both conceptions are utterly misleading. The UK was never on the verge of becoming financially like Greece after the Eurozone debt crisis, and years of austerity failed to even make a dent on government debt. The huge rise in government borrowing precipitated by the Covid pandemic – more than £300 billion – and last year’s £16 billion hike in defence spending have both materialised without the gods of the market punishing us with financial ruin.

QE, meanwhile, was never about encouraging banks to make loans, companies to invest or consumers to spend money. Interest rates – the cost of borrowing money – are already so low as to provide adequate incentive for the taking out of loans or consumer spending in preference to saving. If people aren’t doing so, there must be other reasons for their reticence. “Think about it:” write the authors of Do Central Banks Serve the People? “if investors are reluctant to invest in the real economy with interest rates already at the zero lower bound, under what circumstances, if any, would extra liquidity be sufficient to change their mind?”

Thus the “extra liquidity” of QE, one must conclude, has remained within the financial system. The creation of $834 million dollars an hour by the world’s central banks has fuelled asset bubbles – in company shares, property and, after at first freezing in the wake of the pandemic, in corporate mergers and acquisitions. “Dealmakers”, it is comforting to know, “are having a record year”.

The classic explanation for inflation is too much money chasing too few goods. If the staggering amount of money created by central banks had really been “pumped into” the economy, as the bedtime story tells us, it would show up as inflation. Undeniably inflation is rising but not by anything like the level implied in the standard narrative of QE.

This indicates a crucial difference between austerity and QE. Both are ideological constructs but austerity has a placebo quality – its purpose lay entirely in the perception that it was necessary. QE – actual, real-world QE – by contrast really was, and is, necessary.

The Long 2010s

Government cannot go bankrupt, the gurus of modern monetary theory assure us. But the private sector definitely can and ever since the demise of Lehman Brothers in 2008, governments around the world have strained every sinew to ensure the contagion of insolvency doesn’t spread. The initial bank bail-out was followed by successive batches of QE around the world. The US Federal Reserve increased its balance sheet in the first tranche of QE by $4.5 trillion. The Bank of England has resorted to QE every time the economy has hit turbulence – after the credit crunch, after the Brexit vote and now during the pandemic.

It is commonly accepted that QE works to ensure, artificially, a low effective interest rate (whilst increasing the price and reducing the yield on government bonds, incentivising investors to shift into other assets). So-called zombie companies – firms that do nothing more than survive by meeting the interest payments on their debt and paying wages – are permitted to live on thanks to rock bottom interest rates. It is estimated that a fifth of US and European companies are zombies.

The silent assassin

Interest rates are a potentially devastating tool of government policy. When she first gained office in Britain, Margaret Thatcher hiked interest rates. They peaked at 17% in late 1979 and didn’t drop below 10% until 1983. The ostensible aim was to bring down inflation but the side effect, many think consciously pursued side effect, was to send countless companies to the wall – the UK’s manufacturing sector, which contained many unionised firms, shrunk by a quarter in the first wave of Thatcherism and unemployment rose to more than four million.

This mirrored what was happening in the US where a doubling of the interest rate – dubbed the “Volker shock” after the head of the Federal Reserve, Paul Volker – also precipitated a wave of bankruptcies and send unemployment soaring. The Volker shock also caused international interest rates to spike, triggering many developing countries to default on their loans and sparking the so-called Third World Debt Crisis. Mexico was the first to default in 1982 and others followed. Countries were forced to go cap in hand to the IMF which imposed free market structural adjustment programmes as a condition of support. Thus the worldwide market fundamentalism of today can plausibly be traced back to a massive rise in interest rates four decades ago.

So, for a seemingly arcane financial instrument, interest rates can have shattering consequences. And as a general rule, high interest rates cause bankruptcies while low interest rates preserve companies that would, under free market conditions, go under.

The Janus Face of Interest Rates

It might seem therefore that today’s ultra-low interest rates are a good thing – the government’s bank rate is currently 0.1%, the lowest for hundreds of years – because they stave off suffering both personally and for the economy as a whole. But it’s not that simple. Low interest rates, because they make the cost of borrowing so low, encourage speculation which is exactly the flaw in the economy exposed by the financial crisis and which has only got worse since. They also make it easier to be indebted.  In late 2020 non-financial corporate debt hit $11 trillion and for the first time exceeded global GDP.

Near zero interest rates thus have to remain incredibly low in order to make the debt they encourage manageable. But if, for example, inflation takes hold, higher interest rates may become necessary to combat it by damping down demand the economy. And inflation, it should be stressed, doesn’t just affect creditors and the wealthy. By making basic goods and outlays like rent more expensive, inflation makes life harder for most people.  Thus policymakers are in a quandary.

Low interest rates also seem to require endless QE, a perpetual subsidy to the wealthiest, to remain low. Obviously there is more than one kind of interest rate. The official bank rate, set by the Bank of England, is augmented by countless other interest rates –for example, the rates given or charged by commercial banks or mortgage interest rates. They will usually roughly follow the bank rate.

According to economist Harry Shutt, if markets were “undistorted” (i.e. didn’t have QE), banks and others would refuse to hold the huge debt of corporations without demanding a much higher interest rate. “Rates would have rapidly risen to unaffordable levels, probably 10 per cent or more,” he writes, “thus precipitating mass bankruptcy in both public and private sectors.”

Destined to Repeat it?

Clearly markets, notwithstanding the propaganda, aren’t suddenly going to become undistorted.  Authorities will use every weapon in the arsenal – no matter how much they contradict free market doctrine – to ward off systemic market collapse. They have also, one would assume, learned the lessons of the recent past. The 2008 Financial Crisis had its proximate cause in the steady raising of interest rates by the Federal Reserve (mirrored by other central banks). They rose from 1 per cent in 2003 to 5.25% in 2007. As a result US mortgage interest rates increased and holders of sub-prime mortgages began to default, leading to a nationwide collapse of the housing market.

So central banks will not willingly hike interest rates or end QE unless compelled to do so. They can, it might be assumed, continue to follow the example of Japan, which pioneered QE and has taken it further than anyone else. This is a world of low growth, low interests rates and low inflation – unequal, rigged and immensely unfair – which nonetheless persists for fear of the alternative. Or the pain of the real economy, probably exacerbated by inflation, could compel the authorities to change tack.

At present, the financial system and the economy most people actually inhabit seem to exist in near total isolation from each other. The former prospers while the latter suffers. If their fates realign, things could get very interesting.

You can read part one of this article here

 

 

 

 

 

Corporate Socialism and the Capitalist Underclass

 

Politics now – witness Keir Starmer’s neo-Blairite recapturing of the UK Labour party – seems to inhabit a mental universe of its own creation rather than trying to deal with the inconvenience of reality. And occasionally the dissonance reaches comical heights of absurdity.

Boris Johnson, for example, when asked recently to justify the ending of the £20 uplift for Universal Credit recipients in October – which the government’s own internal modelling concedes will have a “catastrophic” effect – replied that it was his “strong preference” that people saw their wages rise “though their efforts” rather than through the taxation of other people.

Effort you say. Leaving aside that most people on Universal Credit are actually in work – and thus already are making an effort – the preferences of conservatives don’t seem to stretch to the most glaring welfare dependence affecting society today – the mammoth no strings giveaways to corporations and the immensely wealthy. Which curiously aren’t ending next month and necessitate about as much effort as turning a computer on.

Austerity in reverse

In the aftermath of the Great Financial Crisis of 2008, the world’s central banks (state banks like the Bank of England or the US Federal Reserve) literally created $10 trillion. In response to the Covid-19 pandemic, they created a further $9 trillion. For the past 18 months, central banks have generated $834 million an hour. This goes by the innocent sounding name of Quantitative Easing (QE for short).

QE is initiated by the central bank bringing into being a batch of new money (often called ‘fiat money’ i.e. money without the backing of gold – from the Latin meaning ‘let there be money’. Don’t picture a Fiat 500, that doesn’t capture its size). This is used to buy assets, usually government but also occasionally corporate bonds (debt), from banks, insurance companies or pension funds.

This has two main effects. One is to force interest rates down to very low levels, thus enabling heavily indebted institutions to survive. And the second is to create – by the buying of the assets – a huge mass of money ($13.9 million each minute) seeking investment opportunities and which is incentivised by the low interest on government bonds to go into other assets such as shares, property or commodities. As a result of this influx, their price increases.

QE is invariably presented as “pumping” money into the economy. In reality it involves pumping huge amounts of money into the financial system. Banks are not inclined to lend to the ‘real’ economy, which is the official story behind QE, if returns from buying and selling other assets (such as company shares) are higher. Corporations are not motivated to invest in plant or equipment if they can make more money from buying back their own shares, whose value is guaranteed by QE. Mergers and acquisitions – buying a company, asset-stripping it and selling it on – are also fuelled by the vast funds created by QE.

In theory, QE can be an emergency measure, helping the economy through a rough patch, and then being reversed so that ultimately no new money is created. But this is not how it turns out in practice. The Bank of Japan is still engaging in QE 20 years after it pioneered the policy. In 2018, the Federal Reserve started ‘quantitative tightening’ – the selling or retiring of assets on its balance sheet – but had to call a halt to the process less than a year later because of a negative reaction from markets. This was, it should be stressed, before the pandemic.

Rich bono

Unsurprisingly given how it works, QE has a hugely regressive effect on inequality. It’s not rocket science to understand that if the value of shares goes up, the prime beneficiaries are rich people because they are most likely to own shares. Additionally, banks and corporations benefit because they own shares in each other. “Owners of property have made out like bandits,” said hedge fund owner Paul Marshall in 2015. “In fact, anyone with assets has grown much richer. All of us who work in financial markets owe a huge debt to QE”.

The latest, Covid-inspired, rush to QE has massively exacerbated this inequality. Five million more millionaires were created during the pandemic, while the number of people worth more than $50 million increased by a quarter. Stock markets have hit record highs despite precipitous drops in GDP. In Britain, contrary to all previous recessions, property prices have continued their upwards trajectory. “The world is awash with central bank money,” says economist Grace Blakeley, “and it’s all flowing up rather than trickling down”.

Take from the poor and give to the rich

The QE reflex exposes just how right-wing – across the political ‘divide’ – our politics is, notwithstanding ephemeral lapses like Jeremy Corbyn’s Labour party. In 2019 the China-based economist Michael Pettis mused over two different ways to stimulate an economy – “giving to the rich” and “giving to the poor”. Giving to the rich involves tax cuts for business and the wealthy and policies such as QE “which tend to cause a rise in the prices of assets, most of which are owned by the rich.” Giving to the poor, in Pettis’s description, entails cutting taxes on the not wealthy, funding social safety nets, creating jobs or “setting minimum basic income policies”.

It’s revealing that the response of the British government – and other western governments – to the financial crisis and the Covid pandemic has almost exclusively centred on the first option. In addition to endless QE, corporation tax has fallen from 28% to 19% (it is slated to rise to 25% in 2023 but whether that will happen is a moot point). The top rate of income tax was also cut by George Osborne in 2012 and, if that wasn’t enough, capital gains tax (the tax you pay when you sell shares) was slashed by the soon-to-be newspaper editor in 2016.

As for the second option, it is not a question of giving to the poor but rather of taking from them. Taxes which affect poor people the most, such as VAT and now National Insurance, have been hiked. Social safety nets, by contrast, have been cut – witness the benefit freeze, sanctions, and the £30 cut in weekly payments to disabled people. Creating jobs has been left to the tender mercies of the private sector, and as for basic income policies, I think there’s been a pilot project in Finland. In Britain, destitution and food banks are the preferred course of action.

Boris Johnson’s “strong preference” for people to see their incomes rise “through their efforts” strangely only applies to folk without share portfolios. “The imbalance is unbelievable,” says Robert Reich, former labour secretary under Bill Clinton in the US, “Socialism for the rich, corporate socialism, but the harshest form of capitalism for most working people and the poor.”

The whimper of capitalism

 Of course, the notable feature of “corporate socialism” – apart from its colossal unfairness – is that it’s not capitalism anymore. QE is a massive distortion of the fêted free market. The theory of capitalism is that asset values are based on economic fundamentals – if stock prices rise that is because people believe, maybe mistakenly but genuinely, that the companies in question will generate profits in the future. Under the QE regime, they are rising because the state, in the guise of ‘independent’ central banks, is injecting huge amounts of money into markets.

Former Greek finance minister Yanis Varoufakis sees this as a momentous change. Pre-financial crisis capitalism (before 2008) may have been based on “daylight robbery” – the extraction of rent from a market controlled by Coca-Cola or General Electric – but it was still rooted in some kind of market and driven by private profits. That is no longer the case:

Then, after 2008, everything changed. Ever since the G7’s central banks coalesced in April 2009 to use their money printing capacity to re-float global finance, a deep discontinuity emerged. Today, the global economy is powered by the constant generation of central bank money, not by private profit.

To be more precise, the pursuit of private profit is still at the heart of the system – we haven’t socialised hedge funds – but the profit urge does not ‘make the world go round’. Central banks do.

 Market society, not economy

The supreme irony is that while the economic summit of society is changing into something that is not capitalist, capitalist values are penetrating ever more deeply into the texture of life. Economic and monetary values dominate politics and morality and we seem unable to value non-economic realms without assigning them a financial status, such as “natural capital”.  Individual endeavours, such as learning, physical fitness, volunteering, or nurturing ‘mindfulness’ are frequently seen in terms of their effect on our employability and careers, and undertaken for that reason.

In the 1980s, the social ecologist Murray Bookchin pioneered the idea that we don’t just live in a market economy, but also a market society. By the middle of the 20^th century, he said, “large-scale market operations had colonised every aspect of social and personal life.” The prognosis in the second decade of the 21^st century is that we seem to live in a market society without the concomitant market economy. Or possibly an irredeemably rigged market economy.

How long will it last?

The ultimate question is whether this regime of corporate socialism is sustainable. Japan, “the petri-dish” of Quantitative Easing, been following the policy since 2001 – several years before the rest of the advanced capitalist world followed in its wake. Indeed, it has deepened the practice considerably, coming to own around half the company shares quoted on the Tokyo stock exchange. “If this trend continues it is evident that the Japanese state will become the de facto owner of the bulk of what has been the hitherto privately owned enterprise sector,” wrote economist Harry Shutt in 2019.

However, from the point of view of the powerful and wealthy in Japan, the discernible effects don’t appear catastrophic. Profit has continued to be extracted, well-known corporate forms have endured and, if there has been a quiet revolution in ownership under the surface, it hasn’t resulted in a shift in power. In fact, inequality, low growth, ferocious competition for jobs and little prospect of pay rises, have, far from inculcating a spirit of rebellion, fuelled a culture of conservatism among Japanese youth.

The rulers of our society don’t have, despite the propaganda, a fervent ideological commitment to the free market, but merely a belief in private property. If that endures, they are satisfied.

The lingering question is, if Japan has indulged the QE fixation for two decades without presaging economic Armageddon, are western economies free to follow its example and practice QE for years, decades even, and emerge basically unscathed? Or are we preparing the ground for a financial collapse of mammoth proportions?

I want to address this question in the second part.