Inflation – what a Hout!

As I write, Britain is bombing a former colony – one of the poorest countries on earth, the scene recently of the “world’s worst humanitarian crisis” according to the UN, which was caused by a war inflicted by the medieval limb-severing Saudi Arabian regime with British weapons. But trying to stop the genocide in Palestine is crime enough to resume the sorties. And they want ordinary people to actively help out with this never-ending war for civilisation!

But pause for a minute and consider the reason for ‘Operation Prosperity Guardian’. The fear is that any continued obstruction to shipping routes in the Red Sea, which accounts for 15% of global sea trade, will reignite inflation, the bogeyman western governments and central banks have been trying to slay for the past two years or more.

I don’t want to minimise the problem of consumer inflation, to give it its proper name, which given that it causes massive rises in the cost of essentials like food involves real misery. This is exacerbated in an era when collective bargaining has been reduced to a rump of the economy so that wages can’t keep up with the price rises.

However, consumer inflation is not the only kind of inflation. Over many years, western countries have also been subject to asset price inflation – basically huge rises in the prices of shares and houses. In Britain, house prices have risen by about 1,000% since the early 1980s. And despite some ups and downs, the stock market across the western world keeps hitting record highs. In America it has enjoyed some of its best returns since the 1880s.

It is a basic axiom of our Thatcherite political mind-set that, in total contrast to consumer inflation, asset-price inflation is not something to dread. Quite the opposite, it is positively benign.

But, as we are now seeing, this is a travesty of the truth.

The inflation we like

So, unlike consumer inflation, the authorities have not tried to fight asset-price inflation. They have, by contrast, endeavoured to boost it at every turn and, if it seems to be flagging, to rekindle it with blatant forms of state intervention (despite the propaganda we don’t live in a ‘free’ market economy).

House prices in Britain have been deliberately stoked by restricting supply. It is a basic law of economics that if the supply of any good is suppressed, its price will increase.  This happened first through Thatcher’s ‘Right to Buy’ policy and was then reinforced by simply banning local councils from building new council houses. More recently, more direct forms of buttressing house prices have been necessary, for example the government’s ‘Help to Buy’ policy which is a simple subsidy to housebuilders.

The rise in share prices was first underpinned by legalising the process of share buy backs, banned in the aftermath of the Wall Street Crash of 1929. This has led to an internally-generated rise in share prices, caused by companies being pressured by their shareholders to ‘retire’ some of their shares, thus increasing the share price and the dividend payments to existing stock-holders. This practice has now become routine in the corporate world – according to economist Michael Hudson, publicly-listed American companies have, since 1985, retired more stock than they have issued.

Since the 2008 financial crisis, share prices have also been massively boosted by the artificial method of (electronic) money printing known as Quantitative Easing (QE). QE works by creating a huge mass of money, and by reducing the yield on government bonds, ‘incentivising’ investors to place it in the stock market or with other assets such as housing, or financing corporate mergers. According to investment manager, Kate Rogers, at venerable asset manager Cazenove, “Quantitative easing certainly stimulated asset markets. The billions that went from the banks to investors to buy the bonds was soon recycled into more attractively valued equities and property-boosting prices.”

This flagrant state intervention, practiced simultaneously in Britain, America, and Europe, is what lies behind the thriving stock market performance of the last decade or more (15% returns compared to an average of 9%). It is nothing to do with a healthy economy pushing up share prices. GDP growth, as we know, has been consistently poor for many years.

Of course, central banks are now pursuing the opposite policy to Quantitative Easing. ‘Quantitative Tightening’ involves selling assets to reduce liquidity in the financial system. This hasn’t (as yet but more on that later) produced a collapse in share prices. The conventional interpretation is that large companies are finally able to stand on their own two feet. But possibly QE under Covid was so huge – the creation of $834 million per hour – that the subsidy is still having an effect.

This is how it feels

The only way in which this asset-price inflation is commonly seen to have a downside is in terms of housing. The enormous rise in house prices – from an average of £26,000 in 1983 to £280,000 today – is regarded as a boon for the majority of people who already ‘own’ houses (or have mortgages on them). They can sit back and see their asset rise in value without having to do anything. But for young people who want to buy their first house – to ‘get on the housing ladder’ in common parlance – it’s a disaster. They frequently can’t even afford the deposit and are forced into permanent renting which, for those who have experienced it, is a distinctly unpleasant and insecure existence, apart from the fact that it soaks up most of your disposable income.

The last time houses were this unaffordable in Britain Benjamin Disraeli was Prime Minster.

However, with the resumption of consumer inflation and the central banks’ response of raising interest rates, the majority are no longer so content. They are, belatedly, seeing at first hand the malevolent side of asset-price inflation. Because house prices, with official blessing, have risen exponentially for decades, mortgages are a lot more expensive. And when interest rates rise above the minute level they have occupied for years, so do mortgage interest payments. This has resulted in huge increases in mortgage payments for many people. More than anything else, this lies behind the haemorrhaging of Conservative support in Britain. The private renting experience is going viral.

The share-owing oligarchy

What has happened to house prices might have its downsides, a defender of the status quo might argue, but surely there is little to object to in shares rising in value, the other main form of asset-price inflation? In fact there is. Undoubtedly some people benefit but the windfall accrues to a very small minority of share owners, including corporate executives who, these days, are all partially paid in share options. The original Thatcherite promise of a ‘share-owning democracy’ is now just a bad joke.

We now live in a resolutely two-track economy in which the stock market prospers while the real economy flounders. But given that rich people, who own shares, largely control the manufacture of public opinion, this experience doesn’t truly hit home. Thus the official opposition can come out with ludicrous non sequiturs like “when business profits, we all do” and are taken seriously.

The share price boom also comes at the cost of spiralling inequality. Since 2009, as the stock market has enjoyed nearly unprecedented gains, the wealth of the top billionaires in Britain has grown by 281%. In 2021, as actual economic activity was mothballed but massive amounts of QE ensured asset prices went skywards, the planet’s wealthiest people saw their balance sheets swell by $5 trillion. In Britain, since the pandemic, in the midst of the cost of living crisis, the number of billionaires has risen by a fifth.

Another trusted method of ensuring share prices go on rising – share buy backs – also damages the real economy. Because often the money companies use to buy back their shares (thus decreasing their number and raising their price) comes from funds that could otherwise be spent on business investment, they work to enrich their shareholder owners at the expense of wider economic health. Anaemic investment in production is a problem all over the western world.

The share price boom is not a win-win situation. It’s more like they win, you lose.

The economic trapeze

Central bankers – those who twiddle the dials of the world economy – are in a real quandary because of the actions of the Houthis. They believed they had, through historically moderate interest rates rises, solved the problem of the re-emergence of consumer inflation, as prices were heading downwards. They could then return to their prime function – ensuring that asset prices go on rising.

However, if global trade is impaired because of attacks on shipping in the Middle East, consumer inflation may return with a vengeance. If that happens, central bankers might feel they have no choice but to increase interest rates again, risking pricking the multi-asset bubble they have so carefully cultivated for the last decade or more.

It is a little appreciated fact that the 2008 Global Financial Crisis was sparked after a rise in interest rates. In America, they rose, incrementally, from 1 per cent in 2003 to 5.25% in 2007. Really large rises in interest rates do cause recessions, as evidenced by the experience of Britain and America in the early 1980s when, to prepare the ground for the Thatcher and Reagan ‘revolutions’, rates were increased to 17/18% in full knowledge of the carnage that would – and did – follow.

Given that western economies are much more indebted than they ever were when John Lennon was murdered, much more modest rises could have a catastrophic effect. 

According to economist Radhika Desai, if the Federal Reserve raises interest rates to “required levels, the US can expect a recession that will make that of the 1980s seem like a boom”. The alternative to not doing so is, if the projected effect on world trade comes to pass, the return of chronic (consumer) inflation. “Both paths,” she says “will damage working class incomes and wellbeing”.

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.

Flags and Fascism

If you want an indication of the madness into which British elite society has descended in the last few years, just consider its attitudes to two flags – the Ukrainian and the Palestinian.

Following the Russian invasion of Ukraine, the Ukrainian flag fluttered from public buildings across the land, alongside the Union Jack. It became almost treasonous – and a sign of a depraved fascistic mindset – not to unconditionally support Ukraine and the sending of whatever weapons it requested (including cluster bombs) for its fight against the indisputably evil Vladimir Putin.

Now, following the genocidal Israeli bombardment of Gaza, the completely opposite mentality reigns. Displaying the Palestinian flag is semi-illegal and a sign, according to our government and the ‘opposition’, of hate-filled venom and support for terrorism.

This is despite the fact that, in the words of British veteran Joe Glenton, the two cases, “they’re not exactly the same, but they are similar. There are people resisting an occupation.”

To explain the flagrant double standards, it’s easiest to look at Britain’s inveterate ‘how high’ Atlanticism, which means it automatically does whatever it thinks the US wants. But there are deeper, historical reasons – to do with Empire and who is considered worthy of support and who isn’t – onto which we should shine a light.

Universal human rights

In January 1941, when trying to get Congress to approve his lend-lease proposals, Franklin Roosevelt set out what would become war aims (even though it would be almost a year before the US entered WW2 and then explicitly because of Pearl Harbor). “Freedom,” he said “means the supremacy of human rights everywhere. Our support goes to those who struggle to gain those rights or to keep them.”

The speech formed the foundation of the famous Atlantic Charter (released in August 1941 still months before the US entered the war) whose third point emphasised self-determination to those deprived of it.

This set off a torrent of speculation that the right to self-determination should apply not only to those suffering under Nazi and Fascist tyranny but to the hundreds of millions of subjects of western empires across the world. Clearly they didn’t live under governments of their choosing. What about their freedom?

Winston Churchill, at that stage, in Orwell’s phrase “posing as a democrat”, went to great pains to make sure people didn’t lapse into error on this matter. The charter’s third point, he told the House of Commons, only pertained to the restoration of self-government to the states and nations of Europe “now under Nazi yoke”.

A lot of water has passed under the bridge since these words were uttered – including (often involuntary) decolonisation. But the attitude behind them, as shown by the black and white reactions to Gaza and Ukraine, has proved remarkably resilient.

Ukraine is an example of the unbearable sight of Europeans suffering from war crimes and human rights abuses. Gazans, clearly, don’t merit similar sympathy despite their plight being much worse. In fact, they are perpetrators, not really genuine victims at all. And to go back to the Churchillian distinction, you can’t restore self-determination to Palestinians because they’ve never actually enjoyed it – not under the British mandate, not under post-war Egyptian control, and certainly not under Israeli occupation since 1967.

People like us

This aliveness of this attitude can be seen in a myriad of ways. Ukrainian refugees are treated with the understanding due to people who we can, there but for fortune, imagine being. Refugees from the Middle East, by contrast, are seen as dangerous interlopers who we must keep out – either from Britain or continental Europe – by any means necessary. This ‘people like us’ mentality can even be discerned in something as apparently innocent as the inclusion of Israel and Australia in the Eurovision song contest.

In recent years, it has been common to suggest that post-Brexit Britain is in danger of “creeping fascism”. But the fascist temptation is, in my opinion, equally strong in both Britain and in the European Union from which it so tortuously parted company from just three years ago.  While pro-Palestinian demonstrations are denounced as “hate marchers” by Tory politicians in Britain, in Germany and France they are simply banned and Israeli Jews protesting against the slaughter are arrested.

Fascism is not Nazism

“Much against their will the British governing class have been forced into the anti-Hitler position,” George Orwell noted on the eve of the Second World War. These days, for the wealthy and powerful, the same impediments to realising your heart’s desire don’t exist. But I don’t want to suggest that a revitalised Nazism is the danger. The master race ideology, later annihilationist insanity, and the impulse to empire-build on the European continent, strictly limit its appeal. But classical Fascism – of the Italian vintage – is a different matter.

 

It’s little remembered that liberals, when forced in the 1920s to choose between Mussolini’s black-shirts and the workers’ movement they physically smashed, enthusiastically plumped for the former. And once in power, Mussolini’s economic policy, in its initial years, followed some eerily familiar patterns:

·        Fascism embraced austerity in the form of cuts to welfare spending and slimming down the civil service (reduced by 65,000 in 1923 alone). Just as in 21^st century Britain and Europe, austerity has been imposed for more than a decade with the exception of – just as with Mussolini – skyrocketing military spending.

·        Fascism increased VAT, a regressive tax because everyone – billionaire and disability claimant – pays the same. In Britain, VAT stood at 8% in 1979. Now it is 20%. Since 2008 around 80% of the member-states of the EU have increased their VAT rates. Mussolini also reduced tax on corporations. In Britain corporation tax stands at 25%. It was 51% in 1981. ‘Social Democrats’ in Europe have likewise sought to ‘stimulate’ growth through corporate tax cuts.

·        Fascism put technocrats in full charge of economic policy. In its first three years of power, liberal economist Alberto de Stefani, formerly of the Centre party, was granted “unprecedented  authority” as minister of finance. Today, the European Central Bank now oversees EU economic policy, ensuring the debt of member-states doesn’t rise above acceptable levels.  And the ECB and the European Commission have no compunction about imposing technocratic governors like Mario Draghi on recalcitrant countries. In non-EU Britain, the central bank – the Bank of England – is now ‘independent of political control’. In fact, a key neo-liberal reform across the world has been to remove economic decision-making from the hands of politicians and give it to unelected technocrats.

·        Fascism privatised state enterprises. Between 1922 and 1925, the fascist government implemented a “large-scale privatisation policy”, selling most of Italy’s state-owned telephone networks, for example. The aim was to balance the budget, a “core objective of fascist economic policy in its first phase”. Privatisation of utilities such as telephones and water was a signature policy of Thatcher in Britain and embraced by her successors. Since the 1980s, the privatisation mania has spread around the world, including to Europe.

·        Fascism was not initially anti-Semitic or at least no more so than other western ‘democracies’. It implemented policies of confiscating Jewish property and rounding up Jews as a result of its alliance with Nazi Germany but this attitude was not home-grown.  At first, being Jewish and Fascist was not some kind of hideous non-sequitur.  Fascism was, however, inherently racist towards non-white people from the get-go, employing poison gas on a wide scale in its 1936 invasion of Ethiopia, for example.

This indicates that elite liberalism of the kind represented by both Britain and the EU (which means liberties for the elite) is not, in principle, incompatible with Fascism. This is not to say everyone to the Right of Jeremy Corbyn is a Fascist itching to remove the mask, but many people will tolerate it if the only alternative is seen as worse  – for example some sort of socialism, which is regarded as far more inimical to freedom.

For instance, the election of the far-right Georgia Meloni in Italy – in her youth a member of a neo-Fascist party – was seen was by many as the trigger for a period of unbridled conflict with the EU. But it hasn’t turned out that way. Her “relatively conservative 2023 Budget law,” notes one assessment of Meloni’s first year in office, “quelled investors’ fears.” Maybe, in truth, if you are an investor (or a CEO, or someone of ‘high net worth’), there isn’t much to be afraid of.

The danger of Europeanism

Much-vaunted Europeanism is not an antidote to this. It can easily degenerate into the idea that we must protect our European culture and freedoms from outsiders, usually of a darker skin tone, who seek to destroy it. And, when all is said and done, the EU is a trading bloc for Europe. If you’re not lucky enough to live there – and the vast majority of the world’s population obviously aren’t – well, that’s tough luck.

Culture can easily serve as a synonym for the way race was used in decades gone by. For example, justifying the invasion of Abyssinia in 1936, Mussolini said he was putting an end to slavery in a “barbaric pseudo-state” and bringing the benefits of western civilisation. And slavery certainly existed under Haile Selassie. Naturally this civilising mission entailed wide-scale extermination of the native population.

Looking at the way the war on terror has been prosecuted in places like Iraq, Syria and Libya there are clear echoes in the way the immense cost to the indigenous populations of imposing allegedly morally superior regimes – or in the case of Libya no regime at all – is downplayed in a manner that simply wouldn’t happen if they were white and European.

All this is supremely relevant because the government our governments are giving carte blanche – and weapons – to, to bomb hospitals and commit ethnic cleansing is basically Fascist. In a letter to the New York Times in 1948, Albert Einstein and Hannah Arendt, among others, claimed that Tnat Haherut (the Freedom party) in the newly-created state of Israel was “closely akin in its organisation, methods, political philosophy and social appeal to the Nazi and Fascist parties”. Tnat Haherut was the forerunner of Benjamin Netanyahu’s Likud party. He is unquestionably “nationalist, genocidal, chauvinistic” and his coalition government, the most right-wing in the country’s history, contains out and out Fascists. One, Bezalel Smotrich, identifies as a “fascist homophobe”, lives in an illegal settlement, and denies that the Palestinian people even exist. Another, national security minister Ben-Gvir, was convicted in Israel of inciting racism and supporting a terrorist organisation.

Netanyahu’s government is, in classic fascist style, attacking the independence of the judiciary and is brutally cracking down on free speech among Israelis.

There are internal conflicts. The government contains a self-confessed “fascist homophobe” but the Israeli Defence Force, which is leading the attack on Gaza, proclaims a progressive attitude to LGBTQIA+ people unusual among the world’s militaries. But just as in the Ukraine, where the support for the Nazi Azov Battalion has gone hand in hand with allegedly advancing the rights of sexual minorities, these apparently intractable contradictions are not insurmountable.

Bringing it all Back Home

The classic ingredients of fascism – extra-parliamentary violence against the Left, cracking down on free speech, corporate-friendly economic policies, war preparation, and blatant racism – are already present in the UK and Europe, ready to be assembled into a coherent whole. Anyone who doesn’t the see connection between support for genocide abroad what happens domestically is engaging a fatal delusion.

Manchester United and the malaise of our time?

 

What do Manchester United and English water companies have in common? Not a great deal you might say beyond being not very successful at what they do. Once a football titan, Man U is now a has-been. Twice a recent winner of the Champions League and regular semi-finalist, the club now struggles to get out of the competition’s group stage. The winner of 13 Premier League titles since 1992, it now cannot compete with its rivals across the city of Manchester, not to mention numerous other clubs.

English water companies, meanwhile, are notorious for not doing their basic job of ensuring clean water in rivers and seas. Despite it being a legal requirement, they have not invested in infrastructure, preferring to pay out enormous dividends to their investors. And the real level of the pollution may be much higher than the firms admit.

But delve a bit deeper and there is something else that unites these two apparently disparate ‘businesses’*. They are both creatures of private equity (PE). Private equity is where a firm is taken off the stock market by a takeover. The new owners borrow the money to acquire the target company in what is called a ‘leveraged buyout’, in the process loading it down with massive debt. Once acquired, along with interest payments on the debt, large dividends are prioritised, either solely for the owners or for their investors/clients.

A family club

Manchester United, for example, had been a public limited firm (i.e. anyone could buy shares in it) from 1991 until 2005 when it was taken private by the Glazer family in a £790m leveraged buyout. Virtually debt-free since 1931, the club’s net debt now stands at £500m and has been much higher. Man U pays over £18m in annual interest on that debt and, unusually for a football club, £32m in yearly dividend payments to the Glazers.

Private Equity ownership is now more common for football clubs (think of Chelsea) but Manchester United provides an opportunity to observe the effect of PE ownership over time – and the picture is not a good one. This is not a financial crisis, which football clubs are especially susceptible to, but the mature consequence of a particular type of financial regime. No wonder fans are desperate for the Glazers to sell up.

Now consider the ten English water companies, all but three of whom have been taken off the stock market by their private equity owners. The commonalities with Manchester United are striking. When Thatcher privatised the ‘industry’ in 1989, it had its existing £5bn debt written off. Since then the debt pile has mushroomed to £60bn. The debt of the largest water company, Thames Water, rose from £3.4bn to £10.8 billion after it was acquired by Australian investment bank, Macquarie, in 2007 and now the firm is in danger of bankruptcy. Since privatisation, over £70bn in dividends has been paid out while bills have increased by 40%, while increases of a similar scale are forecast to deal with the sewage spills that have been allowed to happen.

In either case, what you might think of as the primary function – winning trophies or ensuring clean water – has taken a back seat in favour of maximising returns to the owners.

‘Public’ versus Private capitalism

Maximising returns, you might say, is simply what capitalism does and you’re not wrong as Walter from The Big Lebowski would doubtless attest. However, as English academic Carolyn Sissoko argues, the ‘old fashioned’ way of maximising returns through ‘public’ corporations at least sometimes had a collateral benefit in the shape of capital investment leading to products that people wanted to buy. What happens under private equity capitalism is an entirely valueless process in which the only beneficiaries are extremely rich people becoming even richer. Actually it’s worse than that. Private Equity destroys value for everyone else – consumers, workers, supporters, target companies – apart from the owners who make out like bandits.  As Sissoko puts it:

Whereas the corporate form is a win-win for the economy when it is used to facilitate the raising of funds for large projects that could not otherwise by completed such as railroads or trans-oceanic cables, the corporate form is transformed into a win-lose for the economy when it is used to impose huge debt burdens on otherwise successful corporations.

And this particular form of capitalism is on the march. According to Sissoko, private equity now controls more than 10% of the US stock market, up from 0% 40 years ago. And she says it is “positioned to continue displacing the public corporate form at a rapid pace”.

Where America leads, Britain dutifully follows and PE on these shores is, in the description of advertising sultan Martin Sorrell, “rampant”. Supermarkets such as Morrisons and Asda are PE-owned as was Debenhams before its demise. And in addition to water companies, many care homes have been taken over by private equity firms.

It is important to stress here that the critics of PE are not merely saying the practice is perverting organisations that have – or should have – a social purpose at their heart. It is doing that obviously but by loading down for-profit companies with huge debt – procured in order to take them over – PE is, in a supreme effort of self-destruction, warping capitalism itself. The frighteningly large level of global corporate debt, which has increased by double the rate of personal and financial debt since 2007 (which have also risen exponentially) can be attributed, at least in part, to the modus operandi of private equity. And while this debt mountain may have been manageable in the context of rock-bottom interest rates, as rates have risen, the debt-ridden concoctions of PE are – as shown by the travails of Thames Water – becoming more and more exposed.

No paradox

This is not a new problem though one that hasn’t been around for a while. In the 19^th century, Karl Marx bemoaned the existence of ‘usury capital’ – money lent purely to maximise the interest paid to the lender. This was in contrast to ‘industrial capital’ which had a social purpose in that it purchased shares in – and thus financed – enterprises which made new products or changed the way they were produced. The former, he said, “does not alter the mode of production, but attaches itself as a parasite and makes it miserable. It sucks its blood, kills its nerve, and compels reproduction to proceed under even more disheartening conditions.”

For usury capital in the Victorian age, read Private Equity today.

Brett Christophers, the Sweden-based academic and author of the exposé of PE, Our Lives in their Portfolios, has previously noted the interesting fact that Adam Smith – the darling of the Right and father of market economics and Marx – the pre-eminent left-wing critic of capitalism – shared “the belief that it was entirely possible for an activity to be revenue- and profit-generative without actually contributing to the creation of value. There was no paradox.”

And we are now in an era where value, once again, is not being created. As contemporary economist Michael Hudson has documented, PE is just one of several ways that ‘activist shareholders’, hedge funds and banks have, since the 1980s, increased looked upon public listed companies as cash cows to be looted regardless of the long-term consequences. Illegal until the Thatcher and Reagan eras, share buy-backs are now commonplace for corporations. In the US, Apple, IBM, Exxon Mobil, and Proctor & Gamble are some of the most famous exponents. In the UK, recent practitioners include BP, Shell, Diageo (Guinness, Smirnoff etc.), HSBC, and Unilever.

Share buy-backs are often undertaken under pressure from large shareholders and the company will, not infrequently, swallow a “poison pill” (in Hudson’s words), placing itself in severe debt to purchase its own stock. The effect of a share buy-back is to reduce the overall number of a company’s shares, thereby increasing capital gains and dividend pay outs to its existing shareholders. But its side-effect is to shrink the amount of capital the company has to invest in research and development and growing its own business.

But some companies, says Hudson, have stubbornly resisted the trend and concentrated on building up their business. He cites the example of Google, which, at least in its early days, aimed to use “corporate profits to expand the business rather than giving quick hit-and-run returns to the wealthiest One Percent.”**

Capitalism will eat itself

But this highlights a fatal flaw in the arguments of those who criticise private equity – and kindred financial innovations – for subverting capitalism. Google may have defied the financial bloodsuckers and concentrated on R&D but the effect of this, although good for Google’s health as a business (it’s worth over $1 trillion now apparently), cannot be classed as beneficial for society as a whole. Its innovations have consisted in myriad ways to beguile the attention-spans of billions of people so that they can be exposed to more advertising. If this is a “win-win”, in Sissoko’s description, I think we need to re-define what we mean by winning.

Google is also an intimate part of the whole Big Tech social media revolution which, because it is founded on getting people to compare themselves to others, is having a corroding effect on mental health. From 2018 to 2023, Norway, for example, fell from 3^rd place in the world happiness league table to seventh because of a decline among its young people. And – an assiduously cultivated – addiction to social media also certainly lies behind that.

Likewise, if oil companies want to buy back their own shares rather than putting all available resources into drilling for oil and gas deposits, thereby intensifying global warming, why should we try to talk them out of it?

Why, this time around, should we be the ones – in erstwhile Keynesian fashion – to ‘save capitalism from itself’?

It is a good question.

To be continued

* H/T to a friend who pointed out the link

** Quote from Hudson’s Killing the Host which is well worth reading