For the Record – Flawed Methods, Unnecessary Divisions

OCTOBER 9, 2013 – Charlie Kimber and Alex Callinicos (2013) have written a defence of the British Socialist Workers Party (SWP), a party wracked by crisis since late 2012. This crisis was precipitated by the response, on the part of the SWP leadership, to allegations of rape and sexual assault. However, Kimber/Callinicos assert that “all those involved … have agreed that the case itself should be treated as ‘closed’” and therefore barely address issues of sexual violence, sexism, women’s oppression – the substantive issues that have generated the current crisis.

Others will, no doubt, respond to Kimber/Callinicos on these points. This contribution concerns one specific aspect of their text. To illustrate one point in their article, the authors cite a passage from a 2001 Callinicos pamphlet, The Anti-Capitalist Movement and the Revolutionary Left (2001), a pamphlet which was to circulate quite widely in the years which followed, prominently featured on the SWP website until late 2009 (SWP 2009). This is a very questionable text, in 2013, to be used as an authoritative source.

The first 6,000-word portion of Anti-Capitalist Movement is relatively straightforward. It paints a picture of the political terrain at the turn of the century, the birth of a new left, and a reflection on what Callinicos sees as a parallel period – the radicalization of the 1960s. The concluding 6,000-word portion is completely different. The year of the pamphlet’s publication, 2001, was the year that the SWP argued for and won the expulsion of the U.S.-based International Socialist Organization (ISO) from the International Socialist Tendency (IST). The final 6,000 words of Anti-Capitalist Movement are entirely devoted to justifying this expulsion.

It is a justification based upon three very flawed methods: inflated rhetoric, careless use of historical analogies, and a misleading political economy. Many of us – who at the time were convinced to support the SWP leadership’s drive to expel the ISO –with the benefit of hindsight know now that we were quite wrong. Two years ago, for self-clarification, this author drafted, but did not publish, a critique of Anti-Capitalist Movement. With this 2001 pamphlet now resurfacing as a part of current debates, perhaps these notes – slightly revised – will be of interest to others. So, for the record …

Seattle

The political environment at the turn of the century was shaped by anti-corporate activism. In 1999, a coalition of young anti-globalization activists and veterans of the trade union movement disrupted the annual meetings of the World Trade Organization (WTO) held that year in Seattle, Washington (Bakan 2000a; Bakan 2000b). Ralph Nader called this Seattle moment a “fork in the road” (1999) – a watershed pointing towards new waves of struggle against corporate globalization. In the years that followed, hundreds of thousands challenged the symbols of corporate capitalism – in Genoa, Quebec City, Prague and elsewhere.

The first section of Anti-Capitalist Movement documents the emergence of the anti-globalization wave of protests. Callinicos argues that “there has crystallized in the advanced capitalist countries a politically active minority that sees global capitalism as the source of the world’s ills”. He lists the key moments in the “new cycle of protest” which had emerged since the Seattle events, including demonstrations in “Washington (16 April 2000), Millau (30 June 2000), Melbourne (11 September 2000), Prague (26 September 2000), Seoul (10 October 2000), Nice (6-7 December 2000), and Washington again (20 January 2001)”. Even larger protests were to occur in the months following the publication of Anti-Capitalist Movement – the huge 300,000 strong mobilization in Genoa and the 80,000 who challenged the Summit of the Americas in Quebec City (George 2001; Ritsema 2011). For those of us who participated in various of these protests against corporate capitalism, reading through the history outlined in Anti-Capitalist Movement is a useful reminder of their importance. For others, it might provide a good summary and history of an historic movement.

With the benefit of hindsight of course, some of the analysis needs to be modified. Twelve years ago, many of us, including Callinicos, saw Seattle as the central fact in the new movement. But Seattle did not emerge in a vacuum. Its organizers had been deeply influenced by Global South mass movements against neoliberalism and imperialism, movements which – from January 1, 1994 – exploded onto the world scene with the anti-neoliberal uprisings in Chiapas, Mexico. Seattle needs to be seen as one link in a bigger chain – in part, being an echo of the mobilizations against neoliberal globalization and imperialism that emerged out of Latin America in the 1990s, going back to the Zapatistas and beyond. Even after the events of 9/11, this radicalization continued, with the 2002 mobilization against the attempted coup in Venezuela and the massive uprisings associated with the gas wars in Bolivia in 2003 and 2004. Both of these events served as part of the immediate background to the election of Evo Morales in 2005.

Another aspect of the analysis in Anti-Capitalist Movement needs to be re-examined. In a comparative evaluation of the Al-Aqsa Intifada and the Seattle protests, Anti-Capitalist Movement asserts that the Intifada “is driven by the Palestinians’ burning resentment of the oppression they suffer at the hands of the Zionist state … but the system itself is not at the centre of their consciousness”. This implies that the Seattle-inspired movements were at a higher level, being directed against the system as a whole. But the Al-Aqsa Intifada was a key spark for the radicalization in the region, not least in Egypt, a radicalization which exploded in 2011 in the Arab Spring. For many in the Arab Spring revolutions, both Palestine and “the system itself” were very much at the centre of their consciousness (Barghouti 2011). It does not seem credible, more than a decade later, to see the post-Seattle anti-globalization protests as existing at a higher level than the Al-Aqsa Intifada. The Global North protests in Seattle, Prague, Genoa, Washington and elsewhere were significant. But looking back from the second decade of the 21st century, it is clear that the main streams of mass movements and radical change since the 1990s have flown through the Global South – Chiapas, Caracas and Cochabamba; Palestine, Egypt and Tunisia. However, hindsight is always 20/20, and this contribution by Callinicos is a worthwhile part of an ongoing discussion.

Inflated Rhetoric

In the second half of the pamphlet – announced with the headline “An American Tragedy: the International Socialist Organization” – Anti-Capitalist Movement takes a quite different turn. Prominent throughout the next several thousand words are examples of what Leo Panitch has called “inflated rhetoric” (1987) – the exaggeration of differences to the point of caricature through the use of highly-charged language. The SWP and the ISO disagreed as to the significance of the Seattle protest. Anti-Capitalist Movement elevates this disagreement far above a mere question of tactics. According to Anti-Capitalist Movement, the Seattle events revealed “the ISO’s metastasis into a sect”. The ISO had “become so ossified that they are unable to relate to the revival of the left for which they have waited for decades”. It argues that there had been a long history of “sectarian degeneration” in the ISO, that there was, in various of the writings of the ISO, “evidence of a deep-rooted sectarian mentality”, and that even when there were moments of health, there was a recurring tendency of “retreating into the sectarian bunker”. Already, during the Balkan Wars, “we can see the ISO displaying the attitude that by which Marx defined a sect”.

Anti-Capitalist Movement does not hesitate to amplify, arguing that the “ISO leadership’s urge to differentiate … is reminiscent of some of the worst sectarian aberrations of the 1960s, for example, the refusal of the orthodox Trotskyist followers of Gerry Healy and Pierre Lambert to participate in the student and anti-war movements”. Raising the ghost of the late Gerry Healy is a strong clue signalling where the argument is headed. Perhaps no left group more captured the essence of sectarianism than Healy’s Socialist Labour League (SLL) and its successor the Workers’ Revolutionary Party (WRP). These were formations on the British far left, known among other things for their adulation of Libya’s Muammar Gaddafi, and for the scandal of sexual abuse which ultimately shattered both Healy’s reputation and the current which he had led.[1] Phrases such as “sectarian bunker” have a known content in the socialist movement, clearly intended to identify a group which has turned in on itself and retreated from the reality of day-to-day life and struggle – hence the reference to Healy.

This use of inflated rhetoric was characteristic of the whole debate. An earlier letter to the ISO (drafted by Callinicos and Tony Cliff), argued that the ISO had “failed the test of the 1999 Balkan war” (cited in Birchall 2011, 548). This accusation – “failing the test of war” – also has a known content. The phrase emerges from debates triggered by the First World War. The socialist left was a mass, united movement in the first years of the 20th century. August 1914, this unity was shattered, when the world’s largest socialist party, the German Social Democratic Party (SPD), voted for war credits and gave its blessing to the horrors of patriotic war. The German SPD, and most other member organizations of the Second International “failed the test of war”. This led to profound isolation for internationalists such as Rosa Luxemburg, Clara Zetkin, Leon Trotsky and Vladimir Lenin, forcing on this minority the necessity to, from scratch, begin again the project of constructing an international socialist movement. Taking this known term from the World War One era, and applying it to tactical differences over the war in Kosovo, is an extreme case of inflating the rhetoric.

The invective had the effect of sharply polarizing the discussion along apparently irreconcilable lines. The engaged realistic activist was counter-posed to the sectarian. The anti-war socialist was counter-posed to those who had supposedly capitulated to patriotism. But was such rhetoric and extreme polarization actually necessary? It is really very difficult to discover any meaningful political differences, at the turn of the century, between the ISO and the SWP. In his biography of the late Tony Cliff, leading SWP intellectual Ian Birchall argues that “[i]n principle the different assessments of the anti-capitalist movement could have been contained within the international tendency” (2011, 549). The ISO, like the SWP, participated in the Seattle protests, and many of the other anti-globalization mobilizations. The ISO, like the SWP, took a clear position against NATO’s bombing of Kosovo. There were differences, not over matters of principle, but rather over matters of expectation, nuance and tactics. What are the prospects of this new movement? This is about expectations. Should the movements be characterized as anti-capitalist or anti-globalization? This is a nuance. How do you combine opposition to NATO’s bombing campaigns with criticism of Serbia’s attacks on Kosovo? This is a tactic. All are appropriate subjects for reasoned discussion and debate. When they become wrapped in distortion and extreme invective, that discussion and debate becomes difficult, and the value of diverse views becomes lost in an urge to silence disagreement.

The SWP leadership, however, insisted on the limitations of the ISO, and the urgency of isolating and then expelling the organization from the IST. At a 2001 meeting of the IST, held in London U.K., the ISO was formally expelled.[2]

Careless Use of Historical Analogies

It would be fairly straightforward if this use of inflated rhetoric could be ascribed solely to problems of etiquette. Bad manners can be addressed and corrected fairly easily. However, the inflated rhetoric was, at least in part, a linguistic expression of a second problematic method. Argument by way of careless historical analogy – drawing too straight a line between the Russian Revolutionary era and our own – is a central method employed by Anti-Capitalist Movement.

Callinicos argues that the new movements in the wake of Seattle demanded the adoption of new modes of work, and the abandonment of old ones from a different era. To make this point, he quotes Trotsky. “[I]f in the preceding period too many elements of inertia have accumulated in the leading organs of the party, then the party will prove itself unable to fulfill its leadership at that supreme and critical moment for which it has been preparing itself in the course of decades. The party is ravaged by a crisis, and the movement passes the party by – and heads toward defeat”.

The quotation is from Trotsky’s work, The Lessons of October, an analysis of the challenges which confronted the European left in the context of revolutionary upheaval in 1917 and 1918. Callinicos says that it represents Trotsky “reflecting on the experience of the Bolsheviks”. That is not entirely accurate. In the paragraph from which the selection has been culled, Trotsky contextualizes his analysis. “On the basis of our experience – even taking only one year, from February 1917 to February 1918 – and on the basis of the supplementary experience in Finland, Hungary, Italy, Bulgaria, and Germany, we can posit as almost an unalterable law that a party crisis is inevitable in the transition from preparatory revolutionary activity to the immediate struggle for power” (1937, 4). These words are absent from Anti-Capitalist Movement.

Surely we should be careful about the applicability to our times of any analysis thinking through the challenges faced by socialists “in the transition from preparatory revolutionary activity to the immediate struggle for power”. Further, look at the parties Trotsky was analyzing, – parties based in Finland, Hungary, Italy, Bulgaria, Germany and Russia. Unlike the small organizations which comprise the IST, the key parties on this list were real, mass parties. According to Tony Cliff, the Bulgarian socialist group which “voted to affiliate to the Comintern” in 1919” was a mass party with 35,478 members in 1920” (1979, 10–11). In Germany, the communists numbered some 50,000 until December 1920, when they were joined by the left-wing of the Independent Social Democrats to create a party of 350,000 (1979, 11). The Hungarian Party was significant enough to be at the centre of a 133-day “Soviet” republic in 1919 (1979, 12). When the Italian Socialist Party voted to affiliate to the Comintern it had 300,000 members (1979, 10). As for the Bolsheviks, they were formed in 1903 and two years later were confronted by a revolution involving the birth of workers’ councils. Years of defeat and reaction followed, then the horrors of world war, then the two revolutions of 1917 and the working class seizure of power. In those tumultuous years, the Bolsheviks were variously a group of dozens, hundreds, thousands, tens of thousands and eventually hundreds of thousands(1975, 98–138; 168–182; 235–252; 352–366). It is a rich and complex story. But from the standpoint of the 21st century, it is little more than just that … a story. Anti-Capitalist Movement tells this story selectively. It insists that lessons appropriate to mass organizations in conditions of autocracy, confronted with the transition to state power, are directly applicable to the experience of small left formations confronted with demonstrations and movements in the context of liberal democracies.

Britain and North America in the 21st century have no mass socialist organizations. There are no workers’ soviets (self-governing popular councils). We do not at the moment have a Tsarist-like reaction forcing the left and organizers underground. Russia between 1903 and 1917 could not really be more different than Britain and North America between 1989 and 2001, or, for that matter, 2013. It is not at all clear how lessons from the one period could be applied to the other, except in the most general manner. To offer real lessons from the Russian Revolution, demands paying careful attention to specific contexts and precise differences. A method based on selective out-of-context quotation is the mark of internalized factionalism. It does nothing to contribute to clarity.

Anti-Capitalist Movement reduces the key lesson from this complex story to Lenin’s leadership method of “bending the stick”; “of focusing on the key tasks in the current situation to the exclusion of all secondary factors and indeed to the point of exaggeration … the price of failing to develop this approach is sectarianism”. The argument is crystal clear. The ISO did not “bend the stick” towards the Seattle movement, and hence became sectarian.

Contemporary research is calling into question this whole take on Lenin and the Bolsheviks. Lars T. Lih has argued that Tony Cliff’s biography of Lenin, where the “bend the stick” thesis is advanced, took one moment in Lenin’s life quite out of context (Cliff 1975; Lih 2006, 22–27). Further, even were we to agree that Lenin frequently did exaggerate to make his point, what exactly does this imply for the very different circumstances we confront in the 21st century? Until 1917, Lenin was almost always in exile. Trade union and party organizers inside Russia operated underground. Activists faced frequent arrests, jail, exile and deportation. The Russian state was a repressive, Tsarist nightmare. The Bolshevik movement in 1905, and then again from 1912 until 1917, was a mass movement, with deep roots and real influence in the working class. Navigating this situation must have been extremely difficult. There would be a premium on tacking and turning, avoiding traps and obstacles, looking for the key next step. Perhaps we might label this tacking and turning, “bending the stick”.

But for small left currents and individuals in the context of advanced capitalism and liberal democracy in the 21st century, it is not at all clear how this has relevance. When groups are on the margins, have little influence, can at best participate in struggles, but rarely lead them, then to invoke “bending the stick” is unlikely to mean much in practice, unlikely to be a factor in changing the direction of the mass movement. In the absence of being able to “bend the stick” in action, there is only one choice left. The stick bending is done in words. The invective and the inflated rhetoric take flight. At best, it is just pretentious. At worst, it becomes a justification for yelling and verbal abuse.[3]

Misleading political economy

The third flawed method underpinning the analysis of Anti-Capitalist Movement is an extremely misleading political economy. Callinicos defends the practice, current in the IST since the early 1990s, of using – in the U.K., North America and elsewhere – the decade of the 1930s as an analogy for the decade of the 1990s (albeit in “slow motion”) (Callinicos 1994; Cliff 2000, 81–82). In 2012 and 2013, for Greece and some of the other countries in Southern Europe, the 1930’s decade has certainly returned as a point of reference. However, the situation in Greece in 2012 and 2013 is one thing and the situation in North America and Britain in the 1990s is quite another. The ISO leadership challenged the 1930s in slow motion framework, Callinicos acknowledges, pointing “to the American boom of the 1990s as a decisive counter-example to the ‘1930s in slow motion’ analysis”.

Surely the ISO leadership had a point. Let’s try to get a picture of the 1930s, and then contrast it with the 1990s. The most basic measure of economic health is the value of GDP (output) per capita, adjusted for inflation. When that figure is rising, then the economy is growing. When that figure is shrinking, so is the economy. The first chart here takes the output per capita for the U.S. in 1929 as 100, and then shows the trajectory of output per capita in the years which followed, from 1930 until 1940. It is an extraordinary picture of decline. By 1933, output per person was almost 30 percent below what it had been in 1929. It was this kind of economic collapse which led to mass unemployment, soup kitchens and bread lines. By the end of the 1930s, output per person was slowly increasing, inching back to where it had been in 1929. But we now know that output per person was finally able to surpass the 1929 figure, and the economy could return to growth, only because of manufacturing gearing up for World War II.

If that is the profile of the 1930s, how does it compare to the 1990s? The second chart applies the method of the first to the decade of the 1990s, and includes three countries, the U.S., the U.K. and Russia. 1990 is used as a baseline, output per capita that year expressed as “100”. For one of the three countries, the 1930’s analogy clearly has some relevance. The chart documents the catastrophic decline of the Russian economy in the 1990s. By 1998, output per capita was barely half what it had been in 1990. The end of Stalinism in Russia and the transition to the market were very big stories in that decade. But Russia’s experience was qualitatively different from that of the U.S. and the U.K. There was decline in 1991 for the U.S., and for 1991 and 1992 in the U.K. But from that point on, the story is the opposite of the 1930s, output per capita rising in both countries. By 2001, output per person, in both countries, was 25 per cent greater than it had been in 1990. Clearly, for those two countries at least, any analogies with the Great Depression of the 1930s would have to be treated with some suspicion. If a fourth country had been added to the picture, the entire analogy would have collapsed. The spectacular economic take-off in China was well underway in the 1990s. In 2001, output per capita in China was an extraordinary 162 per cent greater than it had been in 1990.


Anti-Capitalist Movement insists that, in using the analogy with the 1930s, they were “very careful to stress the differences between the 1930s and the 1990s”. The truth is, once the 1930s analogy had been put on the table, being “careful” was going to be difficult. The problem with invoking the 1930s, even with many qualifications, is that, for millions of people, the phrase has real, and instant meaning. It is not ambiguous. “The 1930s” is a headline signifying social and economic collapse. The decade of the 1930s was one of catastrophic economic decline, catastrophic levels of unemployment, catastrophic collapse of living standards, the rise of fascism, the occupation of the factories in the United States, civil war in Spain, horrendous war and social collapse in China – and ultimately the beginning of the Second World War. It was a decade of wars and revolutions, of socialism or barbarism. In that context, Trotsky argued that the objective basis for capitalist crisis was clear for all to see, the objective material for socialism was at hand, but what was lacking was subjective – the organized, experienced cadre in the leadership of mass socialist organizations. “The crisis of mankind is reduced to the crisis of revolutionary leadership” (Trotsky 1981, 2). This was a desperate formulation from a desperate decade, misleading but perhaps understandable given the horrors of fascism and the stark failure of the Stalinist parties. That was then. When the analogy with the 1930s was (quite wrongly) applied to the 1990s in the U.K. and the U.S., in such a way as to imply that the only barrier between the 1990’s generation in those two countries and the move towards socialism was a subjective one – in other words, when the bar was raised so high that success was absolutely impossible – then the finger-pointing and divisions soon followed. It became a political economy justification for the inflated rhetoric, invective, factionalism and splits, which proved to be very damaging.

It is also not hard to see the way in which a viewpoint fixated on the lessons of the 1930s might also lead to unrealistic expectations. Anti-Capitalist Movement argues that, “in the second half of the 1990s the long downturn in class struggle drew to an end”. This would be a logical expectation flowing from a focus on the 1930s – a decade which opened in North America with a deep downturn in working class struggle, a downturn which finally came to an end, in both the United States and Canada, through an explosive wave of strikes and factory occupations (Preis 1972; Dobbs 1972; Palmer 1992, 214–267; Jamieson 1968, 214–275). But while there have been important moments of struggle in Britain and North America, a sober assessment of the state of the workers’ movements in both places would indicate that Callinicos’ assessment was rather inaccurate. This would certainly be the case for the first few years of the 21st century in the United States, where strike levels remained at historic lows, and where most years the rate of unionization was lower than the year before.

The final chart accompanying this article is not the last word on this issue, but it needs to be seriously examined as part of the discussion. By a very basic measure of working class combativity – days not worked because of strikes and lockouts – a clear picture emerges for the United States, the United Kingdom and Canada. There is considerable combativity through the 1970s, underpinning the deep radicalization of that decade. But this slowly declines in the 1980s, then falls precipitously in the 1990s, remaining at very low levels into the 21st century. There is an interesting and important spike in 2000 in the U.S., the year after Seattle. But it is not sustained, and it certainly does not provide – at least as it concerns these three countries – confirmation for the assertion that “the long downturn in class struggle drew to an end”.


Conclusion

Twelve years ago, just before the expulsion of the ISO, this author (at the time a member of the IST) and Paul D’Amato (a leading member of the ISO, and managing editor of the International Socialist Review) both travelled to Jakarta, Indonesia, to participate in a small anti-globalization conference. The conference was physically attacked by an armed group of right-wingers, aided and abetted by the armed forces of the Indonesian state. Paul and myself, along with some 30 other activists – after a long ride through the crowded streets of Jakarta, crammed onto the back of an army truck – ended up spending a night on the floor of a Jakarta police station, our passports seized and under threat of arrest (Wearmouth et al. 2001). Following a weekend of protests both inside and outside Indonesia, we got our passports back, and the threat subsided.

But at the time, in the face of the overwhelming Global South challenges confronting the poor and the working class in Indonesia, the Global North differences between the IST and the ISO receded into the background. In fact it was impossible to even begin to explain the nature of the division to the activists in Jakarta. They participated with us in conference discussions, formal and informal, worked with us shoulder to shoulder against the repression of the Indonesian state, and drew the quite correct conclusion that our politics were, for all intents and purposes, identical. If there is one single lesson from the last twelve years, that experience in Jakarta probably frames it best.

Sometimes there are meaningful political differences. But to sort out the meaningful from the meaningless, we need to reject methods which serve to artificially inflame and exaggerate. In other words, we have to reject the methods employed in Anti-Capitalist Movement.

In 2006, three Palestinian rights’ activists, leaders of the Boycott, Divestment and Sanctions (BDS)  movement, outlined a helpful alternative approach. “The roots of sectarianism” they said “lie in fetishizing minor programmatic differences and organizational forms ahead of the interests of the movement as a whole”. As an alternative, “[w]e need to change the way we relate to each other, realizing that building unity in practice is our most powerful weapon. … [T]he best political line is something developed through a common political practice – not bequeathed to the movement from historical texts” (Hanieh, Jamjoum, and Ziadah 2006).

© 2013 Paul Kellogg

Endnotes

[1] Those who wish to understand just how sectarian Healy was, should examine the little pamphlet, Politics as Religion (Hallas 1974) written by the late Duncan Hallas, a key article from which “Building the Leadership”, is now available online (Hallas 2008).

[2] There was another key issue involved late in the dispute, an allegation that the ISO was involved in a split in the Greek section of the IST (Birchall 2011, 549), an allegation which pushed many to vote with the SWP CC. In 2012, I had the privilege of attending an ISO public meeting addressed by Antonis Davanellos (2012), leading member of one of the groups in question, the International Workers Left (DEA). This connection with the DEA was invaluable in providing material for an article on the crisis wracking the Southern Mediterranean (Kellogg 2012). It also made it quite clear that, in 2001, we were all operating with very partial information. In any case, the bulk of the polemic in 2001 was focused on the issues discussed here, Seattle and anti-war work.

[3] This analysis relies on research developed by Abigail Bakan (2009).

References

Bakan, Abigail. 2000a. “After Seattle: The Politics of the World Trade Organisation.” International Socialism II 86 (Spring): 19–36.

———. 2000b. “From Seattle to Washington: The Making of a Movement.” International Socialism II 87 (Summer): 85–94.

———. 2009. “Party, Movement, Class: Gramscian Reconsiderations and the Case of the BDS Movement.” Conference Paper, Seventh International Conference, Rethinking Marxism: New Marxian Times. University of Massachusetts, Amherst.

Barghouti, Omar. 2011. “BDS: The Global Struggle For Palestinian Rights.” Socialism 2011. Chicago: WeAreMany.org.

Birchall, Ian. 2011. Tony Cliff: A Marxist for His Time. London: Bookmarks.

Callinicos, Alex. 1994. “Crisis and Class Struggle in Europe Today.” International Socialism II 63 (Summer): 3–47.

———. 2001. The Anti-Capitalist Movement and the Revolutionary Left. London: Socialist Workers Party.

Cliff, Tony. 1975. Lenin Volume 1: Building the Party. Lenin. London: Pluto Press.

———. 1979. Lenin Volume 3: The Bolsheviks and World Communism. London: Pluto Press.

———. 2000. Marxism at the Millennium. London: Bookmarks.

Davanellos, Antonis. 2012. “Greece After the Elections.” Evening Plenary, Socialism 2012. Chicago: WeAreMany.org.

Dobbs, Farrell. 1972. Teamster Rebellion. New York: Monad Press.

George, Erin. 2001. “300,000 March Against the G8.” Rabble.ca. July 26.

Hallas, Duncan. 1974. Politics as Religion: The Degeneration of the Fourth International. Highland Park, Michigan: International Socialists.

———. 2008. “Building the Leadership (October 1969).” Marxists Internet Archive. February 24.

Hanieh, Adam, Hazem Jamjoum, and Rafeef Ziadah. 2006. “Challenging the New Apartheid: Reflections on Palestine Solidarity.” Left Turn – Notes from the Global Intifada. June 1.

ILO. 2010. “Strikes and Lockouts – 9C Days Not Worked, by Economic Activity.” LABORSTA Labour Statistics Database. Geneva: International Labour Organization. http://laborsta.ilo.org/.

Jamieson, Stuart Marshall. 1968. Times of Trouble : Labour Unrest and Industrial Conflict in Canada, 1900-66. Ottawa: Task Force on Labour Relations.

Kellogg, Paul. 2012. “Greece in the Eye of the Storm (the Greek Left, SYRIZA and the Limits of the Concept of ‘left Reformism’).” Links, November 18.

Kimber, Charlie, and Alex Callinicos. 2013. “The Politics of the SWP Crisis.” International Socialism II 140 (Autumn).

Lih, Lars T. 2006. Lenin Rediscovered: What Is to Be Done? in Context. Leiden: Brill Academic Publishers.

Nader, Ralph. 1999. “Seattle and the WTO.” The Nader Page. December 7.

Palmer, Bryan D. 1992. Working-class Experience: Rethinking the History of Canadian Labour, 1800-1991. Toronto: McClelland & Stewart.

Panitch, Leo. 1987. “Working Class Politics in Capitalist Democracies”. Lecture Notes, Graduate Course. Department of Political Science, York University.

Preis, Art. 1972. Labor’s Giant Step: Twenty Years of the CIO. New York: Pathfinder Press.

Ritsema, Noreen Mae. 2011. “Rabble Turns 10! Our Story: Launching During the Quebec City FTAA Protests.” Rabble.ca. April 16.

SWP. 2009. “Theory & Discussion.” Internet Archive. November 25.

Trotsky, Leon. 1937. The Lessons of October [1924]. New York: Pioneer Publishers.

———. 1981. The Death Agony of Capitalism and the Tasks of the Fourth International [1938]. New York: Labor Publications.

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U.S. Bureau of the Census. 1975. “Chapter A: Population.” In Historical Statistics of the United States, Colonial Times to 1970. U.S. Dept. of Commerce, Bureau of the Census.

UNdata. 2012a. “Population.” National Accounts Main Aggregates Database. Washington, D.C.: United Nations Statistics Division. http://unstats.un.org/.

———. 2012b. “GDP, at Constant 2005 Prices – National Currency.” National Accounts Main Aggregates Database. Washington, D.C.: United Nations Statistics Division. http://unstats.un.org/.

Wearmouth, Alexis, Paul Kellogg, Tom O’Lincoln, and Giles Ungpakorn. 2001. “On the Edge of the Abyss.” Socialist Review 254 (July).

I fought the Google, and the Google won: the Genesis of PolEcon.net

Apologies to the Clash, the Bobby Fuller Four, and especially Sonny Curtis and The Crickets. • Since 2007, I’ve maintained a little blog, formerly known as PolEconAnalysis.org. It’s gone. You are at its successor, PolEcon.net. You’re reading this, so you’ve arrived here. Welcome. A little explanation is in order.

Blogging is almost free. In the case of this blog, it has been hosted from 2007 to the present, at no charge, at Blogger.com. To give it a recognizable handle, I decided to pay $10 a year for the domain name “PolEconAnalysis.org.” That’s it. Self-publishing has become really possible and really accessible.

However, that domain has to be renewed once a year and, well, I forgot. Life sometimes does interfere with commentary. The attempt to fix the error took me deep into the bowels of the Corporate Internet. It was an interesting trip.

First challenge – find a live person. You won’t (or at least I couldn’t). There is apparently no landline. Emails remain unanswered. Help sites are better labeled “unhelp” sites. One told me to contact the web-hoster GoDaddy, the company which manages domain names for Blogger. I got hopeful. GoDaddy has a landline. I reached a person. He was very sympathetic. But he couldn’t help.

“Sorry. You didn’t buy direct from us. You need to contact Blogger.”

“But Blogger said to contact you.”

“Sorry.”

Next mistake – wait a week. At the end of that fateful week, the issue was no longer GoDaddy. My old domain opened up into another person’s blog – a dummy blog with no content – but a blog nonetheless. I got worried. I went back to GoDaddy. At least they had a landline.

“Tell me what’s happening, please.” They took pity.

“I’ll check,” said the fine young man on the phone.

The results of his research? “It’s a live domain, sir. Someone else owns it.”

I got scared. I had been pirated. My old domain gathered into the arms of a domain name harvester. I went back to the old domain. It was even worse. The pirate who purchased it had stolen my blog summary, “analysis and commentary with a political economy slant.” This was a disaster. How much would it cost to buy it back? Probably more than $10. Maybe I could sue? Maybe I could get a loan? Maybe I could get one of those six-month zero-interest credit card deals? Maybe I could get a home equity line of credit?

Then I got angry. I had really stepped into it, and was mired in the unsavoury underbelly of the world of intellectual property, and about to become a victim of someone else’s attempt at scamming a bit of money. It’s just a name. Who cares? Start over. Ten dollars later, I was the owner of PolEcon.net, a little humbler, a little wiser, and with a little work to do to re-establish connection with folks who read these articles.

Then, I got curious. What are the contours of this vortex into which I had been drawn? What is this company with unhelpful help sites and no landlines? Probably a shoestring operation. Probably unable to afford landlines. Probably living hand to mouth.

That might have been the case a few years ago. Back in 1999, a San Francisco company called Pyra Labs, launched Blogger. Pyra was made up of “three friends … trying to make our own grand entrance onto the Internet landscape … we created Blogger, more or less on a whim.” These three friends carried on through the dot-com boom at the turn of the last century, and “then the bust happened, and we ran out of money” (Blogger). So bad was the bust, that the entire staff was laid off in late 2000. That would explain the absence of a landline.

Except a little cash came to the rescue. In 2003, for an undisclosed amount of money, Pyra Labs was purchased by Google, and Blogger became part of the growing Google empire (McIntosh 2003).

But then, at the time, using the word “empire” was a little bit of a stretch. Google itself only filed for incorporation in 1998 (Google). I heard about it first from my late father-in-law, who called me into his study: “Paul Kellogg. Have you heard about this thing called ‘Google’?” I hadn’t. I listened patiently, but concluded that it was little more than a novelty, or a party trick.

Many agreed. When Google purchased Blogger, there were quite a few sceptics. The only source of revenue for a search engine like Google, is from advertisements, and a common opinion voiced at the time was that “advertising doesn’t support many dot-com Web sites.” The author of that analysis, writing at the time of Google’s purchase of Blogger in 2003, worried that “Google may be stepping down that well-trodden portal path” and asked: “Five years from now, will googling be just an answer to a trivia question” (Morochove 2003)?

The unease did not go away quickly. In 2004, Google decided to “go public,” selling shares in itself through an Initial Public Offering (IPO). In the run-up to the IPO, there was lots of negativity. In August, 2004, one writer commented that “one big brokerage house has already pulled out of the highly anticipated public offering, and many more are grumbling about the large workload and low margins” (Martinez 2004).

Google did, in fact, stumble out of the gate. Originally hoping to sell 25.7 million shares, it had to drop that figure to 19.6 million. It had to cut the cost per share drastically, from a range of $108 to $135 a share, to a range of just $85 to $95. As a result, instead of the hoped for take of $3.6-billion (U.S.), the Google owners were going to have to settle for a mere $1.86-billion (McCarthy 2004).

But don’t shed a tear for poor little Google. The chart here tells the story. August 19, 2004, a share in Google was worth $102.37. That price rose to $280, August 19, 2005; $383.36, August 19, 2006; $500.04, August 19, 2007; and soaring to a high of $741.79, November 7, 2007. It was pulled down to earth during the recession of 2008-2009, share prices falling to $292.96 by November 3, 2008. But February 1, 2012, Google shares were back up to $604.64 (Yahoo! Finance 2012a), giving Google Inc. an enterprise value of $159.48 billion and a market capitalization of $196.6 billion. It had annual revenue of $37.9 billion, gross profit of $24.72 billion, net income of $9.74 billion with $43.33 billion of cash on hand (Capital IQ 2012).

It seems that Google (and Blogger) could actually afford a landline. Maybe they are hesitant about installing one because, once you start to hire people, some of that net revenue might just disappear. Or maybe the new economy is not just about the Internet. Maybe the new economy is also about replacing people with computers and machines (although to be fair, Google does employ 32,467 full-time employees) (Yahoo! Finance 2012b).

How do do they make all that money? That question is answered with just one word – advertising. In 2010 and 2011, advertising comprised fully 96% of Google’s revenues. In 2009, that figure was 97% (Google Inc. 2011, 10). And as is well known, this is “targeted advertising,” shaped to the individual user through the masses of data Google has gathered about us, and our Internet-browsing habits.

They keep urging all of us in the blogging community to get in on the action. “Monetize your blog” they say. They will sculpt ads according to the information they glean from the articles written here, and the people who read them.

Could become a clearing-house for books on ALBA (the Bolivarian Alliance for the Americas), or maybe Joel Bakan’s film “The Corporation.” Maybe get a cut from sales of Frantz Fanon and W.E.B. Dubois. I wonder if there are ads ready to go for C.L.R. James and Raya Dunayevskaya? How’s the market for chachkas from Venezuela, Cuba, Bolivia, Palestine?

No, no – this is not about money, it’s about “analysis and commentary with a political economy slant.” We’ll pick up the thread from last year’s conversations, and carry on.

And corporate or not, – it’s still only $10. I’ll do a little blogging, tell a few stories, and see who’s interested. It won’t be a problem to reconnect with former readers. I’ve got lots of email addresses, and I’ll send out a bunch of messages.

From my Gmail account, owned by Google.

Suppress that thought – return to the story. Please look at the Youtube videos, which appeared at the beginning of this article. The title of this blog entry is a rip-off from the title of a great song. The Clash version from 1979 is the one I knew. The original was from 20 years before that. The third version here, a reprise done in 2003, is just priceless.

Oh yes – Youtube is owned by Google, purchased October, 2006 for $1.65 billion (U.S.) (Thaw 2006).

Not to worry. I’ll bypass both Gmail and Youtube. I’ll do an end-run around Google. I’ll contact my Facebook friends, and we’ll all soon be back in touch. Facebook isn’t owned by Google. It’s owned by that 20-something guy in the U.S. They did a film about him.

Oh yes – Facebook is about to go public – rumours are it will be a $100 billion affair, and will instantly create 1,000 millionaires (Bensinger 2012).

Welcome to the Corporate Web.

© 2012 Paul Kellogg

References

Bensinger, Ken. 2012. “IPO to Create 1,000 Millionaires; Facebook Tiny Stake Pays Off Big Time for Workers.” The Gazette, February 12.

Blogger. “The Story of Blogger.” Blogger.com.

Capital IQ. 2012. “Google Inc. (GOOG), Key Statistics.” Yahoo! Finance.

Google. “Google History.” Google Company.

Google Inc. 2011. Form 10-K. Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. United States Securities and Exchange Commission.

Martinez, Michael. 2004. “Google IPO Irks Wall Street.” The Ottawa Citizen, June 29.

McCarthy, Shawn. 2004. “Less-hopeful Google Slashes IPO Price, Cuts Share Supply.” The Globe and Mail, August 19.

McIntosh, Neil. 2003. “Google Buys Blogger Web Service.” The Guardian, February 18, sec. Business.

Morochove, Richard. 2003. “Will Search for Revenues Destroy Google?” The Toronto Star, March 10.

Thaw, Jonathan. 2006. “Google Buys YouTube for $1.65B U.S.” The Gazette, October 10.

Yahoo! Finance. 2012a. “Google Inc. (GOOG), Historical Prices.” Yahoo! Finance.

———. 2012b. “Google Inc. (GOOG), Profile.” Yahoo! Finance.

Debt crisis in the U.S. – the issue is warfare, not welfare

JULY 26, 2011 – As July came to an end, the United States central government had come up against its congressionally mandated debt ceiling. Without an agreement to raise that debt ceiling – last set at $14.3-trillion – the U.S. central government will be unable to borrow money to pay its bills. The consequences could be extremely serious – soaring interest rates, a collapse of the U.S. dollar, not to speak of social security stipends, pensions and salaries going unpaid.

The barrier to raising the debt ceiling comes from the sudden rise of a new right-wing in the Republican Party. The 2008-2009 Great Recession has not yet, unfortunately, led to the creation of a mass new left in the United States. Instead, anger against capitalism has been politically captured by the far right in the so-called “Tea Party” movement. Deeply reactionary and with barely disguised racist undertones, the Tea Party conservatives have a simple answer to the ills facing the U.S. – too much government, too many taxes.

This simplistic message captured first the Republican Party, and then the House of Representatives, last year’s congressional elections seeing the House fall under the control of a Tea Party dominated Republican Party.

These Tea Party Republicans will not countenance raising the debt ceiling unless big steps are taken to deal with the U.S. deficit. And they are insisting that this happen without any increase in taxes.

There is an enormous deficit problem in the U.S. central government. The $14.3 trillion debt figure, so much in the news, is the result of a decades-long practice of spending, every month, far more than comes in from revenues. The chart at the end of this article documents this clearly.[1] Through all of the 1980s and most of the 1990s, deficits as a percent of receipts became quite high, twice reaching annual rates of 30 percent. For comparison’s sake, that would be like an individual making $3,000 a month, and every month supplementing that with about $1,000 on a credit card.

In the context of the economic boom of the 1990s, there was a brief reversal of this trend, the last four years of the Bill Clinton presidency and the first year of the presidency of George W. Bush actually seeing revenues exceed expenditures. But from 2002 to the present, there has been a return to deficit spending, peaking first during the height of the Iraq war, and then soaring in the context of the 2008-2009 recession. At its peak in 2009, deficits soared to 70% of revenues. Remember that person bringing in $3,000 a month? Now s/he would be taking out cash advances of $2100.

But is it really credible to try and fix this problem without tax increases? The key taxes that need to be addressed are not those paid by individual, but rather those paid by corporations.

In the 1950s, corporations paid 39% of all income taxes. By the 1970s this had fallen to 25%. In the first nine years of the 21st century, the figure was 19%.[2] Making corporations simply pay the share of income tax they did in the 1950s, or even the 1970s, would make a huge dent in the deficit. And in 2011, corporations have the money to pay new taxes. Story after story in the press documents that Corporate America is sitting on record piles of cash.[3]

The Tea Party Republicans will not look at these facts. Instead they are insisting on reducing the deficit strictly through cuts in expenditures. After President Obama’s dramatic speech to the U.S. July 25, CNN commentators summarized what that means – cuts to “the Big Three: medicare, medicaid and social security.”

But what about the “Big One” – warfare? In Canada, about eight per cent of central government expenditures goes towards warfare. That is enough to rank Canada quite high on the list of arms spenders in the world, 13th in the world, according to arms spending experts in Sweden.

But the United States is in a whole other league. Fully 43% of all money spent on arms in the world is spent by the United States government.[4] It means that instead of 8%, a shocking 20% of its budget goes towards the military.[5] But the military establishment is barely part of the discussion for the Tea Party right wing.

Here’s the big problem. If the Tea Party right wing won’t talk about raising corporate taxes and cutting the bloated military budget, neither will President Obama.

In his speech July 25 he talked about “the tough challenges of entitlement and tax reform.” By entitlement, he means exactly what the CNN commentators headlined – medicare, medicaid and social security. The “Grand Bargain” that Obama tried to win this month involved billions of dollars in cuts to these vital social services.[6] He, like the Tea Party Republicans, will not raise the issue of the biggest driver of expenses in the United States – the war machine.

Unlike the Republicans, he does talk about tax increases. But listen closely. He quite rightly wants to roll back the wildly generous tax breaks given, by George W. Bush, to the richest citizens of the United States. But he is not putting on the table the really big item – the need to seriously tax the corporations.

The bitter truth is that both Democrats and Republicans – for all their differences – share two fundamental viewpoints. Both agree that corporate power needs to be nurtured as the only way to drive the economy. And both agree that the U.S. needs to maintain its imperial interests abroad, an empire which will come unstuck without a truly massive arms budget.

Instead, both are insisting that ordinary citizens pay for the deficit and debt – even though these twin problems were created by handouts to corporations, and trillions wasted on sending young men and women to die for corporate profits abroad.

The deficit/debt problem can be dealt with – by taxing the corporations and by attacking the warfare state.

But those demands will have to come from new social movements, independent of Obama and the Democrats.

Part of a series of articles based on a recent trip to the United States


Read next …
‘!Obama, escucha! Estamos en la lucha!’

© 2011 Paul Kellogg

Chart referenced in article

Publishing History

This article has been published as United States: Debt crisis – the issue is the war machine, not welfare,” Links, 27 July.

References

[1] Compiled from Financial Management Service, A Bureau of the United States Department of the Treasury. “MTS: Monthly Treasury Statement: Quick Links – Monthly Receipts, Outlays, and Deficit or Surplus, Fiscal Years 1981-2010.” June 2011.
[2] According to Julie Snider, Investigative Reporting Workshop. “Graphic: Who pays the taxes?” What Went Wrong: The Betrayal of the American Dream. February 7, 2011
[3] For a recent news story covering this phenomenon, see John Melloy. “Firms Have Record $800 Billion of Cash But Won’t Hire.” CNBC. June 22, 2011.
[4] Compiled from Stockholm International Peace Research Institute (SIPRI). “SIPRI Military Expenditures Database.” 2011.
[5] Based on calculations in Paul Kellogg, “From the Avro Arrow to Afghanistan: The political economy of Canadian militarism.” In Greg Albo and Jerome Klassen, eds. Empire’s Ally: Canadian Foreign Policy and the War in Afghanistan. Toronto: University of Toronto Press, forthcoming).
[6] Lori Montgomery. “In debt talks, Obama offers Social Security cuts.” The Washington Post. July 6, 2011.

Message to the U.S. – Blame the Wars, not China

DECEMBER 2, 2010 – There is a growing chorus of voices in the media and the academy singling out the actions of the Chinese state as central to the dilemmas of the world economy. This focus finds its most articulate presentations, not in the xenophobia of the right, but in the polite analysis of many left-liberals. Paul Krugman, for instance, writing in the run-up to November’s G20 summit in South Korea, praised the United States’ approach of creating money out of nothing (“Quantitative Easing”) as being helpful to the world economy, and criticized the Chinese state’s attempts to keep its currency weak as being harmful. “The policies of these two nations are not at all equivalent,” he argues, adding his influential voice to the chorus which is increasingly targeting China for the world’s woes.[1] Krugman’s, however, is a simplistic analysis which overlooks the role of the U.S. over decades in creating huge imbalances in the world economy, and has the dangerous effect of scapegoating one of the poorest nations of the world (China) for the problems created by the world’s richest.

Krugman’s argument proceeds through a sleight of hand. He objects to the attempts by the Chinese state to keep down the value of its currency – the yuan – as a series of policies whose “overall effect … on foreign economies is clearly negative.” This is a common theme – China’s “weak-yuan” currency being good for China (making its exports cheaper in world markets) and bad for the rest of the world.

But there is a problem. By his own admission, the U.S. policy of creating money out of nothing will result in a “weaker American dollar.” What he doesn’t say, but what is implicit in his analysis, is that this U.S. policy is identical to China’s – a “weak-yuan” policy in the latter, matched by a weak-dollar policy in the former. Krugman nonetheless lets the U.S. off the hook because, he argues, even though the U.S. dollar is certain to fall in value as a result of the new trillions being created, “that is not the ultimate goal.”

Judging a policy on its intent rather than its effect is disingenuous. Brian Burke’s intent as General Manager of the Toronto Maple Leafs has been to deliver a Stanley Cup to Toronto. Hockey fans are unlikely to forgive him, though, for the fact that his policies see the Leafs sitting, again, near the basement of their conference. However, let’s take Krugman at face value. Why does he see the U.S. policy as good for the world? Because, he argues, “basically, the United States is pursuing a policy that increases overall world demand” and China “is pursuing a contractionary domestic monetary policy, reducing overall world demand.”

Let’s begin with some of the key facts. At the peak of the economic crisis, the United States, Canada, and the European Union had to borrow hundreds of billions of dollars from the rest of the world to finance stimulus programs to stabilize their economies. China also engaged in serious fiscal stimulus (relative to GDP virtually on the same scale as the United States)[2], but unlike the North American and European powers, it was able to do so without borrowing a penny from the rest of the world.[3]

One of the reasons the U.S. had to resort to large-scale foreign borrowing, was because of years of high levels of central government deficit spending. Charts accompanying this analysis can be found at the end of the article. The first one shows the last twenty years of central government spending, a story of only momentary surpluses and a “norm” of deficits in the hundreds of billions of dollars – in 2009 and 2010 in the wake of the financial crisis, passing the one trillion dollar mark.[4]

Because the United States central government had been running very large deficits for years, borrowing on a large scale was inevitable to do the very necessary work of trying to “stimulate” the economy at the peak of the crisis in 2009. But with these deficits pushing debt levels very high very quickly, there has been increasing nervousness about both deficits and debts getting out of hand. Enter, “Quantiative Easing.” As an alternative to creating more government debt, the world’s most powerful economy can, for the moment, simply “create more money,” push it into the economy, and hope that this has the desired stimulus effect.

Krugman assesses the merits of these actions solely on their effect on world demand. But is this a sufficient criteria? There are all sorts of policies pursued by the U.S. over generations which have increased overall world demand. One in particular comes to mind. The U.S. central government has for a long time been the centre of military expenditure in the world, and its role as such is accelerating. In 1990 its military expenditures represented 36.19% of the military expenditures in the entire world. By 2009, its military expenditures had grown to fully 44.13% of world military expenditures. In other words, almost half of the money spent on war in the world is spent by the U.S. state.

This huge infrastructure of planes, missiles, bases, tanks, guns, ammunition and personnel has a powerful effect on demand in the world economy. For instance, “the U.S. military is the single largest consumer of energy in the world.”[5] This might be bad in terms of global warming. Nonetheless gobbling up millions of barrels of oil certainly helps stimulate world demand for petroleum. The trillions spent on war and militarism do meet Krugman’s criterion in that they “stimulate world demand.” But they do so in perverse ways. In particular, they are the principal reason for the desperate fiscal weakness of the U.S. central government, documented above, fiscal weakness which is driving the move to Quantitative Easing.

Let’s try on three different scenarios to examine the relationship between military expenditures and U.S. deficits. Begin with one aspect of arms spending, the “War on Terror.” Launched in 2001 it has had three components – Operation Enduring Freedom (the war in Afghanistan), Operation Iraqi Freedom (the war in Iraq) and Operation Noble Eagle (beefing up U.S. military bases and homeland security). The official bill to-date for this “War on Terror” is almost identical to the amount of money created in the first round of Quantitative Easing – $1.1 trillion dollars.[6] This is probably an understatement, perhaps a gross understatement. Joseph Stiglitz and Linda Bilmes estimate that the true cost of the war in Iraq alone will be in excess of $3 trillion.[7] However, for arguments sake we will take the official figures. If those official figures are removed from the books (scenario 1) – that is, if we see what the picture would be like had the War on Terror not been launched – then a change begins to take place in the picture of U.S. deficit spending. It doesn’t eliminate the deficit problem. But it does lessen it, to the extent that as late as 2007 – the year the financial crisis first revealed itself – the U.S. central government would have actually have run a modest surplus.

But the War on Terror is just the tip of the iceberg. The United States, as documented above, spends money on the military at a rate far greater than any country in the world. In 2010 for instance, the War on Terror costs of $130 billion were dwarfed by the $534 billion spent on other aspects of the military. Since 2006, the total “defence” budget of the U.S. has been over half a trillion dollars. By 2011 it is projected to be closing in on three quarters of a trillion dollars. Now imagine a pacific instead of a militaristic United States. In other words, see what the picture would be like without sustaining this massive war machine. When this military spending is removed (scenario 2), the picture of the U.S. central government budget is completely different.

In 2009 and 2010 there are of course quite large deficits. This is the normal “Keynesian” turn to deficit spending that occurs in any economic downturn. What is remarkable however, is the fact that in terms of non-military spending, before 2009 and 2010, there would have been no deficit whatsoever. In fact in many years there would have been surpluses, twice (in 2000 and 2007) touching half a trillion dollars. With a budget history for the last 20 years resembling this graph, a pacific U.S. government could have spent billions on its stimulus package, without borrowing a dime. Stimulus could have been completely financed out of accumulated surpluses from the last 20 years.

And in fact, this understates the situation. Many of the costs of the U.S. bloated war budget are hidden. It would take a team of forensic accountants with unlimited time and unlimited funds to sort through government finances and corporate balance sheets to tease out the actual costs of sustaining the world’s biggest military, and the world’s only truly global empire. But there are two “non-defence” line items that we can say with certainty are directly related to the U.S. military. Veterans Affairs spending is extremely high in the U.S. precisely because so many young people have come back maimed and broken through U.S. military adventures abroad. And the space program is a barely disguised excuse to develop and test the rocket technology that is the backbone of the U.S. nuclear arsenal. When these two are factored in (scenario three), the picture is breathtakingly clear.

The U.S. central government deficit problem has one source – addiction to war and empire. That addiction has led to borrowing on an unprecedented scale, making it impossible for the U.S. to stimulate its economy through accumulated savings and making it increasingly nervous about the accelerating practice of borrowing on a mass scale. The Quantitative Easing approach – creating money out of nothing – has been made inevitable by the massive deficits used to sustain empire abroad.

Return, then, to Krugman’s argument. If we only have one criterion by which to assess this – the creation of demand in the world economy – then there is no problem here. Massive levels of arms spending create demand. Years and years of arms-related U.S. budget deficits do “stimulate” the world economy. But downing two or three pots of coffee in one setting will similarly “stimulate” a person’s metabolism. That doesn’t mean it is a recommended method by which to obtain our nutrition.

Obviously “the creation of demand” is not the only criteria we should use. When trillions are spent, it is useful to us ordinary folk when these trillions are spent in productive ways – on homes for the homeless, on childcare, on healthcare, on education, on infrastructure, on subways, on clean energy, on water purification in the Global South – the list is endless. But when the trillions are wasted on grenades, nuclear weapons, M-16 rifles, nuclear submarines, aircraft carriers and all the other paraphernalia of the U.S. killing machine – this is ultimately the equivalent of taking those trillions and flushing them down the toilet. It is “investment” which leaves nothing behind – except nuclear waste that future generations will have to dispose of, deadly munitions that will exist for generations to maim and kill peasants in the field, and broken bodies and minds chewed up in endless wars. The creation of “demand” is not the only criteria. It matters – and it matters desperately – exactly what kind of “demand” we are feeding.

And think this through. This creation of money from nothing will systematically drive the U.S. dollar lower relative to other currencies. For those holding billions (and in some cases trillions) of U.S. dollar denominated debt, the devaluation of the U.S. dollar means a devaluation of the worth of their holdings. In effect, the United States through Quantitative Easing is forcing the rest of the world to pay for its empire, to pay for the costs it has incurred through sustaining a bloated Permanent Arms Economy.

It is irresponsible to assess the value of the policies of the U.S. and Chinese governments by narrowly focussing in on momentary decisions related to their currencies, and by pretending that these policies happen in a vacuum. There is a history to the current predicament of the United States, a predicament of its own making. When put in this bigger context, the message that must be sent to Krugman and others making similar arguments is quite clear: blame the wars, not China.

Previous:
Currency Wars and the Privilege of Empire
Another G20 Summit: The new club of ‘hostile brothers’

Charts referenced in the article


(c) 2010 Paul Kellogg

Publishing History

This article has been published as “War and the Global Economic Crisis: Blame America’s War Economy rather than China,” Global Research, 23 December 2010. Also published as “War and the Global Economic Crisis,” Нова српска политичка мисао, 25 December 2010; “Message to the US – Blame the wars, not China,” Links, 2 December; “Message to the U.S. – Blame the Wars, not China,” The Bullet No. 444, 23 December.

References
[1] Paul Krugman, “When China Exports, Everyone Pays,” Truthout, 4 November, 2010.
[2] Eswar Prasad, “Assessing the G-20 Stimulus Plans: A Deeper Look,” Brookings, 2 December, 2010.
[3] Joseph Trevisani, “While Many Countries Must Borrow, China and Japan Can Fund Their Own Stimulus,” Seeking Alpha, 28 January, 2009.
[4] Figures for this and the next three charts (Scenarios 1-3) are primarily derived from “Budget of the United States Government: Historical Tables Fiscal Year 2011: Table 4.1 – Outlays by Agency, 1962-2015.” For the years 2001 to 2010, the charts are based on figures in Office of the Under Secretary of Defense (Comptroller) / CFO, United States Department of Defense Fiscal Year 2011 Budget Request: Overview, February 2010: 1-1. The latter differ slightly from the former, but have the advantage of explicitly incorporating the military portion of the War on Terror, euphemistically referred to as “Overseas Contingency Operations.”
[5] Sohbet Karbuz, “US Military Energy Consumption – Facts and Figures,” Sohbet Karbuz, 20 May 2007.
[6] Amy Belasco, “The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11,” Congressional Research Service, 2 September 2010: 1 and 3.
[7] Joseph E. Stiglitz & Linda J. Bilmes, “The true cost of the Iraq war: $3 trillion and beyond,” The Washington Post, 5 September 2010.

Currency Wars and the Privilege of Empire

OCTOBER 23, 2010 – In uncertain times, the headline was soothing – “Secretary Geithner vows not to devalue dollar.”[1] United States Secretary of the Treasury Timothy Geithner was saying, in other words, that if there were to be “currency wars” – competitive devaluations by major economies in attempts to gain trade advantage with their rivals – the United States would not be to blame. Who, then, would be the villain? China, of course. Earlier this year, Democratic Party congressman Tim Murphy sponsored a bill authorizing the United States to impose duties on Chinese imports, made too inexpensive (according to Murphy and most other commentators) by an artificially devalued Chinese currency. “It’s time to deliver a strong message to Beijing on behalf of American manufacturing: Congress will do whatever it takes to protect American jobs.”[2] But the Geithner balm and the Murphy hyperbole are simply matching sides of a deep hypocrisy. For three generations, the United States has leveraged its position as the centre of empire to print dollars with abandon, devalue at will, and “debase” its currency at a rate impossible for any other economy. But the privileges of empire are starting to unravel, and the U.S. economy is wallowing in the consequences of 60 years of irresponsible monetary policy. Emotional attacks on China are simply a cover for problems deeply rooted in the U.S. itself. One part of that is a long history of currency wars, where the U.S. dollar has been used as a weapon in a manner without parallel in the modern world economy. That story has four aspects – Bretton Woods; the Nixon Shock of 1971; Petrodollars; and Quantitative Easing. This article will look at each in turn.

1. “Good as Gold” at Bretton Woods

To get to the first aspect of this story, you have to dial the film back to the restructuring of the world economy out of the ruins of the Second World War. In 1944, as that catastrophe was winding to a close, representatives of 44 allied nations met in Bretton Woods, New Hampshire to try to develop policies to prevent history repeating itself. Prior to 1914, capitalism had by and large been able to develop through exporting its horrors to the Global South – bringing genocide, slavery and the destruction of ancient civilizations to the Americas, Africa and Asia. But from 1914 on, some of those horrors had come home to the heart of the system itself. World wars engulfed the most “civilized” and capitalist powers themselves, first from 1914 to 1918, and then again from 1939 to 1945. Between these two moments of industrialized slaughter was the interlude of the Great Depression – the unprecedented collapse of trade, finance, employment and income, which shattered lives for a decade. It was clear to everyone that these two elements – war and economic collapse – were intimately related, and that to forestall another military catastrophe, deep economic restructuring would be required.

In this context, a once obscure economist emerged into prominence. In 1919, the then 30-something John Maynard Keynes was horrified when the peace treaty imposed by the victorious allies – the Treaty of Versailles – put in place punitive reparations on Germany. Keynes argued that the billions of dollars that were to be stripped out of German society would impoverish and embitter the country, lay the ground for economic difficulties, and for new wars. He captured this in his first major book, The Economic Consequences of the Peace.[3]

By 1944, Keynes was no longer an outsider and critic. This time he was at the table – one of the chief architects of the Bretton Woods’ institutions which were to emerge from this gathering. His ideas were listened to, in part because his warnings in 1919 had been so appallingly confirmed. His argument that economic competition needed to be regulated, that there had to be a central role for the state to mitigate the effects of the boom-bust cycle, and that there had to be institutions which could manage competition at an international level – these ideas were to be taken very seriously, as policy makers everywhere stared back at the horrors which were the alternative.

The Bretton Woods discussions would create the International Monetary Fund (IMF – designed to “administer the international monetary system”) and the International Bank for Reconstruction and Development or World Bank (“initially designed to provide loans for Europe’s post-war reconstruction”).[4]

But two other key goals were not achieved. One has been well-documented. Keynes had wanted an “International Trade Organization” to forestall the vicious trade wars which had broken out in the 1930s. He was not successful on that front. All that could be arrived at was the General Agreement on Tariffs and Trade (GATT), which took until 1995 to evolve from an agreement into an institution in the shape of the World Trade Organization (WTO). The second unrealized objective has received much less attention. It was to establish an “International Clearing Union” (ICU) for use in transactions between countries.[5] The U.S. – enthusiastic backer of much of the Bretton Woods’ discussions – was completely opposed to this. The establishment of an ICU would have sidelined the role of the U.S. dollar in international transactions. Emerging from the war controlling something like half of the world economy, the United States looked forward to the advantages that would accrue to its corporations and government from its new place as the centre of empire. Without an ICU, the U.S. dollar – like the British empire’s pound before it – would almost inevitably become the chief currency for international transactions.

Money is a peculiar thing. It is the necessary link between producers and consumers, employers and workers. It is also something that can be a “store of value.” Accumulate a lot of money, and you can have access to a lot of commodities, or a lot of that most special of commodities, labour power. In the early years of the world economy, precious metals, such as gold and silver, evolved into the material of choice to represent value – scarce enough to be “valuable” in themselves, but abundant enough so they could circulate in sufficient quantities to keep the economy functioning. In states that were sufficiently large and stable, a modification of this system developed. Paper money (probably first used in China more than 1,000 years ago) is essentially a promise that, should the holder so choose, the paper can be exchanged for a certain amount of gold or silver. So precious metals had not disappeared from the equation. They had simply been pushed into the background.

At Bretton Woods, the U.S. argued for and won a particular framework by which money could circulate in the world economy as a whole. It argued that it could guarantee currency stability by a double linkage – world currencies to the U.S. dollar, and the U.S. dollar to gold. Other currencies could price themselves in U.S. dollars, and that would be “good as gold” as the U.S. committed that anyone who wished, could turn in their U.S. dollars in exchange for the real thing – for gold, held at a fixed rate of $35 an ounce.

The establishment of the U.S. dollar as the world’s chief currency for international transactions had some risks. Should everyone with U.S. dollars demand they be exchanged for gold at the same time, the system would be in crisis. But it also held out enormous benefits. A key component of the world economy consists of the international reserves held by each country’s central bank to facilitate economic exchanges between nations. Traditionally, the key component of these reserves was gold. But with the U.S. dollar “good as gold” it became increasingly the practice for central banks to hold U.S. dollars as their international reserve, along with and increasingly in place of gold. The U.S. dollar was not the only such currency. Most central banks hold reserves in several of the different major currencies. But since Bretton Woods, by far the dominant currency held in central banks has been the U.S. dollar. Charts mentioned in this analysis are available at the end of the article. The first chart[6] shows that this remains true into the 21st century. At any one time between 1995 and the present, U.S. dollars represent some 60 to 70 per cent of allocated international reserve holdings throughout the world.[7]

There are some important qualifications to be given to these percentages. First, these figures are provided “on a voluntary basis” from the 140 countries participating in the IMF process which compiles them. Second, not all international reserves are identified. The percentages here are for “allocated” reserves alone. There is a quite large, and growing, portion of international reserves held by central banks which are “unallocated” because the IMF simply does not know what they are. In 1995, 26 per cent of foreign exchange reserves went into this mystical “unallocated” category. By 2010, that had risen to 44 per cent. These qualifications aside, it remains the case that fulfilling the role of internationally recognized “store of value” for international transactions, requires a huge quantity of U.S. dollars, measured in the trillions. The next chart[8] demonstrates this, showing total foreign exchange reserves, total allocated reserves, and total reserves held in U.S. dollars. The amounts are vast (by 2010 more than $8 trillion in total foreign exchange reserves, of which more than $3 trillion in U.S. dollars) and growing.

This was the first, and centrally important, privilege of empire. The United States, alone in the world economy, had partially broken the link between trade deficits and currency decline. Most countries which run large trade deficits, see their currency decline in value. Less relative demand for an economy’s goods means, normally, less relative demand for that country’s currency. But the United States could partially defy that law. Regardless of demand for U.S. goods, there is always a demand for U.S. dollars, as the principle “store of value” for central banks around the world. As long as the U.S. dollar was “good as gold” it could run – and has run – very large trade deficits, without seeing its currency collapse. The annual trade deficits which the U.S. has been running since 1975 are a downward pull on the value of the U.S. dollar. But that has been significantly lessened by the constant demand for the U.S. dollar as a store of value on an international scale.

It is, then, of some interest, what exactly is represented by the large and growing “unallocated” portion of foreign reserves, pictured above. If that represents a hidden move away from the U.S. dollar towards other currencies, then this long love affair between the world’s central banks and the U.S. dollar might be in jeopardy. If and when that love affair ends, and the U.S. dollar starts behaving like a “normal” currency, the consequences will be profound.

2. The Nixon Shock and the Era of Devaluation

So the first, and still important, privilege of empire was to establish the U.S. dollar as “world money.”[9] But empires do not last forever. The second aspect of United States’ currency wars developed in the late 1960s and early 1970s, as the first signs of the relative weakening of the U.S. empire began to reveal themselves.

Part of the background were the U.S. wars in Indochina. From small beginnings under John F. Kennedy, these wars under first Lyndon Johnson and then Richard Nixon, grew into murderous, destructive and hugely expensive affairs. The U.S. had won the right, through Bretton Woods, to print money almost without impunity. But emphasis here has to be put on the word “almost.” The enormous expenses involved in keeping an army of half a million overseas began to put severe strains on the U.S. economy.

The other part of the background had to do with the defeated powers from World War II. Japan and Germany (and with Germany the rest of Europe) had considerably recovered from the destruction of war. Their economies were growing, and they were not burdened with the cost of empire and war as in the United States. Crucially, the recovering European and Japanese economies were running big trade surpluses, and accumulating growing piles of U.S. dollars. Gold on the open market was trading above $35, but the Bretton Woods’ exchange rate system pegged the U.S. dollar to gold at $35 an ounce. Increasingly, central banks, in Europe in particular, were exercising their Bretton Woods right to convert their U.S. dollars for gold – in effect, gaining access to gold below market value. The dangers to the U.S. economy were very clear, as gold fled the country both to pay for imperialist wars and to meet Bretton Woods obligations.

Secretary of the Treasury John Connally, a life-long militarist and hawk, would not, of course blame U.S. foreign policy adventures for the crisis of his country’s economy. But the other half of the equation he saw absolutely clearly. He argued that action was needed “to head off what the Administration believe[d] to be the most important non-military threat to U.S. national security: economic competition from Japan and Western Europe.”[10]

August 15, 1971, Richard Nixon announced a New Economic Policy. In Japan, it became known as the Nixon Shock. That day, the Bretton Woods system broke down. More accurately, the United States walked away from Bretton Woods. Nixon announced that the U.S. would no longer automatically exchange U.S. dollars for gold at $35 an ounce. In effect, he was removing gold as the standard by which currencies were measured, leading to the current system of “floating” exchange rates. The immediate effect was a steep and stunning decline in the value of the U.S. dollar relative to other currencies. This was precisely the intention of the Nixon Shock. As Time magazine reported in 1971: “American officials who once proclaimed the majesty of the dollar now cheer declines in its price on newly freed money markets, because they hold the potential for helping the U.S. balance of payments.”[11] This was devaluation on a scale about which China can only dream. And it is a devaluation which has continued in the almost forty years since.

A previous article examined some of the statistical challenges in measuring the relative strength of the U.S. dollar.[12] The most common database by which to compare the relative strength of currencies begins in 1973. In other words, it excludes the impact of the Nixon Shock, and in doing so “flattens” the picture, showing only a modest downward trend for the U.S. dollar. But a database with a more complete set of statistics, stretching from just before the Nixon Shock to the present, can be put together from other sources – with figures for the U.S. dollar, the historically most important currency in Asia (the Japanese yen) and the “euromark” (a composite notional currency comprised of the German mark until 1998 and the euro from 1999 on). The result, visible in the third chart[13], is very clear. The U.S. dollar is approximately 1/3 of what it was in 1971, compared to the yen and the “euromark,” and its trajectory is without question down. The reasons for this long-term slide relative to other major currencies are for another paper. But the fact of the weakening of the U.S. dollar is incontrovertible.

It is worthwhile at this point in the analysis to marvel at the arrogance of U.S. policy makers. In 1944, a system to stabilize the world economy was put in place, which had the side benefit for the United States, of privileging its currency as the store of value for central banks around the world, allowing United States’ policy makers to print money almost at will. When this capacity to print money out of proportion to the needs of the economy, in particular to finance murderous wars in Indochina, started to put strains on the system, the United States simply walked away from its obligations. It left the Bretton Woods’ monetary system in ruins, and imposed on the rest of the world a remarkably steep devaluation of its currency, making U.S. produced goods more competitive, and those produced in Japan and Europe less so. We could end the story at this point. The evidence of U.S. manipulation of the world currency system to its advantage is overwhelming, and has a very impressive pedigree. But the story is only half done. There are two other key aspects to the “privilege of empire” still to be examined.

3. Petrodollars: the fuel of empire

The collapse of Bretton Woods led to a short-term devaluation of the US dollar. Other things being equal, it is conceivable that this devaluation could have accelerated into a collapse. However, the death of Bretton Woods was followed by another era in the history of the dollar – that of the Petrodollar. In the early 1970s, the Organization of Petroleum Exporting Countries (OPEC) made the historic decision to invoice the trade of oil in dollars. In part under the direction of then Secretary of State Henry Kissinger, the United States and Saudi Arabia in 1974 launched the “United States – Saudi Arabian Joint Commission on Economic Cooperation.” The key decision arising from this commission was for Saudi Arabia to sell its oil in U.S. dollars. “As the largest OPEC producer, the Saudis used their strong influence in OPEC to persuade other members to follow suit; and they did. In 1975, OPEC announced its decision to invoice oil sales in dollars.”[14]

This meant that there was another reason for every nation to hoard U.S. dollars, whether buying goods from the U.S. or not. To buy oil, you needed U.S. dollars, something which set both oil and the U.S. dollar apart from their equivalents in the world economy. To buy apples produced in Canada, someone outside of Canada in effect has to buy Canadian dollars at the same time. The apples are priced and traded in local (Canadian) currency, so a demand for apples implies a demand for the Canadian currency. But not with oil. To buy oil from Saudi Arabia – or Iran, or Venezuela – you didn’t need access to the currencies of those nations, but rather to U.S. dollars. Increasing demand for oil from these producers, then, meant perversely increasing demand for U.S. dollars. Bessma Momani summed it up as follows.

Since the mid-1970s, the value of the United States’ dollar has been upheld by a number of domestic and international factors. An often underestimated factor is that oil is sold and traded in US dollars. Arguably, having the dollar used as the ‘main invoice currency’ for oil makes the trade of this vital resource the new post-Bretton Woods’ Fort Knox guarantee of the dollar.[15]

Nixon broke the link with gold in 1971, and at first glance that should have led to a very steep and long term decline in demand for the U.S. dollar. But because of the pivotal role of the U.S. dollar in the international oil market – the market for the one indispensable commodity for world capitalism – the decline was mitigated. There remained constant demand for the U.S. dollar because of permanent and rising demand for oil.

The United States again benefited from the “privilege of empire.” They could slow the decline of the dollar because of their still dominant position in the world economy. With a resulting capacity to print dollars far in excess of that of other nations, the United States has been able to continue financing enormously expensive wars abroad, while at the same time running large and growing trade deficits at home. No other country in the world has this kind of capacity.

There were other perverse effects from the creation of a world awash in petrodollars. The oil exporting countries amassed huge quantities of these dollars, far in excess of anything they could spend internally. In the late 1970s and the early 1980s, much of these excess funds “were saved and deposited with banks in industrial countries,” in particular in banks in the United States. “The banks, in turn, lent on a large part of these funds to emerging economies, especially in Latin America. When the oil boom subsided in the early 1980s, bank flows to emerging markets reversed sharply, triggering the Latin American debt crisis.”[16]

That is how the antiseptic language of an IMF working paper outlines the issue. It could be restated as follows. Billions of dollars left the United States, Europe and Japan to pay for oil imports in the 1970s and 1980s. The billions of dollars received by OPEC countries were far in excess of any local consumption and development possibilities (in large part because these countries had distorted development patterns after decades of oppression by the rich countries of the Global North.) So in turn, these billions flowed back to the Global North in the form of massive deposits in particular into U.S., banks. “Nearly 500 billion petrodollars were recycled from oil producers with a capital surplus to countries with trade deficits.”[17]

It didn’t end there. The same processes driving this flow of money – the spike in the price of oil in the 1970s – made it very difficult for developing countries in Latin America to finance their industrialization. They had “balance of payments” problems. Under pressure from the IMF, these countries were encouraged to borrow the petrodollars sitting in the vaults of the Global North banks. These petrodollars were in effect ” ‘recycled’ through the IMF”[18] in the form of loans to countries in the Global South from the excess money sitting in the banks of the Global North. This was aggressively marketed as an alternative to the nationalism and state-led development strategies of the 1960s and early 1970s. When interest rates spiked in the 1980s, the loans incurred became unsustainable, and the economies of Latin America spiraled into a deep crisis.

Billions of dollars slosh through the world economy, enriching states and financial institutions in the Global North, creating short-term frenzies for debt-financed development, and laying the basis for long-term crisis in the developing world. The petrodollar aspect of U.S.-based currency wars is an issue for the poorest countries of the world, not just its richest.

The benefits of the Petrodollar era might be beginning to unravel for the United States. Bessma Momani concludes that it is unlikely that in the short term, the OPEC countries will end their use of the U.S. dollar. But, should the U.S. dollar continue the long decline outlined earlier in this article, there will be increasing incentives to diversify away and into other “stores of value” such as the euro. The consequences for the U.S. would be very serious.

4. Quantitative Easing – Dirty Deeds Done Dirt Cheap[19]

The long decline of the U.S. dollar documented earlier – a decline that is ongoing – is one reflection of the growing relative weakness of the U.S. in the context of the world economy as a whole. This growing weakness was revealed by the harsh impact of the most recent recession on the U.S. economy, one felt much more strongly there than in the other major economies. In the face of this deepest recession in a generation, the fourth and final aspect of U.S.-based currency wars came to the fore. It is without doubt the strangest of any that we have looked at, not the least because of its mysterious name, “Quantitative Easing.”

There are several ways of defining Quantitative Easing. According to the Central Bank of the United Kingdom, it is a way of injecting money into the economy “by purchasing financial assets from the private sector.” How are these assets paid for? Why “with new central bank money.” But where does that money come from? Well, “the Bank can create new money electronically by increasing the balance on a reserve account.”[20] And that’s it. New money is just simply, created. If your balance is $1,000, add a “zero” and it’s $10,000, new money created “electronically by increasing the balance on a reserve account.” Quantitative easing’s “effect is the same as printing money in vast quantities, but without ever turning on the printing presses.”[21] A skeptic would argue that the obscure term “Quantitative Easing” was chosen as less likely to arouse suspicion than a more transparent name such as “Harry Potter money creation.”

When this was policy in Japan in the wake of the deep recession of the early 1990s, it was derided in the U.S. press as something “which essentially stuffed Japanese banks with cash to help them write off huge bad loans accumulated during the 1990’s.”[22] But since 2008, this policy of creating money from nothing has been embraced with passion in the United States. In 2008, the U.S. central bank (the Federal Reserve) “bought $1.7 trillion -worth of Treasury and mortgage bonds with newly created money.”[23] That $1.7 trillion did not exist. It was brought into existence electronically, transferred to the books of financial institutions, in the hopes of pushing that newly minted money into the economy and stimulating growth. That program is now over. There is, however, every prospect that another round of Quantitative Easing will be announced in the coming weeks, with anywhere from $1 trillion to $2 trillion being created electronically to “stuff U.S. banks with cash to help them write off huge bad loans” accumulated in the last 10 years, to paraphrase the sarcastic analysis of Japan’s similar policies.

Whether or not this will stimulate growth is a matter for debate. There are, however, two things we know it will accomplish. First, it will in the long term, accelerate the decline of the U.S. dollar relative to other currencies. Second, as this flood of money depresses interest rates in the U.S., it will put upward pressure on other currencies “as investors rush elsewhere, especially into emerging economies, in search of higher yields.”[24]

Several conclusions need to be drawn here. First and most importantly, there are absolutely no grounds for Timothy Geithner or any other U.S. official to point the finger elsewhere – at China for instance – and try to fix blame for the initiation of currency wars. From blocking the creation of ICUs at Bretton Woods in 1944, to the Nixon Shock of 1971, to the Petrodollar era from 1974 to the present, the United States has demonstrated an unprecedented willingness to intervene in and artificially skew the world’s money markets. With its adoption of Quantitative Easing, it has taken this to a new level, a “shock and awe” approach to the currency wars that makes any actions by China pale in comparison.

Second, the issue of monetary policy cannot be looked at from a strictly economic point of view, but has to be examined with one eye on the economy and the other on politics. The entire economic history of the U.S. dollar is incomprehensible without the political history of U.S. imperialism. The deep distortions in the international monetary system are a reflection of the “privileges of empire” abused by the United States. The decline of that empire and the slow ending of those privileges promise to make the United States pay dearly for these distortions, but only after having wreaked havoc on much of the rest of the world.

But there is another conclusion that needs to be taken seriously, and it is something that can only be broached in this article. Conservative analysts see the history outlined above, and long nostalgically for a return to the gold standard. This is a reactionary and impossible utopia. There are just over 30,000 tonnes of gold held in official reserves around the world.[25] But even at the current high rate of $1250 an ounce, the total value of these reserves would be just over $1 trillion. The world economy is measured in tens of trillions of dollars. Any attempt to anchor the transactions of the world economy to the inflexible and slow-growing physical accumulation of gold that exists in the world would be impossible. A gold standard can simply not allow for the reflection of value in the money supply that is necessary for a modern economy to function.

However, there is an important problem, suggested by the picture sketched out here, that needs to be addressed. The break from the gold standard towards the U.S. dollar, the musing in the 1940s about an ICU, the Harry Potter economics behind quantitative easing – all are the chaotic expressions of attempts to address a very real issue. The value of the goods and services produced in the world need to be measured, reflected abstractly in some unit of measurement, and then that information used to determine investment, production and consumption decisions. The problem is not the attempt at addressing this issue. The problem is, that in a world capitalist system, this attempt is corrupted by private greed, imperialist domination of the Global South, and the militarized designs of the hegemonic state, which means that instead of a reasoned and thought-out approach, we get the dangerous chaos and instability outlined here.

Analytically, this demands taking the issue of money very seriously in anti-capitalist analysis. Marx’s brief comments on it 150 years ago are interesting. Earlier, this article used his term “world money” – money set aside for transactions between national economies in the context of the world economy. Marx argued that it is only here, “in the markets of the world that money acquires to the full extent the character of the commodity whose bodily form is also the immediate social incarnation of human labour in the abstract. Its real mode of existence in this sphere adequately corresponds to its ideal concept.”[26] The emergence of world money under capitalism takes a distorted, fetishized form. But it nonetheless represents something real – a reaching towards an adequate mechanism by which to measure the products of our labour, and redistribute them.

This process is controlled by bankers, industrialists, generals and politicians. Until it is brought under the democratic control of the vast majority – the workers in workplaces, fields and homes who produce all the wealth of the system – this money-form of capital will control us, and throw us into periodic crises which wreck economies and lives.

Next
Another G20 Summit: The New Club of Hostile Brothers
Message to the U.S. – Blame the wars, not China

Charts referenced in the article

(c) 2010 Paul Kellogg

Publishing History

This article was published as Currency wars and the privilege of empire,Links, 23 October.

References

[1] Gennady Sheyner. “Secretary Geithner vows not to devalue dollar.” Palo Alto Online News. 18 October, 2010.
[2] Andrew Clark. “US politicians threaten trade war with China.” guardian.co.uk. 29 September, 2010.
[3] John Maynard Keynes. The Economic Consequences of the Peace. Charleston, SC: BiblioLife, 1995 (first published 1919). Also available online.
[4] Manfred B. Steger. Globalization: A Very Short Introduction. New York: Oxford University Press, 2009: 39.
[5] George Monbiot. “Clearing Up This Mess.” Monbiot.com. 18 November, 2008.
[6] IMF. “Currency Composition of Official Foreign Exchange Reserves (COFER).” www.imf.org. 30 September, 2010. Accessed 19 October, 2010.
[7] Prior to 1999, the euro did not exist, so figures here for 1995 through to 1998 are for a “euro equivalent” – the sum of the old Deutsche mark, the French franc, the Netherlands guilder and the European Currency Unit (ECU), all of which have ceased to exist with the launch of the euro.
[8] IMF. “Currency Composition of Official Foreign Exchange Reserves (COFER).” www.imf.org. 30 September, 2010. Accessed 19 October, 2010.
[9] The concept of “World Money” (sometimes translated as “Universal Money” or “Money of the world”) was developed by Karl Marx in the first volume of Capital (Karl Marx. Capital, Volume I. In Karl Marx and Frederick Engels. Collected Works, Volume 35. New York: International Publishers, 1996: 153-156. Available online). The importance of this concept has been underlined in the contemporary period by David McNally in “From Financial Crisis to World Slump: Accumulation, Financialization, and the Global Slowdown.” 2008.
[10] Cited in Bruce Muirhead. “From Special Relationship to Third Option: Canada, the U.S., and the Nixon Shock.” American Review of Canadian Studies, 34:3, Autumn 2004: 439.
[11] “The Economy: Changing the World’s Money.” Time. 4 October, 1971.
[12] See Paul Kellogg. “The Septembers of Neoliberalism.” PolEcon.net, 29 September, 2008.
[13] Derived from Oanda.com. Accessed 19 October, 2010.
[14] Bessma Momani. “Gulf Cooperation Council Oil Exporters and the Future of the Dollar.” New Political Economy, Vol. 13, No. 3, September 2008: 297.
[15] Momani: 293.
[16] Johannes Wiegand, “Bank Recycling of Petro Dollars to Emerging Market Economies During the Current Oil Price Boom.” IMF Working Paper WP/08/180. July 2008: 4.
[17] David E. Spiro. The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets. New York: Cornell University Press, 1999: 1.
[18] Saleh M. Nsouli. “Petrodollar Recycling And Global Imbalances.” www.imf.org. 23-24 March, 2006.
[19] Apologies to AC/DC. “Dirty Deeds Done Dirt Cheap.” 1976.
[20] James Benford et. al. “Quantitative easing.” Quarterly Bulletin, Bank of England, 2009 Q2: 91.
[21] “Quantitative Easing.” The New York Times. 21 October, 2010.
[22] Martin Fackler. “Economists Are Watchful as Tokyo Ends Loose-Money Policy.” The New York Times. 9 March, 2006.
[23] “It’s all up to the Fed.” The Economist. 14 October, 2010.
[24] “How to stop a currency war.” The Economist. 14 October, 2010.
[25] World Gold Council. “World Official Gold Holdings.” September 2010.
[26] Marx: 153.

Addicted to war: A tale of three corporations

In the unfolding of the current economic crisis, many are looking to the state for help. There has been a sudden revival of state intervention or Keynesianism. But what kind of state intervention? There is a dangerous pattern, established over years, of corporations in trouble turning to “Military Keynesianism” – producing for sale to the armed wing of the state – as a “quick fix” for deep structural problems. Corporations addicted to war are the worst way to fix economic problems – a “solution” which only accelerates pressures to engage in overseas military adventures.

Some corporations are well-known as being embedded in the Military-Industrial Complex. In Bowling for Columbine, Michael Moore identified Lockheed-Martin as the world’s biggest weapons maker, and in spite of the outrage this created from supporters of U.S. imperialism, his statement is probably true.[1] But there are other corporations which are less well-known as arms-manufacturers. Boeing, for instance, while for a long time a supplier to the Pentagon, is usually seen as a largely civilian corporation – the company of the Jumbo Jet. However, in a dramatic evolution since the early 1990s, Boeing has transformed itself from civilian to military production.

Boeing revealed itself as a major military player in the context of the development of the National Missile Defence (NMD) program – better known as Star Wars. Boeing is the “Lead System Integrator” for NMD “responsible for ensuring that all component NMD parts and systems are developed and integrated successfully.”[2] Pushed to the background by the wars in Iraq and Afghanistan, the time-bomb of NMD is still ticking away in the background. Col-Gen Varfolomey Korubushin, first vice-president of the Military Science Academy in Russia, has said, “If the U.S.A. deploys a national missile defence [system], other nuclear powers may opt for increasing their nuclear missile potential, which will worsen the situation in the world.”[3] He should know. After all, his government is a full participant in this burgeoning arms race, in 2005 successfully testing a “missile with a highly manoeuvrable warhead capable of annihilating the national missile defence (NMD) currently being developed by the Americans.”[4]

Boeing’s NMD role was symptomatic of a deep change in the physiognomy of the company. In the early 1990s, fully 80 per cent of Boeing’s revenue came from its sales of commercial planes – the jumbo jets and other passenger planes that are everywhere in the skies of the world. But in the next two years Boeing suffered a serious decline in revenues. In its annual report for 1995 it explained this decline as “due to fewer commercial jet transport deliveries as a result of economic conditions and airline industry overcapacity in most major market areas of the world,” [5] what Karl Marx called “a crisis of overproduction.”

The company’s solution to this problem was revealed in 1997, with its merger with McDonnell Douglas. The merger was driven by one consideration – while Boeing was in its majority a “civilian” corporation, McDonnell Douglas was one of the Pentagon’s prime contractors. Its 1996 Annual Report “At A Glance” section, proudly proclaimed that it was “#1 military aircraft maker, #2 prime contractor and research-and-development contractor to the U.S. Department of Defense, and #4 NASA contractor.”[6]


The chart here shows its evolution through the 1990s, the percentage of its revenues derived from building military aircraft, missiles and other paraphernalia of the U.S. war machine rising from two-thirds to nearly 80 per cent.[7] Now there are some who would challenge the interpretation of these statistics. McDonnell Douglas, for instance, has three categories and not two: “military aircraft,” “commercial aircraft,” and “missiles, space and electronic systems.” But unless you are a “fly me to the moon” romantic, it is pretty obvious that “missiles and space” production is driven by the needs of a war economy, not by visions of Star Trek exploration. If anything, the emergence of Star Wars should make this abundantly clear.


The second chart reveals the resulting transformation of Boeing. From deriving just 20 per cent of its revenues from arms sales in the early 1990s, by 2004 and 2005, arms sales accounted for 60 per cent of its revenues.[8] From 2005 to 2008 that drifted down again to the 50 per cent mark. But that was before the outbreak of the current crisis. The picture is clear – Boeing has attempted to “solve” the crisis of overproduction that was plaguing it in the early 1990s, by turning to a customer with an eternal appetite for commodities – the Pentagon.

The transition to the war economy has succeeded in slowing Boeing’s decline. (But only partially – In 2003, Boeing had to cede to AirBus its position as the world’s largest airplane manufacturer.[9])

AirBus has unveiled its new, massive A380 airliner – the largest passenger jet ever built – capable, in some configurations, of seating more than 800 people. The plane is designed as a “jumbo-jet killer” to displace Boeing’s big 747 at the top of the commercial airline market. Perhaps then we can look to Europe as a place where business is not driven by militarism. This is in fact how spokespeople for the European Union often market their institutions.

Look more closely. AirBus pushed hard to finish work on the A380 to allow its engineers to turn to building a new military transport plane, the A400M. This massive plane is described by Airbus Military as “the most ambitious European military procurement programme ever undertaken.”[10] One commentator said that this, “the biggest joint venture ever in the European defence industry” was “crucial for the credibility of the European Union’s commitment to strengthen its military capability and coordination.”[11]

“Total firm orders for the A400M stand at 192 aircraft,” according to a leading airforce technology web site. Outside of Europe, South Africa has ordered 14. Malaysia has ordered four which could open the door to sales in other Asian countries.[12] European industry, in other words, is just as capable of playing the war production game as is American.

Perhaps this new militarism is particular to the troubled aerospace industry, desperate for sales in a world saturated with expensive to build and maintain airplanes? Turn your attention to the world’s biggest manufacturing corporation, General Motors. GM, as everyone knows, is in trouble. Its current lurch towards bankruptcy has roots that go back years. By the end of 2004, its debt burden had skyrocketed to a mind-numbing $291 billion.[13] In 2005, it recorded losses totaling $10.6 billion.[14] The vast majority of GM’s earnings came from its finance arm, General Motors Acceptance Corp. (GMAC), but to cover its mounting losses, it reached an agreement to sell 51 per cent of GMAC by the fourth quarter of 2006[15]. This staved off problems for a few months, but they came back with a vengeance in 2007 and 2008. February 2008, GM announced 2007 losses of $38.7 billion “the largest annual loss in the history of the auto industry.”[16]

Business analyst Robert Walberg has a solution. GM must, he says, find a “higher margin business with more promising and stable growth prospects.” That business, of course, is the death business. He doesn’t call it that. The nice word for the death business is “defence contracting”. Such a move into war production “could be a good one for the automaker, just as it was for the jet maker Boeing nearly a decade ago.” Walberg is nostalgic for “the 1940s, when GM delivered more than $12 billion worth of war material.”[17] Walberg doesn’t mention that the 1940s was the decade of the most destructive war in human history.

In this tale of three corporations, we have in outline form some of the key elements in the contemporary U.S. and world economy. Industry cannot survive in its traditional markets. Recurring crises of overproduction are driving debt levels higher and higher. In the search for a reliable consumer of last resort, again and again corporations are driven towards arms production. War requires that states purchase massive quantities of expensive to produce weapons and materiel – and if overproduction is the problem, then war with its infinite destructive potential is “the answer”.

It is an economic solution that clearly carries with it huge political and social risks, and very starkly poses the necessity of finding a political solution. The turn to state intervention into the economy is a welcome reprieve from the decades of neoliberalism. But if that state intervention is the intervention of the warfare state and not the welfare state, the dangers for working people around the world are obvious.

© 2008 Paul Kellogg

References

[1] See for instance Andrea Rothman, “U.S. chief executives, Pentagon brass fail to make Paris show,” Chicago Sun-Times, June 17, 2003, p. 54. Rothman without comment and quite uncontroversially, refers to L-M as “the world’s biggest weapons maker.” But this is for the consumption of the readers of the business press. It is one thing for investors to know the truth about who builds what. It’s a little more awkward when that is made available to the public at large.
[2] Kevin Martin, Rachel Glick, Rachel Ries, Tim Nafziger and Mark Swier, “The Real Rogues: Behind the Star Wars missile defense system,” Z magazine, September 2000.
[3] Cited in “Deploying U.S. national missile defence may trigger arms race – Russian expert,” BBC Monitoring Former Soviet Union, February 27, 2006, ProQuest document ID: 994482301
[4] “Russia has successfully tested a warhead,” The Press Trust of India Limited, November 2, 2005, Gale Document Number: A138245614
[5] Boeing, 1995 Annual Report, www.boeing.com
[6] McDonnell Douglas, 1996 Annual Report, www.boeing.com
[7] Based on McDonnell Douglas, Annual Reports, 1994-1996, 2nd Quarter 1997, www.boeing.com. The figures for 1997 represent revenue for the first half of the year only
[8] Boeing, Annual Reports, 1995-2007, www. Boeing.com . Figures for 2003-2007 updated from “Five-Year Summary (Unaudited),” The Boeing Company 2007 Annual Report, p. 21 . 2008 Figures are annualized approximations based on three quarters of results available at “Boeing Posts Lower Third-Quarter Results on Reduced Commercial Deliveries,” News Release, October 22, 2008
[9] Robert J. Samuelson, “The Airbus Showdown,” Washington Post, December 8, 2004, p. A31
[10] Airbus Military, “Final go-ahead for A400M military airlifter,” Press Release, May 27, 2003, www.airbusmilitary.com
[11] Yacine Le Forestier, “Europe’s military aircraft dream takes wing at last,” AFP, May 27, 2003
[12] “A400M (Future Large Aircraft) Tactical Transport Aircraft, Europe,” www.airforce-technology.com
[13] Daniel Gross, “GM’s Debt Crisis,” Slate, Dec. 21, 2004, www.slate.com
[14] “Management’s Discussion and Analysis of Financial Condition and Results of Operations / General Motors,” www.gm.com
[15] David Streitfeld, “GM Agrees to Sell 51% of Finance Unit,“ Los Angeles Times, April 4, 2006, ww.latimes.com
[16] Associated Press, “GM reports biggest-ever automotive loss,” www.msnbc.msn.com, Feb. 12, 2008
[17] Robert Walberg, “GM’s best offense could be defense,” MSN.com, February 3, 2005, www.moneycentral.msn.com

The year ‘laissez-faire’ became profane

Pity the poor priests of laissez-faire (the French phrase associated with the advocates of free market capitalism). They want to name a building at the University of Chicago after Milton Friedman. Milton was teaching there in 1976 when he won the Nobel Prize in economics. But 100 faculty members have signed a petition objecting. One of the 100, Bruce Lincoln told the press: “He was the darling of the Reaganite revolution and the American right … He was a scathing critic of the state playing a role of any importance … It’s now a whole lot more obvious to everyone that [Mr. Friedman] got us into some problems and that he didn’t have the final solution to everything that makes an economy work.”[1] That’s an understatement. The financial markets are breathing thanks only to a $3 trillion injection of public funds.[2] Laissez-faire has never been so discredited.

Others are figuring this out. We saw this in the run-up to the October 14 vote in Canada’s federal election. The Bloc Québécois were expected to lose a fair number of seats when Stephen Harper launched his 2008 bid for a majority. But they roared back into contention, ending up with 50 seats, just one shy of their 2006 result. There were several reasons for this comeback. The Tories alienated Quebec voters with a reactionary attack on culture, and an even more reactionary attack on youth “criminals.” But Bloc leader Gilles Duceppe, before any other leader, figured out that with the crisis wracking financial markets, “free-market” had become a swear word.

• During the French language leaders’ debate October 1, Duceppe charged that “Mr. Harper is a laissez-faire-ist like Mr. Bush and we see the disaster happening in the United States now.”[3]

• October 6, Duceppe demanding a recall of Parliament to debate the economic crisis said that Harper had no clue how to fix the broken economy “It is still the economic laissez-faire of George W. Bush.”[4]

• In Trois Rivières, October 7 he took it further. “With his economic philosophy, Harper is the worst thing that could happen to Quebec. It’s laissez faire … It is exactly like (George W.) Bush’s Republican policies and we see the results today.”[5]

• A week after the election, responding to Tories injecting money into Canada’s banking system, Duceppe said: “I think he [Harper] had to do that, but this is not enough. At first they said there was no problem at all. It was the George Bush laissez-faire (approach), and that was a huge error, with the results that we are seeing now.”[6]

What a sea-change. Starting with the entire Reagan-Thatcher years, and continuing during the so-called “neo-liberal revolution,” we were told that the state had caused all our problems. We were told that the market would cure our ills. We were told that if you let the free market do its work, incomes for the rich would go way up, but incomes for the rest of us would follow, even if at a slower pace. Wealth would trickle down, and incomes would trickle up. Language was easy. State, bad; market, good. “Laissez-faire” – the great slogan of Adam Smith, was a badge to be worn with pride.

Now, just one little $3-trillion bailout later, everyone is quietly hiding those badges. Laissez-faire has become a swear word.

© 2008 Paul Kellogg

References

[1] Cited in Paul Waldie, “He inspired Reagan’s revolution,” The Globe and Mail Report on Business, October 22, 2008, p. B1
[2] According to Barry Ritholtz, cited in Alice Gomstyn, “Bailout Critic: Plan Could Cost $3 Trillion,” ABC NEWS Business Unit, Oct. 13, 2008
[3] “Harper targeted on economy, crime in French debate,” cbc.ca, Oct. 2, 2008
[4] Rhéal Séguin, “Duceppe wants Parliament recalled over economy,” The Globe and Mail, Oct. 6, 2008
[5] “Harper improvising on economy, Duceppe charges,” The Gazette, Oct. 7, 2008
[6] “Ottawa has linguistic double standard: Duceppe,” The Gazette, October 22, 2008

The Septembers of Neoliberalism

It was September 11, 1973, that the neo-liberal experiment began. The brutal U.S.-backed coup against Salvador Allende’s government opened the door for the “Chicago Boys” – a group of Chilean economists who had studied under Milton Friedman at the University of Chicago[1] – to “reconstruct the Chilean economy … along free-market lines, privatizing public assets, opening up natural resources to private exploitation and facilitating foreign direct investment and free trade.”[2] September 7, 2008 – thirty-five years later – that experiment came to an end, not with a whimper, but a bang. The neo-liberal regime of George Bush – more closely identified than any other world figure with the politics of keeping government out of the market – is now presiding over a state intervention into the so-called “free” market that is without parallel. When the dust settles: a) hundreds of billions of dollars will have been spent to try and fix a broken financial system; b) a generation of free-market arrogance and ideology will lie in ruins, its ideological clarion call “neo-liberalism” completely discredited; and c) the U.S. empire will be exposed as a declining (if vicious) beast. The events of September 2008 mark a watershed in the history of capitalism.

Fannie and Freddie

The first act in this story is in many ways still the most significant if not the most dramatic. September 7, 2008, the United States Treasury announced it would seize control of two institutions called Fannie Mae and Freddie Mac. At the time, this represented “the world’s biggest financial bailout” (a record it would only claim for a few dozen hours). The U.S. government pledged to guarantee literally trillions in the two companies’ investments, something that estimates said would end up costing U.S. taxpayers in the order of $25 billion.

What are these peculiarly named institutions? Fannie Mae stands for “Federal National Mortgage Association” and Freddie Mac stands for “Federal Loan Mortgage Corporation.” Both are GSEs – “government-sponsored enterprises,” creations of the U.S. government, but which operate as shareholder run companies. Fannie Mae’s roots go back to the depression-era. It was created in 1938 to “provide funding to the housing market … Freddie Mac was created in 1970 to provide competition to Fannie Mae.”[3]

Their role in the housing market is indirect. Homeowners in the United States borrow money from lenders (banks and other financial institutions) just as in other countries. What Fannie and Freddy do is to buy these mortgages from the lenders. This gives the “mortgage initiators” instant cash, and a little bit of profit, allowing them to go back and quickly offer new mortgages. Fannie and Freddy then turn around and repackage the various mortgages they have purchased as “mortgage-backed securities.” They sell these securities on the secondary mortgage market – in effect borrowing money, but using these “securities” as collateral – counting on the income from the payment of mortgage principle and interest to give them cash to repay these loans.[4]

This “provides liquidity” to the housing market. It also has the effect of creating a huge incentive to get more and more people to buy houses, as at every level of this structure, incomes and profits are dependent on a constantly expanding base of home ownership. In the scheme above, there are massive fortunes to be made – by the banks and other mortgage issuers, by Fannie and Freddy and their hangers-on, and by the investors who buy up the Fannie and Freddy debt. Former Fannie CEO Daniel Mudd was in line to receive up to $8.4 million in compensation. Freddie Mac’s former CEO was in line for $15.5 million.[5] And John McCain’s campaign for the U.S. presidency, suffered a setback when it was revealed that Freddy Mac had been paying $15,000 a month from the end of 2005 until September 2008 to a firm owned by McCain’s campaign manager.[6] All had an incentive in “priming the pump” – creating incentives for working people to pony-up and enter the world of home ownership. The whole scheme works fine as long as homeowners can pay their mortgages. But if they can’t …

So base greed is an element that fed this bonfire. But that wasn’t the only, or even the biggest issue – the problems were structural. In the stock market crash at the turn of the century, huge fortunes were lost when the dot-com bubble burst. With investors burned from their experience in the stock market, U.S. interest rates were reduced to unprecedentedly low levels, as the U.S. federal reserve essentially “printed money” to stave off a deeper crisis. One key measure of interest rates, the U.S. federal funds rate, dropped below two percent in November 2001, and stayed below two percent for three years, bottoming out at just below one percent in December 2003.[7] Mortgage rates don’t track Federal Funds Rates exactly, but mortgage rates did come down, so that at their lowest point in 2003 and 2004, it was possible to get Adjustable Rate Mortgages (mortgages which increase or decrease with the rise and fall of interest rates) for between 3 and 4 percent.[8] In fact, people often were able to get mortgages below that rate – with incentives of very low interest rates in the first few years of the mortgage to encourage the plunge into home ownership. With millions moving into home ownership, the mortgage-backed securities market prospered. The effect was to create an environment where billions of dollars could flee an insecure stock market, and find a “safe haven” in the housing market, by investors moving from speculating in stocks to speculating in “mortgage-backed securities.”

This structure was riven with problems. The rush into home buying which this created, pushed house prices very high very fast. This has been a visible problem for some time. In 2006, one analyst wrote: “Cheap money turned the real estate boom into a frenzy … prices in most hot markets … soared by 55 per cent to 100 per cent (on top of inflation). Trying to keep pace, buyers increasingly resorted to riskier loans to lower monthly payments. Two types became the rage: adjustable rate mortgages and exotics.” We have already looked at the ARMs. The Exotics bear a little examination, the most extreme of which was “the negative-amortization loan, which allows borrowers to pay less than the interest due. The unpaid interest is tacked onto the principal, so the size of the loan grows every month. In 2004 and 2005, no less than 75 per cent of all mortgages were either ARMs or exotic loans, compared to 20 per cent in the late 1990s.”[9]


This outline is important. Some are blaming poor home buying decisions by ordinary working people for the way in which this crisis has unfolded. But it was not “reckless spending” by the poor. It was a structure, driven by greed, which created enormous pressures and incentives to abandon renting and jump into the home-buying game – simply because massive fortunes were being made. Suddenly, working people were being pressured to take on debt far in excess of their capacity to pay. The best way of measuring this is looking at the ratio of house prices to household income. The graph here shows a steady upward climb in that ratio for the United States as a whole, from the late 1990s to the mid-point of this decade – in some cities, an extremely steep rise.[10]

But interest rates don’t stay low forever. Here the story has another layer of complications. There is a close relationship in most countries between the health of the currency and the trend in interest rates. Roughly, if the country is increasing its international indebtedness, there will be downward pressure on its currency relative to other currencies. This can be countered by increasing interest rates to attract investors in spite of the increasing debt burden. At times these rates have to go up considerably to prevent a precipitous fall in the currency.


There are some who say this pressure has yet to make itself felt in the United States. The entire post-war period has been defined by the domination of the international economy by the U.S. dollar. Its “unique” place in the world economy is often seen as making it relatively immune to the downward pressure that other currencies experience when their economies become increasingly indebted. A commonly used measure of this is a comparison of the U.S. dollar to major currencies. The resulting graph does not show overwhelming U.S. dollar weakness, but rather a generations-long fluctuation with no clear trend either up or down.[11]

But there is a problem with this way of representing the health of the U.S. Dollar. The figures in this comparison go back only until 1973. This leaves out of the picture the biggest story in the history of the U.S. dollar, the effect of it “freeing itself” from the gold standard. This was the decision Richard Nixon took in 1971, allowing the U.S. to “print dollars” unencumbered by maintaining an equivalent stock in gold. The most readily accessible international comparative figures, because they begin in 1973, do not factor this epochal event into their picture. But it is possible to improvise a comparison.


The chart “Decline of the U.S. Dollar” shows the U.S. Dollar measured against the Yen (currency of Japan) and something that is being called the “EuroMark” – a statistical composite of the Mark, formerly the currency of Germany, Europe’s biggest economy, and the Euro which has now replaced the Mark and most other major European currencies. The result is very clear. The U.S. dollar is approximately 1/3 of what it was in 1971, compared to the Yen and the “EuroMark”.[12]

The U.S. Dollar has been steadily declining against its major competitors for years. The devaluation that happened after the abandonment of the gold standard was immediate and quick, becoming precipitous in the late 1970s. This was reversed in the early 1980s by a policy of very high interest rates, then fell steadily until the 1990s, recovering somewhat in the Clinton years, but returning to decline under Bush. As the dollar declines, it inevitably leads to a day when interest rates have to go up, or the dollar’s fall could accelerate dangerously. So in Bush’s second term, interest rates have inched upwards, and this in turn became part of an environment pushing higher and higher the interest rates on millions of peoples’ mortgages.

Finally, none of this works if homeowners start to lose their jobs. When this cycle began, unemployment was at historically low levels – just 3.9 per cent, in the last four months of 2000. That increased to 6.3 percent by September 2003, dropped below five percent through the last half of 2005 and the first two months of 2008, but has since climbed steadily to 6.1 percent by August of 2008.[13]

The effects of these problems became visible in the summer of 2007. With interest rates rising, some homebuyers could not make the payments, and the number of defaults began to rise. Rising interest rates and rising unemployment, started to decrease demand for houses, so prices began to fall. And with house prices falling, many saw the value of their house fall far below the principal remaining on their mortgage – creating an incentive to simply walk away from the debt – default on the mortgage, and go back to renting. The result has been the highest rates of foreclosures in the modern era. A report from the Mortgage Bankers’ Association indicated that: ”about 2.75 percent of all home loans, or about 1.75 million mortgages, were in foreclosure at the end of June [2008], up from 2.47 percent in March. That was the highest foreclosure rate since 1979, when the Mortgage Bankers first collected the data.”[14]

As these millions of foreclosures rippled through the system, the whole flimsy structure started to shake. Between them, Fannie and Freddy had issued $3.7 trillion worth of mortgage-backed securities.[15] But suddenly, as mortgage payments started to fall because of defaults, as the assets backing these mortgages started to lose value with the falling prices of houses in the United States, these securities looked a whole lot less secure.

Bankers’ Strike

Neo-liberalism is a modern restatement of an old “free-market” orthodoxy. Markets know best. Let the “hidden hand” of the market do its magic, and a million individual decisions based on individual self-interest, will end up with a virtuous direction for the economy and society as a whole. Sometimes there are barriers to the operation of this hidden hand – too much government intervention, too much regulation being two of the most often cited. Get rid of them. The state’s role is to do away with regulation, to unfetter the markets from the hands of government, to let the markets do their work.

So – from the standpoint of neo-liberal orthodoxy, it is a matter of some indifference that Fannie and Freddy were under stress. Joseph Schumpeter argued last century that capitalism worked through processes of “creative destruction” where periodically whole sections of capital are destroyed in economic slump. This process, while painful, was central to the working of capitalism, clearing the ground for a new round of investment, the way in which a forest fire burns away the underbrush, allowing new saplings to reach for the sky. In Schumpeter’s words the “creative destruction” of competition, bankruptcy and consolidation “revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist has got to live with.”[16]

But the capitalists who made the decisions leading to the impasse of the U.S. financial system are not going to live with the consequence of their actions. Something pushed the neo-liberals into acting against neo-liberal orthodoxy and save those capitalists from the consequences of their actions. What the neo-liberals discovered was that the U.S. economy was not all-powerful, that had they let the process go too far, and the consequences of a full-blown cycle of “creative destruction” would have been disastrous. The issue was not simply one of mortgages – it was about the structural problems of the international, not just the U.S., capitalist system.

So far only one part of the story has been told, the story of mortgages, Fannie and Freddy, and their selling of “mortgage-backed securities”. The next question that has to be asked is, who buys these securities? The economists’ answer is that they are bought by “risk-averse investors such as banks, pension funds and central banks around the world,”[17] investors in other words who want a guaranteed return on their investments, and little or no risk of these investments turning into worthless paper. Fannie and Freddy’s total liabilities is mostly debt, most of it from the sale of mortgage-backed securities, and it totals in excess of $1.7 trillion dollars.[18] Significantly, increasing portions of that debt have been sold to non-U.S. banks and investors. The top five in reverse order, as of June 2007 were Taiwan ($55 billion), South Korea ($63 billion), Russia ($75 billion), Japan ($228 billion) and China ($376 billion).[19] The entire structure then was increasingly dependent on the willingness of banks and other institutions in these countries, to continue giving Fanny and Freddy billions of dollars.

This summer, it came to an end. Under pressure from their eroding mortgage business, Fannie stocks fell from $67.30 a share October 5 2007, to just $7 a share, September 4, 2008.[20] Freddy stocks followed the same downward slide, from $63.43 to $4.95.[21] Suddenly, non-U.S. investors, particularly in Asia, began to worry. The slide in share value of Fannie and Freddy raised the possibility that the two companies could go bankrupt. That would leave banks and investors in Asia and elsewhere holding pieces of paper worth billions of dollars less than their face value. “Chinese banks ‘were probably facing significant losses,’ says Logan Wright, an analyst with Stone & McCarthy Research.”[22]

Bankers from outside the United States began to apply leverage. In the first half of 2007, central bank holdings of Fannie and Freddie securities increased on average by $22 billion a month. But in 2008, those holdings fell by $27 billion from mid-July through early September.[23] And the Financial Times reported in August under the headline “Bank of China flees Fannie-Freddie,” that “Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June. The sale by China’s fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6bn, is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities.”[24] “The threat of a central bank buyers’ strike was real,” accord to Brad Setser, a former Treasury Dept. official and now a fellow at the Council on Foreign Relations.[25]

Neo-liberal orthodoxy dictated “let the market rule,” let the processes of creative destruction work themselves out. But bankers outside the U.S. who stood to lose billions from this market failure said; “Creative Destruction be damned. If you don’t act, we will start withdrawing our money. We are already doing it. We will not let you ‘cleanse’ your economy by leaving us holding worthless pieces of paper.” So facing an enormous catastrophe, Bush and the U.S. administration suddenly switched from the world’s biggest neo-liberals, to the world’s biggest state-capitalists, when they intervened to guarantee the debt held by Fannie and Freddy. Many of their neo-liberal ideologues were left wondering what had hit them. This whole thing might, said one commentator become a “nightmare scenario, the descent into quasi-socialism” which “balloons the national debt and wrecks foreign investors’ faith in the economy.”[26]

The state and capital

But of course this has nothing to do with “socialism” – unless it is a kind of Frankenstein’s Monster socialism, where the state robs from the poor to give to the rich – because that is exactly what is happening: tax dollars from U.S. workers to be used to pour into the balance sheet of two failed corporations. It is a myth of the neo-liberals that the state is separate from the market. There is of course the central role of state militarism. The British Navy ruled the waves so that British business could penetrate every corner of the globe in the 19th century. The U.S. military has time and again overthrown governments in Latin America to keep the hemisphere open for business. But there are also the directly economic ways in which the state is intimately tied to the development of capitalism. British imperialism jealously protected its industries behind the walls of empire. India did not build its rail network with British steel and rolling stock because of the market, but because of imperialism.[27] Japanese capitalism burst into the 20th century after the Meiji Restoration used the Japanese state to mobilize resources in order to industrialize.[28] Canadian capitalism had at its core the construction of a continental rail network, which bankrupted the private capitalists, and was only finished because of the state-capitalist “National Policy.”[29] In South Korea, the industrial revolution in the post-war era was inconceivable without the “chaebols”, very much creatures of the South Korean state.

The myth that capitalism is about the retreat of the state, and that socialism is about its reverse – state intervention – is a myth made easier by the long nightmare of Stalinism, where there were states which called themselves “socialist” and which said the same thing as the neo-liberals only in reverse: “We are socialist because the state owns everything: never mind the absence of civil rights and the absence of democracy.” But the Stalinist states are long gone, and a new generation is returning to the roots of the socialist movement, understanding that socialism is about popular control, workers’ control of the economy and the state, or it is about nothing. It can be important to have the state intervene to fix problems in the economy. But the key question becomes – who controls that state? In the United States, we can be pretty sure that the state is controlled by the corporate elite.

That capitalist state, having got the taste of government intervention to save capitalism from itself, has now become ravenous for more. Fannie and Freddy were only two of the institutions under stress because of economic problems in the United States. September 16, the U.S. Federal Reserve took over American Insurance Group for $85 billion. House Speaker Nancy Pelosi criticized the rescue, calling the $85 billion a “staggering sum.” Ms. Pelosi said the bailout was “just too enormous for the American people to guarantee.”[30] But that staggering sum has now been dwarfed by another even larger sum. United States’ Treasury Secretary Henry Paulson is asking Congress to come up with $700-billion to clean “toxic assets” out of the U.S. financial system. What he wants is to have enough money on hand so that any bank or financial institution which has a piece of paper that is looking pretty worthless, Paulson will have the money to say “no problem, we’ll take it off your hands.”

How do you come up with this “worst-case scenario” figure? Federal Reserve Chairman Ben Bernanke said in testimony that “ ‘various metrics’ could be used to arrive at that $700 billion number. It is 5% of $14 trillion in outstanding mortgage debt and roughly the same percentage of the $10 trillion to $12 trillion of commercial bank assets. ‘So it seems like an appropriate amount relative to the size of the problem.’”[31]

Seems like an appropriate amount. You would have thought he would have hired someone to get figures so that he could be a little more definitive given the “size of the problem.” What we are looking at is a trillion-dollar intervention by the U.S. government into the financial system of the world’s biggest economy – the biggest ever economic intervention by a state into any economy anywhere – that is going to change the shape of economics and politics for a generation. The crisis brings into focus three central points.

1) The decline of the U.S. and the Danger of Militarism

There has been a sharp divide in anti-capitalist circles over the position of the U.S. in the world system. Theorists like Antonio Negri and Michael Hardt argued that empire had become disembodied from the state.

In contrast to imperialism, Empire establishes no territorial centre of power and does not rely on fixed boundaries or barriers. It is a decentred and deterritorialized apparatus of rule that progressively incorporates the entire global realm within its open, expanding powers. Empire manages hybrid identities, flexible hierarchies, and plural exchanges through modulating networks of command. The distinct national colours of the imperialist map of the world have merged and blended in the imperial global rainbow.[32]

The actions of states in the context of the current crisis shows this analysis to be inadequate. The states of the various central banks which had holdings of U.S. securities, including the state in China – all have particular interests that they seek to assert. Similarly, the state in the U.S. is suddenly enormously and obviously important to Empire – doing what no corporation on its own can do, mobilizing the tax resources of working people to bail out the financial system. “Empire” is just as bound up with the state system – a system of competing and predatory states – as were all previous systems of imperialism.

Theorists like Leo Panitch and Sam Gindin have challenged Hardt and Negri on exactly this point, seeing very clearly the continuing role of the state in shaping the field of power that has been called “Empire.” However, in the place of a system of imperialist states, they tend to reduce “Empire” to just one state – the overwhelmingly dominant U.S. state. They have argued that U.S. penetration of European and Asian capital is so profound as to make irrelevant and archaic any notion of inter-imperial rivalry.[33] But this view too is being revealed as problematic. The long decline of the U.S. dollar, documented above, is an indication of the worsening competitive position of the United States against its rivals in Europe and Asia. And the way in which this bailout took shape – in part from the threat of a strike by central bankers outside the United States, refusing to further invest in U.S. securities, is another powerful indicator of a changing world order. The U.S. remains the world’s biggest economy and most powerful state. But its position relative to others has been in decline for decades, and this débacle shows that the decline is ongoing.

There is a very developed literature, under the heading of the “Permanent Arms Economy,” that makes a compelling case to explain this decline.[34] The long-term structural shift of resources into arms has effectively starved key sections of the U.S. economy of investment, allowing others in the world system to catch-up and in some cases economically overtake the United States. The massive military presence sustained by the U.S. since the Korean War, has been accomplished at the cost of its international competitiveness. Other countries have invested in their “civilian economies” to a much greater extent than the U.S., overtime weakening the relative position of the U.S. in the world system, something now being starkly revealed in the current economic crisis.

But we also know from the last empire to fall under the weight of its arms spending – the Soviet Union – that an addiction to war might have negative effects for an economy, but it is still an addiction. The Soviet Union stayed mired in pointless and bloody wars abroad virtually until it collapsed in the years 1989-1991. The U.S. addiction to arms spending is likely to have the same contours – bad for the economy, but unshakeable for the state. It means that the wars in Iraq and Afghanistan are likely to be with us for some time.

2) Ideological crisis of neo-liberalism

This September financial shock, has opened up a period of deep confusion and splits for the hegemonic ideology of neo-liberalism. The $700-billion bailout is being pushed by Republican George W. Bush, the world’s pre-eminent neo-liberal. Its principal opposition has come from – the staunchly neo-liberal Congressional Caucus of his own party.[35] It was these neo-liberal hardliners who were at the core of the defeat of the $700-billion bailout package in the first vote in Congress.[36] The neo-liberal monolith has cracked over its key precept – that markets should be “free” of the state.

Without any question, this chaotic, sudden shift from the neo-liberal orthodoxy of the small state and the free market to a new state-capitalist interventionism – this shift will like a thunderbolt make millions question the orthodoxies of neo-liberalism. Why are the bankers being given billions, while those who have lost their homes get nothing? In the parlance of the journalists, “why is Wall Street getting billions that come from the pockets of the ordinary folk of Main Street”? If we are going to have state intervention, why not go all the way – use the money for public transit, green jobs, public housing, schools and education, investments that help ordinary people not overpaid bankers?

But as Naomi Klein has pointed out, a crisis in the ideology of neo-liberalism is not the same thing as a retreat from the policies of neo-liberalism – the privatization and deregulation which have so plagued working peoples’ lives for more than a generation.

It would be a grave mistake to underestimate the right’s ability to use this crisis – created by deregulation and privatization – to demand more of the same. … the dumping of private debt into the public coffers is only stage one of the current shock. The second comes when the debt crisis currently being created by this bailout becomes the excuse to privatize social security, lower corporate taxes and cut spending on the poor. A President McCain would embrace these policies willingly. A President Obama would come under huge pressure from the think tanks and the corporate media to abandon his campaign promises and embrace austerity and “free-market stimulus.”[37]

It is worth remembering that one of the modern architects of neo-liberalism, Margaret Thatcher, was very clear on this point. Thatcher is associated with the phrase “there is no alternative” or “TINA” – usually seen as justifying the unbridled rule of competition. Susan George writes that Thatcher:

… was well known for justifying her programme with the single word TINA, short for There Is No Alternative. The central value of Thatcher’s doctrine and of neo-liberalism itself is the notion of competition – competition between nations, regions, firms and of course between individuals. Competition is central because it separates the sheep from the goats, the men from the boys, the fit from the unfit. It is supposed to allocate all resources, whether physical, natural, human or financial with the greatest possible efficiency.[38]

But in Thatcher’s classic and most often cited use of the term, this was not quite what she said and this was not quite her point. At a speech to the Conservative Women’s Conference, May 21, 1980, Thatcher’s theme was the way in which wages were increasing too quickly.

Wages in the public sector are still higher than the country can afford … earnings will have to rise much more slowly if we are to avoid still more unemployment and if we are to get inflation down. It is too often forgotten that during the last two years there has been considerable increase in average living standards. What we produce has been growing much more slowly. We have to get our production and our earnings into balance. There’s no easy popularity in what we are proposing but it is fundamentally sound. Yet I believe people accept there’s no real alternative.[39]

The point is, Thatcher was not in the first instance driven by an abstract commitment to the market, but by a class commitment to transferring wealth from workers to employers. In this, the role of the state is a tactic, not a principle. The Thatcherite state showed its capacity to intervene against workers’ wages with real brutality during the bitter miners’ strike of 1984-1985.[40] Neo-liberal orthodoxy may lie exposed as nonsensical, but the class which brought us neo-liberalism remains in power, motivated by the same project – capturing the wealth produced by “Main Street” and making sure it ends up in the pockets of “Wall Street.”

3) The need for social movements against capitalism in all its forms

Which leads to the most important point, the need to insist that Thatcher and the neo-liberals are wrong – there is an alternative. In the 1990s and early 21st century, there was a magnificent international movement against neo-liberal globalization. The great protests against NAFTA led by the Zapatistas, the protests against the WTO in Seattle, against the FTAA in Quebec City, against the G8 in Genoa – these protests mobilized hundreds of thousands.

But the political leadership of these movements rested in groups like ATTAC in France or the Workers’ Party of Brazil. For them the target was not capitalism itself, but capitalism in its neo-liberal form. Neo-liberalism is now in open crisis, but the alternative on offer is not re-assuring – a strong state that protects corporations from their own excesses, and does so by taxing and squeezing the wages of ordinary workers. The problem is not just neo-liberalism. The problem is capitalism, whether in its “neo-liberal” or “state-interventionist” form. The next round of anti-corporate mobilizations needs that understanding at its centre.

We are seeing today in North America the hollowness of the neo-liberal dystopia. Others saw it earlier. It was after all the indigenous people of Chiapas who rose up against the neo-liberal North American Free Trade Agreement (NAFTA) in January, 1994, the peasants of Cochabamba in 2000 who stopped the water privatizers in their tracks, the masses of Caracas who in 2002 prevented the coup d’état which would have restored neo-liberalism in Venezuela, part of the swelling rage of all the oppressed in Latin America who, the principal road-block to the 2005 imposition of the U.S. led neo-liberal Free Trade Area of the America (FTAA). Perhaps just as neo-liberalism’s birth was in Latin America, it will similarly be Latin America where we will see the beginnings of the new social movements challenging capitalism in all its forms.

© 2008 Paul Kellogg

References

[1] Gilberto Villarroel, “La herencia de los ‘Chicago boys’,” BBCMUNDO.com, December 10, 2006, http://news.bbc.co.uk
[2] David Harvey, Spaces of Global Capital: Towards a Theory of Uneven Geographical Development (New York: Verso, 2006), p. 12
[3] “US rescues giant mortgage lenders,” BBC News, September 7, 2008
[4] Alana Semuels, “Q&A about mortgage giants Fannie Mae, Freddie Mac,” Los Angeles Times, September 8, 2008, www.latimes.com
[5] The Associated Press, “Answers to your Fannie Mae, Freddie Mac takeover questions,” New York Daily News, September 11, 2008, www.nydailynews.com
[6] Jackie Calmes, David D. Kirkpatrick, “McCain Aide’s Firm Was Paid by Freddie Mac,” The New York Times, September 23, 2008
[7] Bank of Canada, “Monthly Series: V122150: Federal Funds Rate”, www.bankofcanada.ca
[8] HSH Associates Financial Publishers, “HSH’s National Monthly Mortgage Statistics,” www.hsh.com
[9] Shawn Tully, “Real Estate Survival Guide,” Fortune, Vol. 153 Issue 9, May 11, 2006, pp. 94-102
[10] Calculated from Joint Centre for Housing Studies, The State of the Nation’s Housing 2007, “Additional Table: Metropolitan Area House Price-Income Ratio, 1980-2006,” www.jchs.harvard.edu. Figures are not yet readily available for 2007 and 2008. However, an update has been released to one analyst, which shows the same general trend, with the addition that from 2007 on, house prices have started to fall – the graphical representation of the bursting of the housing bubble. See CalculatedRisk, “Update: Ratio Median House Price to Median Income (2008 Report),” June 24, 2008, http://calculatedrisk.blogspot.com
[11] U.S. Federal Reserve Board, Federal Reserve Statistical Release, H.10 “Foreign Exchange Rates,” “Price-adjusted Major Currencies Dollar Index,” www.federalreserve.gov
[12] Derived from “FXHistory®: historical currency exchange rates,” accessed September 24, 2008.
[13] Bureau of Labor Statistics, U.S. Department of Labor, “Labor Force Statistics from the Current Population Survey,” http://data.bls.gov
[14] Vikas Bajaj, “Foreclosures Rose as Delinquencies Eased in Quarter,” The New York Times, September 5, 2008
[15] According to Peter Coy, “Back on Track – Or Off The Rails?” Businessweek, September 22, 2008, p. 24
[16] Joseph Schumpeter, Capitalism, Socialism and Democracy (New York: Routledge, 1994), p. 83
[17] Coy, “Back on Track,” p. 24
[18] MarketWatch, The Wall Street Journal Digital Network, www.marketwatch.com and Forbes.com
[19] U.S. Treasury Dept., as reported by Bruce Einhorn and Theo Francis, “Asia Breathes a Sigh of Relief,” Businessweek, September 22, 2008, p. 32.
[20] Yahoo Finance, http://yahoo.finance.com
[21] Yahoo Finance, http://yahoo.finance.com
[22] Einhorn and Francis, “Asia Breathes A Sigh of Relief,” p. 32
[23] Einhorn and Francis, “Asia Breathes A Sigh of Relief,” p. 32
[24] Saskia Scholtes and James Politi, “Bank of China flees Fannie-Freddie,” Financial Times, August 28, 2008
[25] Einhorn and Francis, “Asia Breathes A Sigh of Relief,” p. 32
[26] Coy, “Back on Track – Or Off the Rails,” p. 25
[27] Clarence Baldwin Davis, Kenneth E. Wilburn, Ronadl Edward Robinson, Railway Imperialism (Westport: Greenwood Press, 1991)
[28] Colin Barker, “Origins and Significance of the Meiji Restoration,” 1982, www.marxists.de
[29] Stanley Ryerson, Unequal Union (New York: International Publishers, 1968)
[30] Edmund L. Andrews, “Fed’s $85 Billion Loan Rescues Insurer,” The New York Times, September 16, 2008
[31] Joshua Zumbrun and Liz Moyer, “Your Guide To The Bailout Debate,” September 24, 2008, Forbes.com
[32] Michael Hardt, Antonio Negri, Empire (Boston: Harvard University Press, 2000), pp. xii-xiii
[33] See essays in Leo Panitch and Colin Leys, eds., Socialist Register 2004: The New Imperial Challenge and Socialist Register 2005: The Empire Reloaded (London: Merlin Press). For an exchange that goes over this controversy in detail, see: Alex Callinicos, “Imperialism and Global Political Economy,” International Socialism 108 (Autumn 2005); Leo Panitch and Sam Gindin, “ ‘Imperialism and Global Political Economy’ – A Reply to Alex Callinicos,” International Socialism 109 (Winter 2006); and Alex Callinicos, “Making sense of imperialism: a reply to Leo Panitch and Sam Gindin,” International Socialism 110 (Spring 2007) – all available online at www.isj.org.uk.
[34] See Michael Kidron, Capitalism and Theory (London: Pluto Press, 1974) for a classic development of this thesis. Some of Kidron’s writings are available at The Marxists Internet Archive, www.marxists.org
[35] Sheldon Alberts and Don MacDonald, “Bailout plan stalls as conservative Republicans voice their opposition,” The Vancouver Sun, September 26, 2008
[36] Carl Hulse and David M. Herszenhorn, “Lawmakers Defy Bush and Party Leaders, Rejecting Bailout,” The New York Times, September 29, 2008
[37] Naomi Klein, “Now is the Time to Resist Wall Street’s Shock Doctrine,” The Huffington Post, September 25, 2008
[38] Susan George, “A Short History of Neoliberalism: Twenty Years of Elite Economics and Emerging Opportunities for Structural Change,” Transnational Institute,, March 24, 1999, www.tni.org
[39] Margaret Thatcher, “Speech to Conservative Women’s Conference,” Margaret Thatcher Foundation, May 21, 1980, www.margaretthathcer.org
[40] See, among other accounts, Alex Callinicos and Mike Simons, The Great Strike: The Miners’ Strike of 1984-5 And Its Lessons (London: Socialist Worker, 1985)

The toxic tango of markets and housing

You can see it in the streets of Cleveland, or Buffalo, or Minneapolis. On all those streets, the working poor who five years ago lived in their own homes, are back in cramped apartments, paying rent to their landlords. On the streets where they used to live, their old houses sit boarded up and rotting. Every week, some of these homes come down, as city governments spend millions to demolish houses abandoned because of what is being called the “subprime” mortgage crisis. It should be called the “free-market” housing crisis. What these streets tell us is the catastrophic failure of a decade long experiment in using the free-market to regulate housing policy in the United States.

Go back to 1999. Then U.S. Federal Reserve Chairman Alan Greenspan put his weight on the scales to block new regulations for interesting things called “derivative products.” Any new regulations would be a “major mistake” he told the Futures Industry Association in March of that year.[1] Derivatives are complex financial instruments whose value is related to an underlying asset. They can become enormously complex. But Greenspan – at the time arguably the most powerful financial manager in the world – used his authority to make sure that the trading in these derivatives should be very loosely regulated. Greenspan is a free-market evangelist.

A loosely regulated derivatives market encouraged the creation of “exotic” investment vehicles, including the practice of combining consumer debt (credit card debt, automobile, mortgages, etc.) from hundreds and thousands of different customers, dividing up the resulting amalgam into smaller portions, calling them “securities,” and then selling these securities for a profit. The underlying assumption was that behind these “exotics” were real assets – debt that was going to be repaid.

Move ahead to 2001. The long stock market expansion rooted in the 1990s came to a sudden halt. The enormous speculation in high tech industries was unsustainable. The stock index most closely associated with the high tech sector – the NASDAQ – suffered a collapse that rivaled that of the Japanese stock market ten years earlier.

Greenspan’s response was to cut interest rates to almost zero – effectively, printing money and making it available on the cheap to banks and other financial institutions, to keep the US economy out of recession.

But this had another effect. Other interest rates came down as well, including those for mortgages. With interest rates for mortgages at historic lows, a new industry emerged – selling mortgages to people who had low incomes, who had never thought of buying a house.

From the standpoint of the poor, it was a good move. If low interest rates meant that a mortgage was cheaper than rent, then why not invest in a mortgage? Millions did so. This in turn fed the practice of repackaging this debt as exotic derivatives, and increasing portions of these derivatives had mortgages as the underlying asset – and many of those were the mortgages taken on by the poor, the ones we have come to call “subprime”.

Don’t blame the poor for the consequences. According to Mark Seifert of Cleveland’s East Side Organizing Project (ESOP) “predatory lenders targeted inner-city, African-American neighbourhoods, where they fudged property values and signed up thousands of borrowers without explaining the details of the loans.”[2]

Lenders and investors were locked in a toxic tango – lenders pushing “cheap” mortgages on the working poor, investors creating a billions-dollar market for the derivatives based on these “cheap” mortgages. As long as the tango lasted, both lenders and investors made huge sums of money in fees and bonuses.

The low rates driving this tango could not last. In the years after 2001, the U.S. Federal Reserve sent interest rates steadily higher. The low interest rate policy had saved the stock market, but it had created another problem – a weakening of the U.S. dollar, which was slowly losing strength against other currencies. To protect the dollar, interest rates rose higher and higher.

By 2007, the problems created were massive. The rise in interest rates meant that mortgage payments were floating up, not down. The low “teaser” rates were ending, and millions of working poor did not have the income to make their payments. The home ownership mirage of the early 21st century had, in the words of British analyst Robin Blackburn, “avoided the real problem, which is the true extent of poverty in the Untied States and the folly of imagining that it can be banished by the waving the magic wand of debt creation.”[3]

Predictably, the working poor were driven from their homes. Their mortgages were unsustainable. They returned to cramped apartments, the locks on their foreclosed homes were changed, windows boarded up, a target for wind, rats and vandalism.

The result is an enormous mess. The subprime/derivatives tango had encouraged real estate speculation sending house prices through the roof. With defaults on the rise, the housing market is being flooded with homes, and predictably prices are now collapsing. But the derivatives market based on mortgages and based on assumptions of continuously rising real estate prices had become truly massive. The Federal Reserve has abandoned its high interest rate policy in an attempt to reduce the damage. This has had some impact – the U.S. economy is not yet in an official recession. But it is exposing the U.S. to other risks, as the return to low interest rates has accelerated the decline of the U.S. dollar.

But the real victims of the subprime crisis are on the working class streets of Cleveland. In 2003, there were 200 foreclosures in Cleveland Ohio. In 2007, there were 7,583. “On average, 20 Cleveland homeowners faced foreclosure every day last year.”

“Many streets” are “lined with vacant buildings. Most have been stripped of windows, doors, siding and even copper wiring and pipes.” And after a while, there is nothing to do with an abandoned house except to tear it down. “Last year, Cleveland spent $7-million demolishing abandoned homes, compared with about $1-million a couple of years ago.” That demolition bill might rise to $70 million to deal with all the vacant buildings.[4]

This is not just a Cleveland story. Chicago Heights mayor Anthony De Luca said that “city officials are planning a major wave of demolitions of homes and businesses that have been left in disrepair.”[5] And governments in Cleveland, Baltimore, Buffalo and Minneapolis “have all filed lawsuits against lenders or developers based on the devastating effects foreclosures have wreaked on their communities.”[6]

“I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk” said the Greenspan in his very defensive autobiography. “But I believed then, as now, that the benefits of broadened home ownership are worth the risk.”[7] But Greenspan was wrong on derivatives and wrong on mortgages, and the result has been an economic and social mess.

Here’s a modest idea. Instead of pushing people out of apartments and into houses, and then back to their apartments, instead of boarding up their abandoned homes and then spending millions to demolish them, instead of spending additional millions to sue the lenders and developers who profited from this mess – instead of this frenzy of unproductive spending, lets instead invest in public housing. Instead of tricking people into financing this public housing with risky mortgages, lets make these new houses geared to income. Instead of leaving the managing of housing to speculators and developers, lets manage housing ourselves through the well-established principle of housing co-ops. There will be some who object, saying “that’s a socialist housing program.” Whatever you call it, it’s a bit more rational than the chaos left behind by ten years of the free market.

© 2008 Paul Kellogg

References

[1] Nelson D. Schwartz and Julie Creswell, “What Created This Monster?”, New York Times, March 23, 2008; cited in Robin Blackburn, “The Subprime Crisis,” New Left Review, 50, March/April, 2008, p. 82
[2] Paul Waldie, “Is the U.S. housing mess headed our way?“, The Globe and Mail, January 19, 2008, p. F.1
[3] Blackburn, p. 73
[4] Waldie
[5] David Schwab, “30 buildings to be demolished this summer,” The Southtown Star, May 4, 2008
[6] Julie Kay, “Empty Homes Spur Cities’ Suits,” The National Law Journal, May 9, 2008, www.law.com
[7] Alan Greenspan, The Age of Turbulence: Adventures in a New World, New York 2007, p. 233; cited in Blackburn, p. 82

U.S. economy – Taking the pulse

Getting a picture of something as complex as the economy of the 
U.S. – the world’s largest – is not an easy matter. An earlier post showed that it is completely misleading to paint such a picture using only the “simple” figures of annual growth of Gross Domestic Product (GDP). To only use these “simple” GDP figures, you arrive at the ridiculous conclusion, pictured in the first graph of this article, that today’s U.S. economy is twice as big as in 1995, four times as big as in 1983, eight times as big as in 1976, 16 times as big as in 1969, 32 times as big as in 1958, and more than 60 times as big as in 1947 – a picture of triumphal, unending growth.[1]

When statistics are presented in graphic form, as here, economic realities can be brought into focus in a way that is much more accessible than unending rows of statistics. For instance, the black line on this first graph shows what happens to “simple” growth figures when a very basic step is taken – adjusting those figures for inflation (price increases). To say the least, this changes the picture. There is still overall growth, but nothing on the scale implied when inflation is excluded.

But this is still not a reasonable picture of the last 60 years of the U.S. economy. Growth statistics are also relatively meaningless if they don’t take into account population growth. A ten percent growth in population has to be matched by a ten percent growth in the economy just for everything to stay in the same place.

The second graph shows both figures – GDP in the U.S. reduced first by inflation (the grey area),[2] then reduced by both inflation and population increase (the black line).[3] The result is a much more accurate picture of the growth of the U.S. economy over three generations.

But still the picture is not complete. What is meaningful to a working person is not only whether, in five years, the economy is going to be bigger than it is today. Equally and sometimes more important is the direction now. Is the economy we are living in today expanding or contracting, and how quickly?

There is a fairly accurate way of getting a picture of this. The reason the first graph has a Roman numeral “I” after the dates, is that is the traditional way of labeling each quarter of the year (I, II, III and IV). U.S. GDP figures are available quarter by quarter, and similar figures can be calculated for both inflation and population increases.

All of this can by combined to get “annualized” growth rates per quarter. This is a measure of how fast the economy is growing, or shrinking, in any given quarter. If the answer to that question is “five percent”, it doesn’t mean that the economy grew five percent in that quarter. It means that its rate of growth was five percent. This rate is determined by measuring back four quarters (one year), and seeing how much bigger or smaller the economy is, and from that calculating a rate. The resulting picture is fascinating.

Serious analysts, both left and right, would not be surprised by this picture. Capitalism’s history is one of recurring periods of booms and slumps, or (in less extreme terms) of “business cycles” An advocate of capitalism like Joseph Schumpeter, argued almost 70 years ago that business cycles “are not like tonsils, separable things that might be treated by themselves, but are, like the beat of the heart, of the essence of the organism that displays them.”[4] The Russian socialist Leon Trotsky – writing more than 80 years ago, wrote that “capitalism lives “by crises and booms, just as a human being lives by inhaling and exhaling. First there is a boom in industry, then a stoppage, next a crisis, followed by a stoppage in the crisis, then an improvement, another boom, another stoppage and so on … Crises and booms were inherent in capitalism at its very birth; they will accompany it to its grave.”[5] Both Schumpeter and Trotsky could have been describing capitalism today.

The cycle of booms and slumps has to be a central feature of any accurate picture of the health of the economy. The graph here exactly confirms Schumpeter’s and Trotksy’s descriptions – this is a system inhaling and exhaling or to use Schumpeter’s analogy, a pulse – the very beating heart of the capitalist economy, booms followed by slumps.

Look at each decade. We know that the 1950s was a time of economic expansion. But that doesn’t mean there were no slumps, no recessions. Three sharp recessions punctuate the decade, short in duration, but sometimes very sharp. In the first quarter of 1958, for instance, the economy was contracting at a rate of almost six per cent. Workers at the time would get little comfort from being told that they were living through boom times.

The decade of the 1960s has the reputation of being the most spectacular decade of what has come to be known as the long boom – and there was considerable growth through the decade. But it opened with a two-quarter recession in 1960 and 1961, and was followed in 1970 by a full year of recession. Even in boom times, U.S. capitalism could not escape the boom-slump cycle. And by historic standards, the 1960s boom was not all that long. Trotsky argued that each business cycle “lasts from 8 to 9 or 10 to 11 years.” Well, the 1960’s cycle was about 10 years long. If anything, what this highlights is not the surprising length of the 1960’s business cycle, but the manic nature of the 1950s, where very high growth rates were punctuated by frequent returns to recession or slump.

Then we get to the 1970s. What a terrible decade. The 1970s recession was followed by three years of growth, and then the brutal slump of 1974-75, where the economy shrank consistently. In the fourth quarter of 1974, the U.S. economy was shrinking at a rate of 4.8 percent a year. There followed three and a half years of growth, and then an even worse slump, which in a real sense lasted from the second quarter of 1979 through the fourth quarter of 1982. (There was a brief return to growth in 1981, but so brief and so feeble that it felt like the recession was still ongoing.) At its worse, the U.S. economy was shrinking at a rate of 7.37 percent, in the second quarter of 1980, a really astonishing rate of decline.

The expansion of the 1980s was a welcome relief, only if you didn’t examine one of its principle sources – the massive re-arming of the U.S. – beginning under Democrat Jimmy Carter and continuing under Republican Ronald Reagan. That boom was shorter than its counterpart in the 1960s. Similarly, the recession which followed it in 1990-91 was shorter than the slump of 1979-82 (the steepest decline in the 1990-91 period was 2.97 percent, considerably less than the 7.37 percent rate ten years previous).

The story of the 1990s and the 21st century is still being written. It is true that there was a third long expansion of the system in the 1990s, but growth rates were lower than in either the 1980s or 1960s. There was a return to slump in the second quarter of 2001, and the period of decline or near decline lasted longer than in 1990-91, not ending until the second quarter of 2003. But the rates of economic decline in this slump were the lowest on record – never registering more than an annual decline of 1.17 percent. We seem to be on the edge of another slump, whose story will have to wait until another day.

Getting this into focus – the cycle of booms and slumps – is an important element in understanding the world in which we live. But even with this picture, there is considerable work to do. One very big missing piece is the overall trajectory. Trotsky introduces a third analogy to get at that picture. “[T]o determine capitalism’s age and its general condition – to establish whether it is still developing or whether it has matured or whether it is in decline – one must diagnose the character of the cycles. In much the same manner the state of the human organism can be diagnosed by whether the breathing is regular or spasmodic, deep or superficial, and so on.”

In more economic language he summarizes: [T]he curve of economic development is a composite of two movements: a primary movement which expresses the general upward rise of capitalism, and a secondary movement which consists of the constant periodic oscillations corresponding to the various industrial cycles.”[6] This article has only looked at the latter – the secondary movement. But even if not the full story, it is a necessary component in developing a complete picture of the current dynamics of the U.S. economy.

© 2008 Paul Kellogg

References

[1] Bureau of Economic Analysis, “National Income and Product Accounts Table: Table 1.1.5. Gross Domestic Product (Billions of Dollars), www.bea.gov.
[2] Bureau of Labor Statistics, “Consumer Price Index – All Urban Consumers,” Series ID: CUUR0000SA0, www.bls.gov .
[3] Population Division, U.S. Census Bureau, “Table 1: Annual Estimates of the Population of the United States”; Population Estimates Program, Population Division, U.S. Census Bureau, “Historical National Population Estimates: July 1, 1900 to July 1, 1999,” www.census.gov
[4] Joseph Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, volume 1 (New York: McGraw-Hill, 1939), p. v. Schumpeter is best known for his praise of the “Creative Destruction” inherent in periodic recessions (Schumpeter, Capitalism, Socialism and Democracy (New York: Harper, 1942), p. 82).
[5] Leon Trotsky, “Report on the World Economic Crisis and the New Tasks of The Communist International,” in The First 5 Years of the Communist International, Volume I (New York: Monad Press, 1972), p. 200.
[6] Trotsky, pp. 200-1.