Tag: greece

The Lesson Of Greece – Stuff Your Money Under The Mattress.

The manager of one of Britain’s largest bond funds has effectively urged investors to put their money under their mattresses. Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds, is concerned that what he describes as a “systemic event” could rock markets possibly to the magnitude of the crisis of 2008 (1).

What Spreadbury advises people to do is increase their liquidity by ensuring they have access to physical money. Spreadbury is honest enough to address concerns relating to global debt, particularly mortgage debt. It’s in the interests of banks to increase the value of property. So what they have traditionally done is to lend ever larger amounts of money to individuals. The circulation of increasing amounts of debt-fueled cash for mortgages results in greater competition for property. This in turn, means an increase in prices resulting in banks’ lending even more money, and so on and so forth.

For the bankers this process amounts to an apparent never ending cycle of growth. But for the vast majority of the rest of us, its an increasing burden of debt. Mortgage debt is being pumped up to record levels. What Chancellor Gideon Osborne is relying on for future demand is an ever-expanding household debt which is already tipping £2 trillion a year. The financial crisis in 2008 largely resulted from the fact that many people acquired houses and goods with money they didn’t have. Since then, more people have acquired even more houses and goods at greater expense with money they don’t have.

Seemingly, the only thing people learn from history is that nobody learns anything from history. Given the fact that our mistakes are part of a continuum, one might reasonably argue it’s not even an historical thing but rather akin to placing ones left hand into a fire to retrieve a coin, getting burned and then using the right hand to do the same in the false hope that the result will be different. The current record level of debt is predicated on historically low levels of interest. Problems will inevitably arise further down the line when interest rates begin to climb.

One might think that putting savings into a bank would be a more secure option than taking on a potentially precarious mortgage debt. But I wouldn’t count on it. The Financial Services Compensation Scheme (FSCS) is supposedly intended to cover depositors for a limited amount invested per bank in the event of any collapse (2).

But under such circumstances, depositors’ would likely panic and demand all of their cash back at the same time. Inevitably there would be shortfall of available cash since the banks who in theory hold it would be unable to release it on mass given that it would almost certainly be tied up in high risk off shore investments.

Will the government be in a position to underwrite each individual depositor? Not so according to Spreadbury who says that such a suggestion is unfunded (3).

Following the 2008 crisis, the line pumped out by the leading figures within the establishment, was that governments’ could not allow banks to collapse because as institutions they were too big to fail. It was this rationale that underpinned their bailing out by taxpayers’. The government have since made assurances that tax payers’ money will no longer bail out failing banks (4).

But here’s the problem. The reach of these banks is greater now than previously because other smaller banks that were teetering on the edge have been swallowed up by the larger ones. So the banks who in 2008 were regarded as being too big to fail are even bigger in 2015. Contrary to government claims, taxpayers will continue to underwrite the inevitable future collapse of these larger banks at a far greater cost to the tax payer at least until 2019 (5). This is be predicated on the notion that in doing so the government will be protecting the savings accounts of depositors to the value of £75,000 (downgraded from the supposed FSCS limit of £85,000) (6).

The priority of government is to protect the bankers from their own incompetence, as opposed to protecting depositors in the event of a run on banks. As far as the banking racket is concerned, losses are ‘socialized’ and profits ‘privatized’. So for them, it’s ‘win-win’ situation.

Due to the close knit ‘revolving door’ culture that exists between leading parliamentarians’ taking their places on the boards of financial companies’ following their “retirement”, and the fact that the irresponsible actions of bankers continue to be underwritten by the tax payer, there is no incentive for either the politicians or the the bankers to change their destructive course. The continued suffering of the Greek people resulting from austerity in which their government is implicated, cannot be divorced from this kind of close knit relationship.

It was, for example, no accident that Greece didn’t do the rational thing by defaulting on its debt but has instead decided to continue with the ‘negotiation process’ predicated on further bail-outs. As Craig Murray succinctly put it, “the ‘Troika’ [of creditors comprising the EU, ECB and IMF] is very keen that there will be another bail-out because of course the money goes to the bankers to whom the political elite are beholden” (7).

In Britain we can see how this insane system has played out in terms of the so called relationship between house price and stock market inflation and what we have been told has been a growth in living standards. House prices in Britain have risen by 26% since 2009. In London during the same period they have risen by a massive 68%. Meanwhile the footsie 100 increased by 75%. And yet the economy is no better then it was in 2009. “Green shoots” have been talked about for years but never materialized. Stock markets and particularly house prices – which some forecasters assert could double within the next five years (8), has no bearing on reality (9).

We have reached a stage in human development whereby an elite backed by governments’ are able to gamble the money of other people with impunity. Even if by some quirk of nature, we as humans make it into the next century which on current trends seems increasingly doubtful (10), future generations’ will surely be amazed at how we have allowed the actions of a small parasitic minority to effectively asset strip the public realm owned collectively by the vast majority whose well-being and, in some cases, very existence depends. Craig Murray put it well when, in relation to Greece, he stated that “It will seem strange to future generations that a system developed whereby middlemen who facilitated real economic transactions by handling currency, came to dominate the world by creating a mathematical nexus of currency that bore no meaningful relationship to real movements of commodities” (11).

The price of nearly all assets – shares, bonds, property, land etc – have been rising for years. One of the reasons why this is so is because the money we have used to prop up the banks has not been to make them more secure in the long-term. The bankers are not interested in long-term stability but, on the contrary, are motivated by short-term gain. The way to ensure short term gain is to encourage people to buy assets. If, for instance, a lot of people invest their money into the same company by buying shares, then naturally the value of those shares will increase and so will their return on their initial investment. It can appear, therefore, that it’s of mutual interest to pump up these assets like a body-builder on steroids. Of course, rather like an over inflated balloon, these assets will at some point explode.

Writing in the Daily Telegraph, Jeremy Warner, states, “The trigger for an inevitable “correction” [financial armaggedon] could come from a clear blue sky – a completely unanticipated event” (12).

A systemic event could, in other words, rock markets thus precipitating another financial crisis akin to 2008 – a “recovery” which we haven’t yet recovered from. The last thing leading investment brokers – who advise investors as to where and what to invest in want to do, is to advise people to hold on to their actual money. Obviously, this is because in so doing, it doesn’t profit them personally. But that’s precisely what many of them ARE doing.

Have we escaped the worst of the crisis that began in 2008 or is the worst yet to come? The unresolved crisis in Greece, as well as the advice of people like Ian Spreadbury, would suggest we may be merely delaying the inevitable.

References:

1. http://www.telegraph.co.uk/finance/personalfinance/investing/11686199/Its-time-to-hold-physical-cash-says-one-of-Britains-most-senior-fund-managers.html

2. http://www.fscs.org.uk/

3. http://www.telegraph.co.uk/finance/personalfinance/investing/11686199/Its-time-to-hold-physical-cash-says-one-of-Britains-most-senior-fund-managers.html

4. http://rt.com/business/204155-taxpayer-bank-bailouts-rules/

5. http://www.bbc.co.uk/news/business-29982181

6. http://www.telegraph.co.uk/finance/bank-of-england/11715807/Banks-to-cut-protection-on-deposits-to-75000-from-January.html

7. https://www.craigmurray.org.uk/archives/2015/07/bail-out-or-sell-out/#comments

8. http://www.telegraph.co.uk/finance/property/house-prices/10216786/House-prices-Why-prime-London-property-could-double-by-2020.html

9. http://econlog.econlib.org/archives/2015/02/the_housing_bub.html

10. http://www.informationclearinghouse.info/article42281.htm

11. https://www.craigmurray.org.uk/archives/2015/07/bail-out-or-sell-out/#comments

12. http://www.telegraph.co.uk/finance/economics/11679761/Are-overvalued-stock-markets-heading-for-another-crash.html

The Economic Crisis: What’s Going On?

Following the recent election result in Britain, the people of that country decided they did not want any one of the traditional three main political parties to rule over them. Throughout the election campaign, the public were fed an almost constant stream of propaganda from a big business perspective.

The mainstream corporate media acted as a kind of echo chamber for this propaganda by reporting ad-nauseum the politicians’ belief that the failure of the people to assign an overall majority to any one particular party would effectively undermine “the national interest”. But when politician after politician speaks about “the national interest”, they mean the interests of those who own and control industry and those who move trillions around the money markets.

What the British people have been witnessing since the election, in the full glare of publicity, is the three main parties jostling and manoeuvring over how this notion of the national interest can be best accommodated in the interests of corporate power.

Sir Martin Sorell, chief executive of the advertising empire WPP, voiced the view of the major capitalists when he said that a hung parliament was the “worst possible” result:

http://blogs.news.sky.com/kleinman/Post:40de91a6-b227-432e-90c5-fe5869ab1a1d

Alan Clarke of BNP Paribas commented that “the UK could lose its top triple A credit status because of its failure to deliver a majority government with the authority to tackle the country’s public finances with immediete effect.”:

http://www.thisismoney.co.uk/news/article.html?in_article_id=495612&in_page_id=2

This is code for the insistence that ordinary people bear the brunt for the economic crisis by way of a series of austerity programmes and savage cuts to public services, while the rich get off scot free.

Sub-prime and the credit crunch

Let’s remind ourselves how we got here. The roots of the current crisis go some way back. After the 9/11 attack in New York, instability and fear pervaded financial markets. In order to steer the US and world economy out of a tight corner there was a reduction in interest rates and loosening of credit, encouraging people to borrow to sustain demand.

Banks took advantage of this and started to push mortgages. Initially the banks were lending on fairly good terms but then competition set in and those with money found they could expand their wealth by borrowing at low interest rates in order to lend to those prepared to pay higher interest rates. One of the main groups prepared to pay these higher rates were poorer sections of the population desperate to get somewhere to live and those who were previously regarded as uncreditworthy. As long as house prices continued rising, they seemed a safe group to lend to, since there was always a profit to be made by repossessing their homes if they failed to pay up on time. This lending became known as the “subprime mortgage market”.

Although on the surface this appeared to be a form of secure lending, in reality it was risky. Why? Because by 2006 the US economy began slowing down and profits in the US started to fall. As profits declined, firms got rid of workers and poor American’s could no longer keep up with their rising mortgage payments. Borrowing at one end of the chain could not be repaid. Repossessions led to falling house prices, and the “collateral” that supposedly guaranteed (provided security) against the loans, fell in value as well. An enormous 400 billion US dollars in lending was suddenly not repayable. 

A whole host of new institutions emerged that began specialising in the same manner as the banks. They would obtain cheap credit in the environment of low interest rates after 2001, use it to make loans, and then ‘securitise’ them. Other financial institutions would also use cheap credit to buy the new securities. Still other financial institutions would combine several of these securities to create even more complex, “synthetic” Collateralised Debt Obligations, which give their holders the right to interest accruing on the earlier securities, and so on.

In this baroque and opaque world, fuelled by cheap credit, it did not take long before just about all the major financial institutions across the world found themselves holding securities that contained bits of subprime mortgages. What was originally a small sickness within the US economy grew enormously because of the way capitalist credit works. In the end, governments’ were forced to intervene by bailing out vast swathes of the capitalist system as a precursor to saving it:

http://www.isj.org.uk/?id=395

In spring 2008, Bear Sterns became an early high profile casualty of the crisis on Wall Street which was followed by the next big Wall Street bank to collapse – Lehman Brothers. The meltdown in Greece followed shortly after. Speculators are already looking for the next domino set to topple after Greece. It might be one of the other weak eurozone countries, with Portugal tipped as the most likely, but it might well be Ireland, Britain or even the US, all of whom in 2010 have a higher projected budget deficit than Greece:

http://www.infiniteunknown.net/2010/05/05/uk-budget-deficit-to-surpass-greeces-as-worst-in-eu/

All this is happening despite the fact that the major economies are technically out of recession. The recovery can be characterised in three words: “weak”, “fragile” and “uncertain”. The recovery is weak because the crisis, in spite of its severity, has not resolved the underlying problems the global economy faces. These problems were created by three decades of sustained low profitability. A recent column in the UK’s Financial Times pointed out that after the Second World War profit rates held up at about 15 per cent in the US. By the 19080s it was 10 per cent, and today it is just 5 per cent:

http://www.permanentrevolution.net/entry/2976

This would appear to indicate that the underlying problems of the global economy are systemic.

Marx’s explanation

Marx’s basic line of argument was simple. Individual capitalists can increase their own competitiveness by increasing the productivity of their workforce. The way to do this is by using a greater quantity of the “means of production”—tools, machinery and so on—for each worker. There is a growth in the ratio of the physical extent of the means of production to the amount of labour power employed, a ratio that Marx called the “technical composition of capital”.

But a growth in the physical extent of the means of production will also be a growth in the investment needed to buy them. So this too will grow faster than the investment in the workforce. To use Marx’s terminology, “constant capital” grows faster than “variable capital”. The growth of this ratio, which he calls the “organic composition of capital”, is a logical corollary of capital accumulation.

Yet the only source of value for the system as a whole is labour. If investment grows more rapidly than the labour force, it must also grow more rapidly than the value created by the workers, which is where profit comes from. In short, capital investment grows more rapidly than the source of profit. As a consequence, there will be a downward pressure on the ratio of profit to investment—the rate of profit.

Each capitalist has to push for greater productivity in order to stay ahead of competitors. But what seems beneficial to the individual capitalist is disastrous for the capitalist class as a whole. Each time productivity rises there is a fall in the average amount of labour in the economy as a whole needed to produce a commodity (what Marx called “socially necessary labour”), and it is this which determines what other people will eventually be prepared to pay for that commodity. So today we can see a continual fall in the price of goods such as computers or DVD players produced in industries where new technologies are causing productivity to rise fastest:

http://www.isj.org.uk/?id=340

As the rate of return on investment declines in its totality, so it is the weakest companies financially – but not necessarily technologically – that go out of business. In turn, this results in an increase in unemployment. Thus workers are able to purchase fewer goods and services. This inevitably leads to a downward spiral of economic slump and crisis within the system as a whole.

But Marx argued that there were countervailing factors which mitigated against a total collapse of the system. For example, the diversion of investment from the production of goods and services to the production of arms – a process that is governed by states that are in constant competition with one another – provided a very important role in producing the long boom after the Second World War.

Also, Marx argued that profitability could be restored by crisis itself, through what he called “the annihilation of a great part of the capital”. During a recession some companies fail and are bought up by rivals, and others have to sell off parts of their business or dump their stock on the market to meet their obligations. Those companies that survive can take advantage of this, grabbing assets at a fraction of their real value and putting them to highly profitable use in the recovery that follows. Depressed wages and high unemployment also allow capitalists to squeeze more out of workers. A process of “creative destruction” may lead to a boom following a slump:

http://www.socialistreview.org.uk/article.php?articlenumber=11255

But this is not some automatic process that pushes the economy back towards some natural equilibrium. The post-war boom followed only after the prolonged horror of the 1930s slump and the destruction of the Second World War, which also forced states to intervene to reorganise whole national economies.

Comparing the present with the Great Depression

There are significant differences between the situation at the beginning of the present crisis and that in 1929.

First, state expenditure has for nearly 70 years been central to the system in a way in which it was not in 1929. In that year federal government expenditures represented only 2.5 per cent of GNP. In 2007 federal expenditure was around 20 percent of GNP:

http://www.usgovernmentspending.com/

And the speed and vigour with which the government has moved to intervene in the economy has been much greater this time. The Hoover administration (March 1929-February 1933) did make a few moves aimed at bolstering the economy, so that state spending rose slightly in 1930, and federal money was used to bail out some banks and rail companies through the Reconstruction Finance Corporation in 1932. But the moves were very limited in scope—and the state could still act in ways that could only have exacerbated the crisis in 1931 and 1932.

The Fed increased interest rates to banks and the government raised taxes. It was not until after the inauguration of the Roosevelt administration in March 1933 that there was a decisive increase in government expenditure. But even then the high point for total federal government spending in 1936 was only just over 9 percent of national output—and in 1937 began to decline.

By contrast, the cost of bailouts pushed through by the Bush government in its dying days, just as the credit crunch began to turn into a recession, could amount to an extra 10 percent of GNP:

http://www.isj.org.uk/index.php4?id=506&issue=121#121harman_65

Figure 1: Net federal expenditure as a percentage of GDP
Source: Éric Tymoigne, “Minsky and Economic Policy: ‘Keynesianism’ All Over Again?”, Levy Economics Institute, working paper

Figure 1

Figure 2: Composition of federal expenditure
Source: Éric Tymoigne, “Minsky and Economic Policy: ‘Keynesianism’ All Over Again?”, Levy Economics Institute, working paper

Figure 2

The increased importance of state expenditures—and the willingness of central banks and government to spend rapidly in trying to cope with the crisis—means there is a base level of demand in the economy which provides a floor below which the economy will not sink, which was not the case in the early 1930s. In this way, military expenditure, at $800 billion twice the level in current dollars of 2001, plays a particularly important role guaranteeing markets to a core group of very important corporations. Such spending can clearly serve to mitigate the impact of the crisis.

But there is an important second difference that operates in the opposite direction. The major financial and industrial corporations operate on a much greater scale than in the inter-war years and therefore the strain on governments of bailing them out is disproportionately larger. The banking crises of the early 1930s in the US was a crisis of a mass of small and medium banks—”Very big banks did not often become insolvent and fail, even in periods of widespread bank failures:

http://www.questia.com/library/book/too-big-to-fail-policies-and-practices-in-government-bailouts-by-benton-e-gup.jsp

This time we have seen a crisis of many of the biggest banks in most major economies. Within a day of Lehman Brothers going bust, banks such as HBOS in Britain, Fortis in the Benelux countries, Hypo Real Estate in Germany and the Icelandic banks were all in trouble. From there the crisis spread to affect other major banks and the “shadow banking system” of hedge funds, derivatives and so on. The most recent estimate of the total losses so far, from the Bank of England, amounts to a staggering $2,800 billion:

http://www.guardian.co.uk/business/2008/oct/28/economics-credit-crunch-bank-england

Despite this, global industrial production now shows clear signs of recovering. This is a sharp divergence from experience in the Great Depression, when the decline in industrial production continued fully for three years. Paradoxically, staving off a catastrophic slump may have simply guaranteed that problems linger on, ensuring that recovery remains weak.

The recovery is also uneven. Initial estimates suggested that British growth slowed to just 0.2 percent in the first quarter of 2010. The US is growing faster, and is also faring better than Germany and Japan, which are more export-oriented and have suffered more from the decline in world trade than from the initial financial meltdown. China was also hit by falling demand for its exports but has continued to boom due to a massive state-sponsored domestic investment programme:

http://www.socialistreview.org.uk/article.php?articlenumber=11255

This has revived the fortunes of some of the developing economies that supply it with raw materials. But even in China there are fears that growth is unstable, with widespread concerns about an emerging property bubble, a glut of lending raising the prospect of colossal levels of bad debt, and the danger that too much is being produced for still-limited markets.

The weakness of the global recovery means that workers will continue to suffer. In some countries this takes the form of high unemployment and attacks on wages, as in the US, Spain and Ireland. In others, such as Germany and Japan, where unemployment has not risen as fast, companies have sought to hold on to workers but have cut pay rates, reduced hours or shifted workers onto part-time contracts. Britain lies somewhere between the two extremes. ibid.

Unemployment and underemployment will persist well into any recovery. A recent IMF report argues that employment falls further and takes longer to recover during recessions that have a significant financial component. The report indicates that it could take a year and a half from the end of the recession for any substantial improvement, assuming that the recovery continues:

http://www.dailymarkets.com/economy/2010/04/22/imf-global-recovery-stronger-than-expected-but-strength-varies/

Finally, any recovery is and will remain uncertain. State interventions replaced private borrowing and investment with mountains of public debt, and falling tax revenues made it difficult to recover the money spent. Now governments everywhere face a dilemma. Do they cut back to pay off their debts, risking a “double-dip recession” as the stimulus is withdrawn? Or do they continue spending and risk a run on their currencies, as the eurozone experienced amid fears of a Greek default?

Copyright: Daniel Margrain.