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Financial Bubble Inflammation
Bubble formation covered up a period of long-lasting stagnation... Former US Treasury Larry Summers even spoke of stagnation as a "new normality"... Crisis consequences are shifted to other subjects. Unemployment and indebtedness are exported... Shrinking the financial sector and expanding the public sector are vital lessons from the 2008 financial crisis to avert future crises.
FINANCIAL BUBBLE INFLAMMATION
To know what inwardly drives the current global crisis dynamic, look at more cartoons
By Tomasz Konicz
[This article published on May 9, 2014 is translated from the German on the Internet, http://www.streifzuege.org/2014/finanzblasenentzuendung. The critical economist Tomasz Konicz is also the author of “The Crisis Explained” (http://portland.indymedia.org/en/2012/01/413591.shtml).]
We all know and love our Road Runner, the running bird as fast as an arrow who escapes the traps and persecutions of his voracious enemy, the coyote Wile E. Coyote in the Warner Bros. cartoon of the same name. However very few lovers of this animated cartoon series are aware that a recurring final scene of the Road Runner cartoons – the central “running gag” of the series – represents the perfect allegorical presentation of the past crisis course. Again and again the coyote in its wild chase after the Road Runner races over the cliff of a deep abyss without immediately plunging to the abyss. Rather the coyote is first suspended in the air until suddenly becoming conscious that there was no ground under its feet. Then the deep fall first occurs.
The capitalist world system finds itself in such an historical crisis phase. Capitalism has long stormed over the cliff. The system is suspended in the air although this fact is often ignored. The foundation on which capitalism has chased maximum profit since its earliest beginning around 500 years ago is the exploitation of workers in goods production. For around three decades, the capital relation had forfeited its substance on account of escalating inner contradictions.
This basic contradiction of the capitalist production method is as follows: Paid labor is the substance of capital while capital at the same time strives to replace paid labor in the production process through competition-conditioned rationalization measures. That capitalist who first successfully introduces a rationalization measure can hope for extra profits until this innovation is generalized in the affected branch of industry. The profit or surplus value generated in the impacted industrial branch declines absolutely. Marx introduced the ingenious term “processing contradiction” for this auto-destructive progress. This contradiction of capitalist goods production in which capital minimizes its own substance through competition-mediated rationalization pushes with paid labor can only be maintained in “processing” in continuing expansion and further development of new exploitation fields of goods production. The same scientific-technical progress that leads to the melting of burnt-out paid labor in established branches of industry also encourages new industrial branches and manufacturing methods to arise.
Thus the famous industrial structural change results from this processing contradiction – the ability of capital to “reinvent” itself again and again – about which the middle class capitalism apologetic is so proud. Since the beginning of industrialization in the 18th century, the capitalist economic style has been marked by a structural change in which the textile branch, heavy industry, the chemical branch, the electronic industry and the Fordist auto-manufacturing served as key sectors that exploited masses of paid labor. With the rise of the micro-electronic revolution, industrial structural change broke down from the 1980s. These new technologies created far fewer jobs than were rationalized away by their aggregate economic application. Thus the productive forces burst “the chains of production relations” (Marx) and capital struck an “inner limit” (Robert Kurz) of its development capability.
To avoid collapsing in its own contradictions, capitalism had to leave the ground of worker exploitation during the neoliberal revolution of the 1980s and set itself in the airy heights of a finance-market dominated economic structure. The system reacted to the breakdown of industrial structural change with the establishment of the financial system as a “key sector.” Consequently capital exploitation is increasingly simulated on the financial markets. Since no real capital exploitation can be permanently pursued within the financial sphere (therefore the entire world for several years has spoken of a necessary “re-industrialization”), growth in the past three decades was fueled by a historically unique boom of the most important good offered by the financial sector: credit. The capitalist world system runs on credit on the anticipation of future exploitation shifted into the future again and again by the awarding of credit. Credit generates the demand that maintains capitalist goods production choking in its productivity. To an overwhelming extent, the accepted credits are real-estate or consumption-credits, not investment credits in goods production and its expansion or modernization.
The central mechanism that transforms the increasing financial market-generated indebtedness into real economic growth is the speculation bubble. The system increasingly processes the speculation bubbles rising and alternating again and again from the 1980s into “hot” air. As soon as a bubble bursts, the fall threatens that was prevented through the rise of a new speculation bonanza. The suspicion that the system is only maintained by hot credit-generated air (the “abyss” seen by the minister of finance Steinbruck in a 2008 Spiegel interview) occurring with the bursting of a bubble had to be repressed by the rise of new speculation waves. One could speak here of a regular bubble-transfer in which all the financial- and fiscal measures used to fight the consequences of a burst speculation dynamic helped create the foundations of a new bubble formation. Ultimately the capitalist financial policy can only put out the speculation fire with gasoline.
This is not a linear but a dynamic process. The costs and expenditures to stabilize the world financial system rise intensely with the bursting of every bubble until financial power exceeds the largest national economies. These crisis tendencies may be concretely understood in the new bursting debt bubbles in many threshold countries (see Konkret 3/14). South Africa, Argentina, India, Indonesia, Ukraine, Malaysia and Brazil are threatened, alongside Turkey. National economies are stricken with high balance of payments deficits, low currency reserves and high indebtedness that experienced a boom fueled in the past years through capital infusions – a so-called deficit economy. Since 2008 the enormous capital inflows in the semi-periphery generated growth. Several “economists” tell of a new global era when threshold countries will act as bearers of global growth. Through the low interest policy in the US and Europe, investments in the threshold countries – as in the real estate sector – were very profitable on account of high yields.
The phase of an extremely expensive monetary policy since 2008 is obviously a consequence of burst speculation bubbles on the real estate markets of the US and several states of Europe. The “cheap money” of the central banks together with the liquidity injections of the Fed, the $85 billion pumped into the markets every month for years first kindled the speculative fear in the threshold-countries that is now strangled by the reduction of bond purchases by the US Fed (to $65 billion) – and threatens to drive the semi-periphery of the capitalist world systems into a serious crisis.
The real estate boom that collapsed in 2008 was initiated by the monetary measures of the US Fed that sought to mitigate the consequences of the stock market speculation with US high tech stocks (Dot-Com bubble) breaking down in 2001. No extreme measures were necessary with the bubble-transfer at that time. The Fed lowered the key interest of 6.5 percent in 2000 to less than two percent in the period between 2002 and the end of 2004. That was enough to make mortgage credits with variable interest rates attractive for people who could not really afford a house. A zero interest policy is no longer enough to stabilize the system which like a debt-junkie is regularly dependent on the liquidity injections of the US Fed.
In middle class economics, it is striking that late capitalism depends on incurring debts, printing money and the inevitable formation of bubbles. Former US Treasury secretary Larry Summers rushed forward in declaring the historically unique expansive monetary policy of the US Fed and the financial bubbles of the past decades economic necessities. In the last decade, speculation bubbles and a loose credit policy only generated “moderate growth,” Summers told the Financial Times. Without support by “unconventional policy” (negative interests and printing money to an unparalleled extent), the US and the important global economies would not be able to return “to full employment and strong growth.” Bubble-formation covered up a period of long-lasting stagnation for the world economy, Summers said. This state could continue for “a rather long time.” In the Financial Times, he even spoke of stagnation as a “new normality” (ironically one challenge of “economics” is explaining the hair-raising exactions of capitalist socialization as normality).
In the New York Times, the well-known US economist and Nobel Prize winner Paul Krugman forecast a global “age of bubbles” in view of the current collapsing speculations in many threshold countries. In a blog entry, Krugman followed the trace of this bubble economy from the Internet stocks bubble of the 1990s and the 1997/98 Asian crisis back to the 1980s, the “late years of the Reagan expansion.” Krugman agreed with Summers’ assessment that “we are in an economy that needs bubbles to produce nearly full employment.” However this is not only true since the financial crisis of 2008. “It is true since the 1980s though with an increased intensity.” Two decades after critics like Robert Kurz explained these connections, bourgeois economy has finally met the inner limit of capital.
The crisis process resulting from the de-substantialization of capital, a blind autonomous process, takes place behind the backs of the market subject. For politics, the crisis process has the form of the notorious quasi objective “practical constraints.” Unable to act beyond the capitalist framework, middle class politics finds itself in a crisis trap. It can only choose between different ways in the crisis. On one side, the political caste can try to maintain the indebtedness dynamic as long as possible by means of printing money and economic programs (a nationalization of the deficit-economy) or it can choose the Kamikaze-strategy or suicide mission and set off a deflationary shock along with the following economic collapse. As everybody knows, German policy in Europe decided for this variant. The results are well known. On the other side, the US and China reacted to the crisis push and stabilized the system by printing money, economic injections and low interests – at the cost of the now collapsing speculation dynamic in the threshold countries. But how can the consequences of future dislocations on the financial markets be compensated when monetary policy acts at the limits of its possibilities?
Another characteristic of capitalist crisis policy comes into play here – shifting the crisis-consequences to other subjects. The capitalism processing bubbles rising into hot air tends to let new regions of its periphery simply fall into the abyss. National economics and states can realize this through an aggressive economic policy by gaining the greatest possible trade- and balance of payments-surpluses. Unemployment and indebtedness are exported with these surpluses given this neo-mercantilist economic orientation. Germany has perfected this strategy by amassing extreme trade surpluses over against the Euro states since the introduction of the Euro on account of Agenda 2010 – driving its southern periphery into socio-economic collapse after the outbreak of the crisis. Previously the southern periphery was maneuvered into debt-bondage by means of the trade surpluses.
Ultimately a successful capitalist economic policy is only possible at the cost of other economic zones in the present historical phase of a deep system crisis. The illusion of a healed intact capitalist work society in Germany is based ironically on foreign debts demonized in Germany. Therefore classic social-democratic economic policy oriented in demand-stimulation runs aground as recently manifest in France. With open markets and a common currency, the backing of domestic demand simply led to France with the largest trade deficit of all countries of the Eurozone. Thus the French domestic market like Southern Europe’s previously collapsed markets – helps the revitalization and expansion of German industry.
What Germany demonstrates in the Eurozone – shifting all crisis consequences to its periphery – is now carried out in a similar way on the global plane toward many threshold countries. With the reduction of bond purchases by the Fed, the global capital streams change direction and increasingly turn from threshold countries threatened by capital outflows, recession, mass unemployment and pauperization while the centers experience a stabilization because of renewed capital inflows. The crisis-plagued Eurozone even profited on account of the falling interest rate. “The financial problems of the threshold countries even increased the attractiveness of the crisis-countries in the Eurozone,” the FAZ (Frankfurter Allgemeine Zeitung newspaper) remarked. Threshold countries are important as raw material suppliers and low wage locations, not as markets. The dislocations now occurring in the threshold countries will hardly lead “to a full-blown infection of the rich countries,” the Financial Times reassured in a commentary since these countries do not play a great role as sales markets. On the limitation of crisis-consequences to the semi-periphery, the Fed speculates on the reduction of its printing money called “tapering.”
The new world trade agreement regulates the unhindered access to the raw materials and resources of the semi-periphery now facing collapse and massively restricts the protectionist measures in the global South. At the same time the global North forces screening tendencies over against the threshold countries increasingly seen as competition – China in particular. The desired free trade agreement between the US and the EU (Transatlantic Trade and Investment Partnership, TTIP) has no other goal. To both sides, the free trade agreement opens the possibility of re-asserting the “global leadership” of the “old West” in a multi-polar world, the Wall Street Journal commented at the start of negotiations. The Neue Zurcher Zeitung newspaper was even clearer: the TTIP does not serve “liberalization of trade.” Rather it represents a protective mechanism against overly strong competition. The targeted free trade zone is a protectionist attempt “to create a trade regime with exclusion of China and other threshold countries.”
Deutsche Welle illustrated the calculation behind this: “Where there are many winners, there must be a few losers.” The volumes of world trade would experience a re-routing through the TTIP, not a fast increase. While the big trading blocs may strengthen the exchange of goods among themselves, imports from “Latin America, Asia and Africa” would decrease in these “super-free trade zones.” The Chinese newspaper Global Times commented that the TTIP would force China “into a corner” because the People’s Republic and other threshold countries could not afford being excluded and ultimately would come “on board” – obviously to conditions of the “Old West.”
Finally the states in the centers of the world system react with outer expansion to the increasing crisis-conditioned inner contradictions and dislocations. Germany announced a greater military engagement in Africa after France capitulated in a political-economic regard and abandoned resistance against German austerity sadism. The forced pressure of the EU to the East – in which Berlin is again the driving force – has the goal of preparing Russia and the whole post-Soviet realm to be Europe’s periphery. Through the intervention of the West in the Ukraine, the possibility of realizing the Kremlin project of a “Eurasian Union” acting as a counterweight to the EU should be taken from Russia.
[from: Konkret 4/2014]