Understanding the Current Economic Crisis

The ABC’s of the Economic Crisis: What Working People Need to Know
Fred Magdoff and Michael Yates

Monthly Review Press (2009)

Book Review

In the ABC’s of the Economic Crisis, Magdoff and Yates use stagnation theory to explain the origins of the current global economic crisis. Karl Marx predicted that overproduction and stagnation would be inevitable under monopoly capitalism once market demand has been saturated. Magdoff and Yates use the auto industry as an example. Immediately after World War II, consumers bought a lot of cars and trucks which were unavailable between 1941 and 1945. By 1970 there was a surplus of cars – all the Americans who wanted cars and trucks had already bought them. Meanwhile the world’s poorer nations didn’t have a mass market large enough to reduce this surplus.

The same was true of other durable goods (refrigerators, washing machines, dishwashers, vaccuum cleaners, etc). And as consumer buying slowed, so did profits and GDP growth.

Why Capitalism Didn’t End With the Great Depression

Many Marxists (including John Strachey in The Coming Struggle for Power) believed the Great Depression signaled end stage stagnation and the imminent death of capitalism. According to Magdoff and Yates, it was only the massive economic boost of World War II military spending that saved capitalism in the thirties and forties.

There was also a brief post war boom in the fifties and sixties, as consumers rushed to buy goods that were unavailable during the war. When the sixties ended, stagnation set in again, accompanied by a marked slowing of profits and growth. However neither declined to 1930s levels, thanks to the “financialization” of the US economy.

The Financialization of the US Economy

The term “financialization” describes the process of creating profits without producing products or services. In the US, finanancialization injected money into the economy in three ways: via massive government spending and indebtedness (to private banks), via massive consumer indebtedness and via an explosion in the trade of derivatives and similar financial products.

Between 1980 and the 2008 crash, the banking, insurance and investment sector became the largest growth sector of the US economy. Beyond financing unprecedented levels of consumer, business and government debt, this sector also engaged massively in speculation (ie gambling).

Financialization: A Giant Ponzi Scheme

As Magdoff and Yates describe, the enormous “wealth” created by the financial sector helps to drive the “real” productive economy. The main problem with financialization is that it’s basically a Ponzi scheme – it can continue only so long as economic growth continues. If it goes on too long, the speculative bubble will burst, resulting in financial collapse, as it did in 1929 and 2008.

The Link Between Declining Profits and Low Wages

Despite the life support provided by “financialization,” economic stagnation continued between 1970 and 2008. As Magdoff and Yates point out, GDP growth dropped from 4.4 to 3.3 percent in the 1970s, to 3.1 percent in the eighties and nineties, and 2.2 percent between 2000 and 2008.

A significant decline in wages and purchasing power accompanied this decline in profits and growth. In order to keep workers consuming, the corporate sector compensated by giving them credit cards – lending them money at 18-20% interest they were no longer paying in wages.

The Case for Unconditional Basic Income (UBI)

Transitions for Society: Job Guarantee and Basic Income

Prosocial Progress foundation (2014)

Film Review

This 20 minute documentary attempts to address the structural unemployment that seems to have become a permanent feature of monopoly capitalism. According to the St Louis Federal Reserve, as of February 2015, only 62.8% of working age Americans have jobs – translating into a 36.2% unemployment rate. A substantial proportion of the jobless are young adults between 16 and 24. Who face more or less permanent exclusion from the economy.

The premise of the film is somewhat unusual. The filmmakers lay out the proposition that the political elite could save capitalism by enacting an unconditional basic income (UBI) for all citizens. However based on past history, they probably won’t. Instead of making the necessary reforms, they will allow human misery and social unrest to increase until the system is overthrown by popular revolt. They see a small chance one or more European countries could enact a UBI. A grassroots Swiss movement has successfully petitioned for a (binding) UBI referendum in 2016.

Martin Luther King’s Call for a UBI

Martin Luther King first called for a UBI in 1967 – in combination with a job guarantee. He maintained the US could easily afford such a program based on the massive automation-related productivity gains. He could not have predicted the financialization of the US economy that would occur in the 1970s, when Wall Street abandoned manufacturing to focus on selling financial products. Nor that this transformation would ensure that the benefits of higher productivity would accrue to the capitalist class, rather than workers.

A UBI, financed by progressive taxation, pays a fixed income to all citizens regardless of their employment or financial status. The most common argument against UBI is that it’s wrong to pay people for doing nothing. However as one interviewee points out, western governments presently pay billions in subsidies to corporations who provide no social benefit whatsoever. If we paid these subsidies to real people instead of corporations, society as a whole would gain gains by reducing the social costs of chronic unemployment and poverty.

How UBI Increases Productivity

Studies in third world countries show that guaranteeing income security causes people to increase their productivity by working more.

The most interesting section of the film describes a pilot program in Madhya Pradish India, in which all men, women and children were paid a UBI. After eighteen months, investigators found their was a clear reduction in illness (due to better nutrition and improved access to health care), a clear increase in the number of women farming their own land and a significant increase in school attendance.

Reducing Foreign Policy to Good vs Evil

Bitter Lake

by Adam Curtis (BBC) 2015

Film Review

By now, people will have noticed I’m a bit of an Adam Curtis fanatic (Curtis also produced The Century of the Self). Like all his documentaries, Bitter Lake focuses on propaganda and ideological manipulation by the political elite. This film traces how fanatical Muslim sects like the Taliban and ISIS are the direct result of western colonization of the Middle East – and how US and British leaders deliberately deceive their citizens by reducing foreign policy to a simple metric of good and evil.

In Afghanistan, this oversimplification created an extraordinary dilemma for US and British troops and confronting the spontaneous Afghan insurgency that opposed the occupation. They naively believed they were bringing democracy to Afghanistan. In reality, they were substantially increasing the power and brutality of corrupt, heroin-trafficking war lords. The documentary artfully intersperses great footage of the Soviet occupation of Afghanistan with video from the more recent US occupation. The parallels between the two are uncanny.

Roosevelt’s Meeting with the Saudi King

The film takes its title from a 1945 meeting Roosevelt had with Ibn Saud, the king of Saudi Arabia, at Bitter Lake on the Suez Canal. The purpose of the meeting was to draw up a mutual security agreement that would keep Saudi oil fields under US control.

Curtis goes on to trace the rise of Wahhabism in Saudi Arabia, starting with the Wahhabist Bedouins who first brought the House of Saud to power in 1932. There was constant tension between the Saudi princes, who sought to modernize Saudi Arabia, and the Whahhabists, who opposed all imperialist development and sought to transform the country into a seventh century caliphate.

In 1964, King Faisal sought to alleviate this tension by sending the Wahhabists abroad to fight the growing influence of communism in the Muslim world. With US support, he used them to set up up madrassa throughout the Muslim world to train low income boys in Wahhabism.

The Economic Impact of Higher Oil Prices

In 1973 the US-Saudi relationship experienced a major breakdown when the US sided with Israel in its war against its Arab neighbors. By quintupling the price of oil, King Faisal forced the US and Israel to agree to a ceasefire.

The higher oil prices led to a total transformation of the global economic system. It caused mucho petrol dollars to flood into the Middle East, which the Saudis and other Mid East governments turned over to US and British banks to invest for them. This would provide the impetus for the “financialization” of the global economy, in which western capitalism would abandon manufacturing to focus on creating and selling financial products.

Higher prices for all commodities would also result in massive economic instability in the western world over the next seven years. A steep reduction in manufacturing jobs and wages would led to widespread popular unrest, which would bring right wing governments to power in most western democracies.

The Soviet Invasion

Curtis carefully outlines the historical events in Afghanistan that would lead to the overthrow of the monarchy in 1973, the Marxist revolution in 1978, the Soviet invasion in 1979 and the US/Saudi collaboration to recruit Saudi Wahhabists to defeat the Soviet occupation. The most prominent of these freedom fighters, known as the Mujahideen, was a Saudi highway engineer and CIA asset known as Osama bin Ladin.

Reducing Foreign Policy to Good vs Evil

Like Ronald Reagan, George W Bush attempted to reduce the US role in Afghanistan to a simple battle of good vs evil. The political reality was far more complex. US and Saudi intervention during the Soviet occupation brought corrupt warlords to power who supported their fiefdoms through Afghanistan’s heroin trade.

The Taliban, consisting mainly of Afghan orphans raised in Pakistani Madrassa, were primarily driven by a desire to end the heroin trade and this endemic corruption, which they (rightly) blamed on the interference of western imperialists in their country’s domestic affairs.

http://www.dailymotion.com/video/x2hdcji_bitter-lake-2015-adam-curtis-documentary-1-of-3-720p_shortfilms

http://www.dailymotion.com/video/x2hdd54_bitter-lake-2015-adam-curtis-documentary-2-of-3-720p_shortfilms

http://www.dailymotion.com/video/x2hde2l_bitter-lake-2015-adam-curtis-documentary-3-of-3-720p_shortfilms

Economic Justice: the Rolling Stone Version

(This is the first in a series of posts about ending the right of private banks to create money.)

In January Jesse Myerson, writing in the Rolling Stone, called for five seemingly radical economic reforms in an article entitled Five Economic Reforms Millenials Should be Fighting For:  guaranteed jobs for everyone, Social Security for all (a guaranteed Universal Basic Income for all citizens), Land Value Tax (which I blog about in Progress and Poverty ), creation of a Sovereign Wealth Fund (enabling government to buy back and own public assets), and a state-owned bank (like the Bank of North Dakota) in every state.

Personally I found the article disappointing and a little sad. Myerson seems to deliberately overlook the most pernicious problem in our present economic system:  the power we give private banks to issue and control our money supply.

Contrary to popular opinion, the government doesn’t issue money, except for a limited amount of notes and coins. As the film below explains, 97% of the money supply is electronic and created by private banks when they issue loans.

A lot of people have the mistaken impression that banks use other depositors’ money when they loan us money to buy a house. What actually happens is that the bank creates the money out of thin air by entering numbers into a computer.

Another common erroneous belief is the the Federal Reserve, which serves as the US central bank, is a government agency. It’s not. It’s a consortium of private banks.

97% Owned (Positive Money 2012) makes the case that the only solution to the current economic recession is to ban private banks from issuing money. They argue for making money creation publicly accountable by restoring this function to government (ironically this is where most people mistakenly believe it lies). Until we make this happen, private banks will continue to use their control of the monetary system to undermine genuine economic and political reform.

Speculators

wall street

Guest blog by Steven Miller

(This is the second of 6 guest posts by Steven Miller describing the financialization of capitalism and the takeover of the global economy by bankster speculators)

Speculators – Part II

Today the financial industry makes far more profit than any other sector of capitalist production. In 1973, they made 16% of total US profits; by 2007, financial profits reached 41% of all profits. (2) Since credit and debt control the levers of the economy, the financial industry has become politically dominant. The planning function of government increasingly devolves to their control. Finance – producing money from money – produces no value; it simply moves money around, but it does centralize even more wealth in the hands of speculators.

Once Wall Street speculators realized, after the 2008 Crash, that their new “financial instruments” were actually weapons of economic mass destruction, they understood that these tools could be employed to attack national and public wealth. Speculators get richer by seizing your wealth.

They do this today with hedge funds, among other things, which are completely private, completely unregulated and completely hidden from the public. But you can make wild speculative bets with their expert staff. Because they are “private”, we are supposed to accept whatever negative effects they have on society. Though the results are highly destructive to society, this is not up for debate.

Today the financial industry in the US is sitting on the largest mountain of cash in human history, over $2 trillion. Why? This is perceived as strange behavior, since they received over $16 trillion in the 2008/9 Bailout. In addition, the US government for at least two years has been dutifully sending them $85 billion a month, over a trillion dollars a year, in free money. (3)

So why don’t they spend it?

Every modern industry, especially finance, is based on extending credit; the debt is then “leveraged” to takeover companies and engage in various forms of speculation. As financial companies began to collapse in 2008, every one that was “solvent” lied and minimized how much of their holdings were based on toxic assets. Since each one knew that the others were also lying, they began to curtail how much credit they would extend. Without credit, modern capitalist commerce was on the verge of collapse. This is why the form of the Bailout was for the government to buy up toxic assets. This situation still prevails today.

Michel Chussodovsky, professor of economics at the University of Ottawa, and organizer of the Center for Global Research describes how this was rigged:

In a bitter irony, while the Wall Street institutions were the recipients of the bailouts, they are also the creditors of the federal government, which has been precipitated into a structure of debt financing controlled by Wall Street. This deficit financing… is controlled by the creditors. It does not create employment. It is not expansionary.” (4)

This reality illuminates the dangerous instability of the times. In essence, the public is financing its own indebtedness and funding its own privatization. The banks collapsed the economy in 2008 because they had been counting their various toxic assets as part of their wealth. Money is now generated, loaned and invested by clicking a computer keyboard. The monthly $85 billion gift, of course, is not put into gold bars and moved into the bank vaults by elves. The financial industry uses public money to offer increasingly shady loans, essentially organized criminal activity against the public.

Every day the value of one-year’s GDP in the US – about $14 trillion  – passes through Wall Street and other financial institutions! This is the Casino Economy. Most of this vast wealth is put into play as speculative bets, driven by computer-driven programs, on anything from water to debt to fracking. Just like mortgages, anything that can be financialized – entire electrical grids, school districts, pensions, and medical credit – almost anything at all – can also be securitized and bundled as fodder for speculation.

It is important to recognize that none of these vast transactions are taxed at all. Real people pay a large sales tax on almost everything in the US; corporate people pay ZERO on their schemes to increase their great wealth. A simple tax of 2 cents on the dollar would generate $28 billion a day, enough revenue to solve every financial issue that America faces.

Numerous people have proposed this idea, since it would end Austerity and usher in an era where governments could provide incredible resources to real people for free. The fact that this “reform” will never be permitted is a telling sign of a system that is approaching its demise.

The immediate result of the Crash was that the banks, hedge funds, insurance companies, private equity firms, real estate interests, etc. simply reprogrammed their computers to speculate on food and petroleum. Hence the mega-jump in food prices in the Fall of 2008. But money that doesn’t circulate produces no profit, so the financial industry has begun to invest in solid, material assets, tangible properties that cannot be wiped out with a click of a keyboard. Meta-money is the cousin of the NSA’s meta-data. Its use by corporations is equally malign.

Thus today we are in the midst of a tsunami of privatization, as the banksters are seizing and privatizing everything they can get their hands on. They are seizing public assets and a rate never before seen. Everything is financialized – given a monetary rating; then it is securitized – turned into speculative assets, which are quickly privatized; then your access to it without money is eliminated and thus criminalized. (5)

This trend has been noted by a number of observers:

Michael Hudson, professor of economics, University of Missouri Kansas City,:

This financial engineering is not your typical bubble. The key to the post-2000 bubble was real estate. It is true that the past year and a half has seen some recovery in property prices for residential and commercial property. But something remarkable has occurred. This new debt-strapped low-interest environment has seen Hedge funds and buyout funds doing something that has not been seen in nearly a century: They are buying up property with cash, starting with the inventory of foreclosed properties that banks are selling off at distress prices.” (6)

Ellen Brown, Web of Debt Blog:

Giant bank holding companies now own airports, toll roads, and ports; control power plants; and store and hoard vast quantities of commodities of all sorts. They are systematically buying up or gaining control of the essential lifelines of the economy.”  (7)

Michel Chussodovsky again:

The privatization of public monuments, museums, national parks, the post office, etc., has been raised in recent media reports as a possible ‘solution’ to the debt crisis. But let us not be misled: the process of acquisition of federal public property including the infrastructure and State institutions is likely to go much further. The public sector is up for grabs. Wall Street will eventually go on a buying spree picking up State owned assets at rock bottom prices.” (8)

References and Resources

 2)  Dave McNally, Global Slump, 2011. P 86

 3)  Harding. “Bernanke takes plunge with QE3.” www.ft.com

4)      Chussodovsky. “The Shutdown of the US Government  and ‘Debt Default’. A dress Rehearsal for the Federal State System?”. Center for Global Research

5)       5)  “Debt As a Class Weapon”. Rally Comrades, October 2011

 6)  Michael Hudson. “The Bubble Economy as a 2 Part Play for Privatisation”. July 4, 2013

 7) Ellen Brown. “The Leveraged Buy-out of America.” Center for Global Research, August 26, 2011

 8)  Chussodovsky. Op sit

photo credit: nromagna via photopin cc

To be continued.

***

Steven Miller has taught science for 25 years in Oakland’s Flatland high schools. He has been actively engaged in public school reform since the early 1990s. When the state seized control of Oakland public schools in 2003, they immediately implemented policies of corporatization and privatization that are advocated by the Broad Institute. Since that time Steve has written extensively against the privatization of public education, water and other public resources. You can email him at nanodog2@hotmail.com

Originally posted at Daily Censored