[R-G] [BillTottenWeblog] The Global Collapse

[Bill Totten]

A Non-Orthodox View

by Walden Bello

ZNet (February 22 2009)

This is the longer version of an essay by the author released by the
British Broadcasting Corporation (BBC) on February 06 2009.


Week after week, we see the global economy contracting at a pace worse
than predicted by the gloomiest analysts.  We are now, it is clear, in
no ordinary recession but are headed for a global depression that could
last for many years.


The Fundamental Crisis: Overaccumulation

Orthodox economics has long ceased to be of any help in understanding
the crisis.  Non-orthodox economics, on the other hand, provides
extraordinarily powerful insights into the causes and dynamics of the
current crisis.  From the progressive perspective, what we are seeing is
the intensification of one of the central crises or "contradictions" of
global capitalism: the crisis of overproduction, also known as
overaccumulation or overcapacity.  This is the tendency for capitalism
to build up, in the context of heightened inter-capitalist competition,
tremendous productive capacity that outruns the population's capacity to
consume owing to income inequalities that limit popular purchasing
power.  The result is an erosion of profitability, leading to an
economic downspin.

To understand the current collapse, we must go back in time to the
so-called Golden Age of Contemporary Capitalism, the period from 1945 to
1975.  This was a period of rapid growth both in the center economies
and in the underdeveloped economies - one that was partly triggered by
the massive reconstruction of Europe and East Asia after the devastation
of the Second World War, and partly by the new socioeconomic
arrangements and instruments based on a historic class compromise
between Capital and Labor that were institutionalized under the new
Keynesian state.

But this period of high growth came to an end in the mid-1970s, when the
center economies were seized by stagflation, meaning the coexistence of
low growth with high inflation, which was not supposed to happen under
neoclassical economics.

Stagflation, however, was but a symptom of a deeper cause: the
reconstruction of Germany and Japan and the rapid growth of
industrializing economies like Brazil, Taiwan, and South Korea added
tremendous new productive capacity and increased global competition,
while income inequality within countries and between countries limited
the growth of purchasing power and demand, thus eroding profitability.
This was aggravated by the massive oil price rises of the seventies.

The most painful expression of the crisis of overproduction was global
recession of the early 1980s, which was the most serious to overtake the
international economy since the Great Depression, that is, before the
current crisis.

Capitalism tried three escape routes from the conundrum of
overproduction: neoliberal restructuring, globalization, and
financialization


Escape Route #1: Neoliberal Restructuring

Neoliberal restructuring took the form of Reaganism and Thatcherism in
the North and Structural Adjustment in the South.  The aim was to
invigorate capital accumulation, and this was to be done by (1) removing
state constraints on the growth, use, and flow of capital and wealth;
and (2) redistributing income from the poor and middle classes to the
rich on the theory that the rich would then be motivated to invest and
reignite economic growth.

The problem with this formula was that in redistributing income to the
rich, you were gutting the incomes of the poor and middle classes, thus
restricting demand, while not necessarily inducing the rich to invest
more in production.  In fact, it could be more profitable to invest in
speculation.

In fact, neoliberal restructuring, which was generalized in the North
and south during the eighties and nineties, had a poor record in terms
of growth: Global growth averaged 1.1 percent in the 1990s and 1.4
percent in the 1980s, compared with 3.5 percent in the 1960s and 2.4
percent in the 1970s, when state interventionist policies were dominant.
 Neoliberal restructuring could not shake off stagnation.


Escape Route #2: Globalization

The second escape route global capital took to counter stagnation was
"extensive accumulation" or globalization, or the rapid integration of
semi-capitalist, non-capitalist, or pre-capitalist areas into the global
market economy. Rosa Luxemburg, the famous German radical economist, saw
this long ago in her classic The Accumulation of Capital (1913) as
necessary to shore up the rate of profit in the metropolitan economies.

How?  By gaining access to cheap labor, by gaining new, albeit limited,
markets, by gaining new sources of cheap agricultural and raw material
products, and by bringing into being new areas for investment in
infrastructure. Integration is accomplished via trade liberalization,
removing barriers to the mobility of global capital, and abolishing
barriers to foreign investment.

China is, of course, the most prominent case of a non-capitalist area to
be integrated into the global capitalist economy over the last 25 years.

By the middle of the first decade of the 21st century, roughly forty to
fifty percent of the profits of US corporations came from their
operations and sales abroad, especially in China.

The problem with this escape route from stagnation is that it
exacerbates the problem of overproduction because it adds to productive
capacity.  A tremendous amount of manufacturing capacity has been added
in China over the last 25 years, and this has had a depressing effect on
prices and profits.  Not surprisingly, by around 1997, the profits of US
corporations stopped growing.  According to one calculation, the profit
rate of the Fortune 500 went from 7.15 in 1960-69 to 5.30 in 1980-90 to
2.29 in 1990-99 to 1.32 in 2000-2002.  By the end of the 1990s, with
excess capacity in almost every industry, the gap between productive
capacity and sales was the largest since the Great Depression.


Escape Route #3: Financialization

Given the limited gains in countering the depressive impact of
overproduction via neoliberal restructuring and globalization, the third
escape route - financialization - became very critical for maintaining
and raising profitability.

With investment in industry and agriculture yielding low profits owing
to overcapacity, large amounts of surplus funds have been circulating in
or invested and reinvested in the financial sector - that is, the
financial sector is turning on itself.

The result is an increased bifurcation between a hyperactive financial
economy and a stagnant real economy.  As one financial executive noted
in the pages of the Financial Times, "there has been an increasing
disconnection between the real and financial economies in the last few
years. The real economy has grown ... but nothing like that of the
financial economy - until it imploded".  What this observer does not
tell us is that the disconnect between the real and the financial
economy is not accidental - that the financial economy exploded
precisely to make up for the stagnation owing to overproduction of the
real economy.

One indicator of the super-profitability of the financial sector is that
while profits in the US manufacturing sector came to one percent of US
gross domestic product (GDP), profits in the financial sector came to
two percent.  Another is the fact that forty percent of the total
profits of US financial and non-financial corporations is accounted for
by the financial sector although it is responsible for only five percent
of US gross domestic product (and even that is likely to be an
overestimate).

The problem with investing in financial sector operations is that it is
tantamount to squeezing value out of already created value. It may
create profit, yes, but it does not create new value - only industry,
agricultural, trade, and services create new value.  Because profit is
not based on value that is created, investment operations become very
volatile and prices of stocks, bonds, and other forms of investment can
depart very radically from their real value - for instance, the stock of
Internet startups may keep rising to heights unknown, driven mainly by
upwardly spiraling financial valuations.

Profits then depend on taking advantage of upward price departures from
the value of commodities, then selling before reality enforces a
"correction", that is a crash back to real values.  The radical rise of
prices of an asset far beyond real values is what is called the
formation of a bubble.

Profitability being dependent on speculative coups, it is not surprising
that the finance sector lurches from one bubble to another, or from one
speculative mania to another.  Because it is driven by speculative
mania, finance-driven capitalism has experienced about 100 financial
crises since capital markets were deregulated and liberalized in the
1980s, the most serious before the current crisis being the Asian
Financial Crisis of 1997.


Dynamics of the Subprime Implosion

The current Wall Street collapse has its roots in the Technology Bubble
of the late 1990s, when the price of the stocks of Internet startups
skyrocketed, then collapsed, resulting in the loss of $7 trillion worth
of assets and the recession of 2001 to 2002.

The loose money policies of the Fed under Alan Greenspan had encouraged
the Technology Bubble, and when it collapsed into a recession,
Greenspan, trying to counter a long recession, cut the prime rate to a
45-year low of one percent in June 2003 and kept it there for over a
year. This had the effect of encouraging another bubble - the real
estate bubble.

As early as 2002, progressive economists were warning about the real
estate bubble.  However, as late as 2005, then Council of Economic
Advisers Chairman and now Federal Reserve Board Chairman Ben Bernanke
attributed the rise in US housing prices to "strong economic
fundamentals" instead of speculative activity.  Is it any wonder that he
was caught completely off guard when the Subprime Crisis broke in the
summer of 2007?

The subprime mortgage crisis was not a case of supply outrunning real
demand.  The "demand" was largely fabricated by speculative mania on the
part of developers and financiers that wanted to make great profits from
their access to foreign money - most of it Asian and Chinese in origin -
that flooded the US in the last decade.  Big ticket mortgages were
aggressively sold to millions who could not normally afford them by
offering low "teaser" interest rates that would later be readjusted to
jack up payments from the new homeowners.

How did problematic mortgages become such a massive problem?  The reason
is that these assets were then "securitized" - that is converted into
spectral commodities called "collateralized debt obligations" (CDOs)
that enabled speculation on the odds that the mortgage would not be
paid. These were then traded by the mortgage originators working with
different layers of middlemen who understated risk so as to offload them
as quickly as possible to other banks and institutional investors. These
institutions in turn offloaded these securities onto other banks and
foreign financial institutions.

The idea was to make a sale quickly, get your money upfront, and make a
tidy profit, while foisting the risk on the suckers down the line - the
hundreds of thousands of institutions and individual investors that
bought the mortgage-tied securities. This was called "spreading the
risk", and it was actually seen as a good thing because it lightened the
balance sheet of financial institutions, enabling them to engage in
other lending activities.

When the interest rates were raised on the subprime loans, adjustable
mortgage, and other housing loans, the game was up. There are about four
million subprime mortgages which will likely go into default in the next
two years, and five million more defaults from adjustable rate mortgages
and other "flexible loans" that were geared to snag the most reluctant
potential homebuyer will occur over the next several years.  But
securities whose value run into as much as $2 trillion had already been
injected, like virus, into the global financial system.  Global
capitalism's gigantic circulatory system was fatally infected.  And, as
with a plague, we don't know who and how many are fatally infected until
they keel over because the whole financial system has become so
non-transparent owing to lack of regulation.

For Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Bear
Stearns, Bank of America, and Citigroup, the losses represented by these
toxic securities simply overwhelmed their reserves.  Iceland's banks and
many European financial institutions have since joined the list of
victims. Some, like Lehman Brothers, have been allowed to die, but most
have been kept alive with massive injections of taxpayers' cash by
governments that want the banks to lend to keep the real economy going.


Collapse of the Real Economy

But instead of performing their primordial task of lending to facilitate
productive activity, the banks are holding on to their cash or buying up
rivals to strengthen their financial base. Not surprisingly, with global
capitalism's circulatory system seizing up, it was only a matter of time
before the real economy would contract, as it has with frightening speed
in the last few weeks. Woolworth, a retail icon, has folded in Britain,
the US auto industry is on emergency care, and even mighty Toyota has
suffered an unprecedented decline in its profits.  With American
consumer demand plummeting, China and East Asia have seen their goods
rotting on the docks, bringing about a sharp contraction of their
economies and massive layoffs.

Globalization has ensured that economies that went up together in the
boom would also go down together, with unparalleled speed, in the bust,
the end of which is nowhere to be discerned.

_____

Walden Bello is professor at the University of the Philippines, Diliman;
senior analyst at Focus on the Global South; and president of the
Freedom from Debt Coalition.  He can be reached at waldenbello at yahoo.com
.  This article was first published by the Philippine Daily Inquirer on
February 11 2009, and it is reproduced here for educational purposes.

Source: MR Zine http://mrzine.monthlyreview.org/bello200209.html

http://www.zmag.org/znet/viewArticle/20638


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