Tuesday, 26 July 2011

The Real US Debt Problem

The US government could shut down next week if Congress does not agree to raise borrowing limits. If the government shuts down, then the US could also default on its debts and add another dimension of crisis to the global economy. Here I argue why the US will not default, but also why this is not the real debt problem that the US faces.

Default or not


There are two reasons why the US will not default and, incidentally, why financial markets are not in a state of panic. Firstly, there has been a government shut down five times since 1981, as cash ran out and a new budget limit was not agreed on schedule. Hundreds of thousands of federal employees were told to go home, and many ‘non-essential’ services were stopped. However, on none of the previous occasions was there a risk that the US government would fail to pay its debts and default. Money to cover the debt and interest payments was always found from somewhere, and paid on schedule.

Secondly, it is the US Congress that will decide the new borrowing limit after wrangling over tax and spending plans. This is not a limit imposed by some external body, not by the IMF, nor by a foreign power. If Democrats and Republicans agree on a deal, then this particular crisis will be over.

The only caveat is that it is hard to over-estimate the recklessness of America’s radical right. They could block a deal in order to press their objective to slash welfare payments and stop taxes rising. However, if that meant the US failed to maintain its debt payments, their political victory would be crowned by financial chaos. Such an outcome is possible, but very unlikely because of the consequences of a default. It would be a trigger for America losing its triple-A credit rating, which would feed through to all US companies. As credit ratings fall, borrowing becomes more expensive and less easy for everybody, something that these representatives of the highly indebted US economy are unlikely to risk, whatever their supposed opposition to ‘big government’.

A mere $14.3 trillion?


The federal government borrowing limit is $14.3 trillion, and the current debate is about making it bigger.[1] This sum close to 100% of US GDP, up from 65% just four years ago, and the curve is on a steep ascent. But, although massive, it does not include other government liabilities taken on after the financial crisis struck. The biggest of these is the $5 trillion of potential payments from the nationalised housing agencies, Fannie Mae and Freddie Mac. Furthermore, the US excludes from its debt figures the huge and unfunded obligations to pay future social security and medical bills.

The size of the US government debt relative to the economy is not unusual for major capitalist countries today, as a glance at Europe will testify. However, that is not the only problem. Far bigger than the government debt is borrowing by America’s private sector. This is sometimes ignored, on the blinkered view that private sector liabilities will ‘sort themselves out’ and trouble will only emerge from public sector debts. But that not only leaves out of account the $2.4 trillion of consumer debt, household mortgage debt of $10.1 trillion and business debts of another $10.9 trillion.[2] It also ignores the more fundamental problem of the whole economy.

Borrowing, both by the private sector and the government, grew in response to the crisis of capital accumulation and low profitability. Credit growth then accelerated in the speculative bubble after 2001.[3] Now the bubble has burst, leaving the whole economy drowning in debt. The Federal Reserve has kept interest rates at close to zero, hoping to keep the debt servicing sustainable for a bit longer, and hoping that the economy will recover. But it doesn’t, and meanwhile the Fed itself is also the owner of a mountain of US debt. Its balance sheet has grown from less than $900bn at the start of 2008 to a giant $2.8 trillion by June this year, following its ‘quantitative easing’ programmes. Around $1.6 trillion of this is US Treasury debt and another $900bn or so is made up of mortgage-backed securities that banks cannot sell.

The squabble between Democrats and Republicans over the debt limit ceiling is really about the looming bankruptcy of the country. That is why each party has to claim that it plans to cut the level of debt over the next decade, despite finding themselves having no choice but to raise the ceiling still further.

The foreign dimension


There has been a steady build-up of US borrowing from other countries too. This is shown in the persistent annual current account deficits, where the US imports more goods and services than it exports. Details of the funding of these deficits end up in the figures for the US international investment position. These figures are the best summary of America’s accumulated assets and liabilities with the rest of the world. At the end of 2010, net US foreign liabilities amounted to $2.5 trillion.

In other words, the US owns far fewer assets (ownership of companies, bonds and equities) in other countries than foreigners own in the US. That is a weakness, but so far it has not shown up as a problem. The US still manages to earn more on its smaller assets than it pays on its bigger liabilities. For example, in 2010 the US earned net investment income of $171bn. This extraordinary feat of making a lot of money on a net debt position is rivalled only by the UK.[4]

America can do this because it takes full advantage of its imperial position in the global economy: the US dollar is the world’s major reserve currency, based upon the global dominance of the US economy, banking and finance. Despite America’s relative economic decline in recent decades, it remains the major imperialist power, with not only an extensive military but also a dollar-centred financial infrastructure. There has been little challenge to this position so far. The euro countries have their own problems, and China is still some way from building a financial platform in the world economy.

America’s ability to earn large investment revenues is based on two key factors. Firstly, it has a surplus of foreign direct investment assets, and its return on these investments is far more than it pays for foreign direct investment in the US. For example, in 2010 it earned $275bn more than it paid on this account. Secondly, its net liabilities are for securities that pay only a small return, especially on government bonds, but also on corporate bonds and equities. By the end of 2010, foreign central banks and private investment funds owned $5 trillion of US government securities that were earning minimal rates of interest. These low rates were acceptable to foreign investors because the US government debt market is one of the few that is big enough easily to take flows of global capital, it was denominated in the most important global currency, the dollar, and America’s triple-A credit rating also promised maximum security.

The Triple A question


The US is given a credit grade of AAA by the three major US-based agencies that account for 95% of the ratings market. However, even these have recently become concerned about the escalation of US debts. Formerly they were impressed by America’s imperial might and its ability to borrow in its own currency. Now the numbers have become embarrassing, and some agencies threaten to cut the rating if no credible plan to control future debt is made. They have also warned that if the US government missed any debt interest payments, even if only temporarily, this would be labelled a default and the US would be downgraded.[5]

The loss of its triple-A rating would not only be a humiliation for the world’s major imperialist power. It would cost money too. The cost of borrowing would rise not just for the government, but for all US companies. Even a rate rise of just 0.1% would result in many billions of dollars of extra interest payments when the scale of debt is so high.

A credit downgrade could also lead foreign investors to buy fewer US bonds. That will matter for a country whose current account deficit was $470bn last year. There is a further risk that investors sell some of their existing bonds. Even a very small percentage sale would be dramatic, since the stock of bonds held by foreign investors is so big: $8 trillion, including corporate bonds. This would bring a funding crisis and a slide in the US dollar on foreign exchange markets.

Up to now, global financial markets have used America and the dollar as the benchmark for security. Seeing this benchmark shaken will lead many more to think that global capitalism is not as solid as it pretends to be.

Conclusion


A US credit default is much more important than a Congressman might recognise. However, US capital is likely to make it clear to its political servants that risking a default is more than their jobs are worth. That is why we are much more likely to see a budget deal that agrees to domestic austerity at home, in some form or another, rather than one that risks further the vulnerable global status of US imperialism. Yet, even if a deal is done in the next week, one day the cheque will bounce.


Tony Norfield, 26 July 2011



[1] The $14.3 trillion is made up from $9.7 trillion in debt held by the ‘public’, ie outside the government in the form of US Treasuries, etc, and another $4.6 trillion held by other government bodies. This latter amount represents borrowing from the surpluses of the Social Security Trust Fund and other government funds to finance spending. It should definitely be included in the borrowing total.
[2] These debt figures are for the end of 2010. See the Federal Reserve report on this topic, Table D.3 in http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
[3] See the article ‘Anti-Bank Populism in the Imperial Heartland’ on this blog, 5 July 2011, for details.
[4] See the article ‘Economics of British Imperialism’ on this blog, 22 May 2011.
[5] See Bloomberg News, ‘Moody’s Downgrade Warning Adds Pressure on US Debt Deal’, 14 July 2011.

Friday, 22 July 2011

The Euro Deal

The deal to save the euro that was announced on Thursday night was not yet another sticking tape to hold together a crumbling system. It was a major plaster cast, with additional wheelchair, splints and crutches. The document signed by the euro heads of state does not solve the crisis, but it is a significant political declaration. I would expect it to salvage the system for at least the next year, and to be the starting point for further measures of political consolidation within the euro group of countries.

Here are the key points of the statement, presented with a little elaboration to explain what is going on:


  • They will “do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States.” This is a political rebuff to the financial markets that have had reason to speculate on the system being under threat.
  • Greece will get further official funds (from the euro countries and the IMF) amounting to  €109bn. Private investors (the banks) are expected to contribute €50bn in the next few years, and a total of €106bn by 2019, in accepting write downs on their assets and lower interest payments over an extended period.
  • This deal is “exceptional and unique” and only for Greece, but the lower lending rates of 3.5% for Greece will also apply to Ireland and Portugal, as will the extension of new loans to a 15-30 years maturity.
  • In order to help Italy and Spain, and any other member country, official euro funds will be available to be used in a “precautionary programme”. In other words, a country need not be in the emergency ward before getting any help.
  • This precautionary programme could involve recapitalising financial institutions and the European Central Bank intervening in secondary markets (ie bond markets) to “avoid contagion”. If this means supporting the prices of troubled countries’ bonds in financial markets, this shows how far European politicians have come from their previous worship of the market!
  • To be able to ignore any credit default that the ratings agencies might declare for Greece, or other countries, “reliance on external credit ratings” will be reduced. The agencies have a powerful role, despite their evident failings, as their credit ratings determine whether investors and banks will hold certain bonds. This is a sign both that politics is going to be more decisive, and that the influence of the US-based agencies will diminish.

The euro politicians’ declaration they will do everything to save the system is not really that surprising. A break up of the 17-member euro system would be a catastrophe for them – the end of a project that has been decades in the making - and for their economies, given the huge trade and investment ties between the different states that are based on the foundation of the single currency. The euro system is also a centre of global power that increases the leverage of its main constituent countries, Germany and France. That was not going to be allowed to fail so easily. However, the political leaders can only pretend to be able to count the likely costs. The evolution of the global crisis is out of their hands, and the next week or so will also see a renewed focus on the US and its debt problems that could add to their existing ones.

The latest deal is also surprisingly generous for Greece, and for other countries hit by the crisis. The euro document even said that they would “relaunch the Greek economy” with European funds and recapitalise Greek banks if necessary! This is what a sceptic would call a ‘brave’ declaration, but it is an impressive turnaround from the earlier stance that demanded unrelenting austerity to pay back all the debts. While there will be a “strict implementation” of economic policies in Greece, the costs imposed on the population are likely to be lower. They need to be. After all the measures, the country’s huge government debt of €350bn, around 150% of GDP, is only seen reduced by around €26bn by 2014.

Tony Norfield, 22 July 2011

Friday, 15 July 2011

The Murdoch Mafia


(Note: This is a guest piece)

So far the News International scandal, which is only just unravelling, has focused almost exclusively on ‘phone hacking’ and the invasion of privacy by Murdoch’s printed media. Though this has considerable celebrity and ‘human interest’ value, it entirely misses the main game.

Murdoch’s newspaper business in Britain, though mostly profitable, is peanuts compared to his television and entertainment interests. Murdoch long ago ceased to be a traditional ‘press baron’. He is not Citizen Kane. Unlike newspapers, which anyone can print, television broadcasting is a highly regulated and highly politicised business. In every country, the state is eager to keep control of television broadcasting, the main opinion-forming media, because taxes and broadcast rights generate enormous revenues. TV broadcasting is in the gift of the political class and even a slight ‘regulatory difficulty’ can cost a media company billions or shut it out 
completely.

So any media giant wanting to be in television must have considerable influence over the political elite in the country. These are the people who ultimately take the decision whether or not to let them in.

This is why, for example, Murdoch still owns the London Times. It has never made a profit and will never make a profit. Every year it loses around £40 million, which is an expensive hobby. But The Times is read by everyone in Britain ‘whose opinion matters’. If you think it is useful to talk to Britain’s political elite every morning, then £40 million is a small price to pay. Murdoch’s newspapers provide the influence that keeps the political class in check, which in turn creates an environment for him to further his interests. In every broadcast industry in the world, TV and entertainment conglomerates own not-very-profitable newspapers and radio interests because these provide them with a parallel source of influence. That is the real relationship between commercial TV and the printed press in all countries where broadcasting is not dominated by a state monopoly.

Berlusconi’s Italy is an example of a media mogul whose parallel apparatus of influence became so powerful that he could afford to dispense with the political elite altogether, to buy his own political party, Forza Italia. He then bought the Italian state itself, tore up the constitution, ignored the rule of law and made personal laws to suit his empire.

Murdoch’s strategy has been less flamboyant, but just as insidious. The problem with News International is not the influence its newspapers have exerted, but that it took matters one step further into the realm of mafia-style blackmail and extortion. The story yet to emerge is that News International, like the Mafia, operates a vast information-gathering network, collecting compromising information which provides Murdoch with the ‘dirt’ needed to undermine, intimidate, threaten, hound, and if necessary destroy, any politician, public official or investigative journalist who dares to get in his way. It is the same system that allowed J Edgar Hoover to remain head of the FBI for nearly fifty years even though president after president, and large sections of America’s political class, wanted to get rid of him.

Murdoch’s mafia system also explains News International’s symbiotic relationship with almost every department in the higher command of the Metropolitan Police. It gives the Murdoch empire access to the contents of the National Police Computer and a dozen other intelligence databases that keep records of every person who has ever had a brush with the police, or every address the police have attended. It is an invaluable resource if you are in the business of making people ‘offers they cannot refuse’ because there is no politician or public official who at one time or another has not done something he or she would prefer not to be publicised scandalously in the press, even if it is just an irrelevant or trivial matter.

To what extent did Murdoch intimidate and manipulate the British political elite? It is significant that to move against him there had to be an unprecedented all-party agreement in Parliament so that News International would be blocked from targeting individual politicians. That is how much.

News International is a criminal organisation.

Susil Gupta, 15 July 2011

Tuesday, 5 July 2011

Anti-Bank Populism in the Imperial Heartland

‘Inside Job’, Charles Ferguson’s Oscar winning documentary, is that rare thing: a popular movie about banks and the financial system. Based on interviews with the key players, mainly in the US, it shows how politicians, academics, lobby groups, credit ratings agencies and government officials promoted the banks in the speculative bubble and covered up for them after the 2007-08 financial crash. Yet, despite its many achievements – the viewer is often amazed at the lies, fraud and self-serving delusions – and despite Charles Ferguson’s accomplished efforts in taking us to the heart of the beast, ‘Inside Job’ is only a very limited guide to the financial crisis.

The documentary leaves out two key factors in the real story. One omission plays well for people who want to be seen as victims of a crime, not as willing participants: why did people take on the mortgages in the first place? The other works well for those who do not want to look too carefully at the capitalist system, but only to complain about its excesses: did the overpaid Wall Street cocaine addicts cause the crisis, or were there more fundamental reasons for it?

1. Ninja or speculator?


Did American banks and mortgage brokers trick poor people into taking on debt, lie about the servicing costs and then ramp up the interest rate? Yes they did, but that was not the reason for the financial meltdown. The ‘sub-prime’ fiasco – mortgage lending to those with no income, jobs or assets to repay the loan (dubbed ‘Ninjas’) - was in the latter stages of the US housing bubble, from 2005. A big rise in mortgage debt in the US had already occurred, nearly doubling between 2000 and 2005 to $8,848 billion.[1] Furthermore, even at their peak in 2006, sub-prime loans were only 20% of total mortgages taken out.[2] This was up from 9% a decade before, but by far the biggest increase in US mortgage debt did not come from sub-prime borrowers. The inability of poorer people to pay their mortgage bills was a trigger for the bubble to burst, but the bubble was inflated by the better off: from 1997 to 2004, US home prices increased by more than 10% per year.[3]

One telling detail is that in 2005 and 2006 close to 40% of US homes purchased were not bought as residences, but as ‘investments’ or vacation homes.[4] This was at the peak of the market, which has since seen average prices fall by one-third. So the picture of predatory lenders fooling the innocent poor is one that conceals a more substantial fact: middle class borrowers were the main players in the mortgage credit boom and were then caught out by the downturn.

A similar pattern has been true for other countries that experienced housing market bubbles, particularly in Ireland, Spain and the UK. In each case, wider and wider sections of the relatively well off got into the dream of easy money as credit was cheap and house prices were rising. Perhaps a second home would be an investment for their children – a rising asset too. Or they could ‘buy-to-let’ and live off the rental income. Or they could buy a property, renovate it and sell again later at a much higher price.[5] The banks financing the purchases, the construction companies building the homes and the speculators bidding up the properties were all parts of the same game.

If somebody fell victim to an internet scam, one would probably have some sympathy. But what if the scam was where the victim was promised a fee of $10,000 to help an indisposed notable to transfer $1m via his bank account?[6] If he then found that his bank account had been cleaned out, then most people would judge that the guy had been a complete fool, letting his greed get the better of any common sense. This kind of judgement does not seem to apply to victims of the housing crash.

2. Financial form of the crisis


The latest crisis took on a dramatic financial form. Major banks and other institutions became insolvent, money markets seized up and governments abandoned their free market rhetoric to bail out the financial system. Emergency policies, including near-zero interest rates in many countries, have now managed to turn GDP growth figures from big minus to just-about-plus. But the huge debts incurred during the boom have not disappeared. Debt liabilities of banks and other financial institution have instead been taken on by the state, while state tax revenues have been hit by their weak economies. This has led to a very big rise in public sector deficits and debt in many countries. Even the US government, normally treated with deference by the US-based credit ratings agencies, is being threatened with a rating downgrade unless the debts are reduced.[7] The UK government is in the same position. As a result, government policy in these countries is to cut spending and raise tax revenues. Austerity beckons.

Given the financial form of the crisis and the consequences now seen for people’s living standards, it is not surprising that there has been a popular reaction against banks. Banks are seen as the cause of the crisis, and in the US there has been a revival of the 1930s term ‘bankster’ to summarise the merger of the criminal and the financier. ‘Bankster’ is an evocative term, but, to continue the gangster metaphor, would it be a successful fight against crime if the cops only got the well-paid hitman and left the big boss untouched? This is the substance of the anti-bank rhetoric today: rail against the excesses of capitalism, but leave the basic mechanism in place.

Speculative bubbles, banking crises and crashes have characterised the history of capitalism. A recent historical study showed that the incidence of banking crises has risen since the 1970s, when the US and the UK relaxed controls on financial markets and demanded that others do so too. The study’s authors remarked that “the tally of crises is particularly high for the world’s financial centers: the United Kingdom, the United States, and France.”[8] This fact should lead to the conclusion that something systematic is going on. It is not just one damn ‘accident’ after another.

As far back as 1848, the political economist and philosopher John Stuart Mill made an observation that is relevant today:

“Such vicissitudes, beginning with irrational speculation and ending with a commercial crisis, have not hitherto become less frequent or less violent with the growth of capital and the extension of industry. Rather they may be said to have become more so: in consequence, it is often said of increased competition; but, as I prefer to say, of a low rate of profit and interest, which makes the capitalists dissatisfied with the ordinary course of safe mercantile gains.”[9]

This early statement of the reason behind speculation in the capitalist economy – a low rate of profit - was developed by Marx in his analysis of capitalism. Those who separate the financial crisis from the development of capitalism have taken a step back from the insight of John Stuart Mill. They are further still behind Marx’s analysis of how a fundamental feature of capital investment is the long-term tendency of the rate of profit on investment to fall. This tendency prompts capital to search for other means of gaining revenue, to depend more on the expansion of credit and to move into speculative activities.

Economic growth may be boosted by these actions for a while, but the system grows ever more vulnerable. A blip in the system, a loan that does not get repaid as expected, can then trigger a financial collapse as it calls into question the assumptions behind a myriad of other deals.[10] This is what is really meant by a ‘lack of confidence’ in financial markets: a fear that the expected gains are illusory. A financial collapse will then have an impact on the ‘real’ economy, as credit is withdrawn and the funds lent by banks dry up, even to previously viable companies.

What can appear to be a purely financial crisis is really the end result of a series of developments emanating from the problem capitalism has to produce enough profit. The origins of the financial form of the crisis we see today lie in the promotion of finance, particularly by American and British imperialism, and especially from the late-1970s.[11] Just to cite the promotion of finance, however, is only to describe policy measures and developments since the 1970s, it does not explain why the policy measures were undertaken. Without such an explanation, the policies might seem simply to be ‘misguided’, or the result of one faction of the ruling class gaining control of state policy, ie the bankers or financiers. However, the fact that the so-called neo-liberal policies have persisted under administration after administration, Republican or Democrat (in the US) and Conservative or Labour (in the UK) – with versions of these in other countries - shows the degree to which the financial policies are embedded in the core of the system. The origin of these systematic policies can only properly be explained by capitalism’s crisis of profitability.

3. Low profits led the switch to finance


US data show that there was some recovery of the corporate rate of profit in the decade from the mid-1980s, after the lows seen in the previous years. However, this still left the rate of profit below the crisis-inducing levels that were seen during the 1970s.[12] (See Chart 1) After falling back again in the late-1990s, prompted mainly by the Asian and Russian financial crises, the rate of profit rose once more from 2001 to 2006. This time, there was a sharp spike in the reported profit rate to higher levels. But this was due to the biggest credit-fuelled speculative bubble in US history! Much of the apparent ‘profit’ will either have been a result of the excesses of spending at the time, or will have reflected transient gains in financial market values that companies reported as income. Not surprisingly, the profit rate fell back quickly after 2006 when the bubble burst.[13]

Data to calculate a rate of profit for 2010 are not yet available, but may well show a higher rate than for 2009. This ‘recovery’ (if it does appear from the data) should be seen in the context of huge US government indebtedness as it has taken on private sector liabilities, and on the policy-driven bounce back in equity prices that has followed zero interest rate levels. This is not a sign of flourishing capitalism, more a ‘dead cat bounce’.

The latest speculative financial bubble began in the early years of the new millennium, in response to the previous drop in profitability. Interest rates fell in major countries and central banks expanded credit because growth and investment were very weak.[14] This low growth and low profitability led banks and other corporations to try and find other sources of profit. The result was to boost more speculative forms of activity.[15]

Chart 1: US corporate profit rate, 1945-2009 *





 
Source: US Bureau of Economic Affairs. Calculated from NIPA Tables 6.17 and 6.19 for profits and Fixed Asset Table 6.3 for fixed assets.
Note: * Corporate profits in the current year are divided by the average of the fixed asset stocks in the previous year and the current year. Fixed assets are measured at historical cost. The profits are of both non-financial and financial corporations in the US.


Pension funds got into commodity futures investments to try and get better returns on their assets, industrial and commercial corporations and banks expanded their dealing in futures, options and swaps to try and gain more revenues from financial dealing. This was also the era of ‘financial innovation’ and a swirling alphabet soup of acronyms: ABS, CDO, CDO-squared, CDS, CPDO – and that is only a sample of the ones up to letter C.

Alongside the innovation – and the spur to such innovation - was a determined effort to find gaps in company laws and rules that could be used to increase profits. The revenue gains may simply have been through establishing ‘special purpose vehicles’ separate from the main company, so that it faced less regulation, or where the law said it needed fewer assets to hold in reserve. Or it was through other means of legally transferring business to avoid taxation. Or it was to buy derivatives ‘protection’ so that a risky business was made to look more solidly based. Or it was a mix of many of these. Corporations – banks, industrial and commercial companies - did not invest in productive activities that offered few returns and would not excite shareholders. Instead, they turned to financial ‘engineering’ and ‘produced’ much more money that way. All went well, and, for a while, extremely well. Then, after 2006, the stretched elastic of financial and credit expansion snapped back. Asset values collapsed, but the bills still had to be paid.

I have focused on the US, but similar patterns were seen elsewhere, particularly in the UK where the financial sector is even more prominent. The data covered have also been for the domestic US economy, but it is important to recognise that both the US and the UK get significant profits from other countries.[16] The expansion of the financial sector was an important lever for them (especially the UK) to compensate for weakening industrial competitiveness and to take advantage of their privileged positions in the global economy. For example, a key objective of US political delegations to China has been to encourage the Chinese authorities to open up their financial markets to US financial companies!

4. Reactions to speculative boom and bust


The financial speculation started with the capitalists and then drew in that section of the population who could participate: the middle class. Dealing in financial and commodity derivatives grew tenfold between 1998 and 2008.[17] Financial, commercial and industrial companies boosted their dealings and found a willing market. Equity index values also jumped dramatically from 2003 to the end of 2007: by around 80% in the US, by 90% in the UK, by 130% in France and by 200% in Germany. This well-publicised example of ‘money for nothing’, on every evening news channel, helped set the consensus that there was indeed a way to get rich quick, or to take advantage of the expanding financial system. Another sign of this was that by 2008 the typical US household had 13 credit cards.

The middle class put up with the excesses of finance and banking in the boom period, because most of them also gained to some extent, or at least they felt better off. In the bust, the recriminations are bitter. Few question what role they played in the bubble, or how they may have benefited from it. Hands up the buy-to-let speculators! Hands up those who ‘released the equity’ from the rising value of their homes and used the money to buy holidays and cars! Hands up those who gained from the excessive spending, with jobs as personal assistants, gym trainers, financial consultants or whatever else! Hands up those who were funded by state or private grants – made possible because the financial boom generated extra revenues! Many hands should be seen, because the financial boom benefited a broad section of the population. My point is not to condemn those who got jobs in the boom period. The point is that if you drink capital’s moonshine, you have no right to complain about a hangover.

5. Conclusion


Popular reactions to the financial crisis ignore how its evolution was a response to the more fundamental problems capitalism has faced in maintaining profitability. It is true that the speculative bubble was inflated by banks, and that a crisis was triggered when it burst. However, the banks and other capitalist corporations were looking for ways to boost profits. Insufficient profitability was the main reason they moved into financial speculation. Furthermore, it would not have been possible for the bubble to have been blown to such an extreme were it not for the willing participation of many in the build up to the débâcle. This analysis has shown that the US middle class was heavily involved in the financial boom, especially through speculating on property.

Unless there is opposition to the capitalism that caused the crisis, an attack on the banks will only be a self-serving moan. But the political consequences of this deep crisis are far more serious. The reality of popular capitalism is that the populace is now going to foot the bill for the crisis. Austerity will lead to a search for scapegoats, and capital has a way of presenting many for slaughter instead of itself.


Tony Norfield, 5 July 2011


[1] See Table 1170 on the US census website, http://www.census.gov/compendia/statab/
[2] See http://www.npr.org/templates/story/story.php?storyId=12561184. This figure tallies with US government statistical data showing that only half the families at the bottom 20% of the income distribution had any debt at all. In the top 60% of the income distribution, more like 80-90% of families had taken on debt (mainly related to housing).
[3] Figures on US house prices are taken from the Case-Shiller composite national index.
[5] The housing market is different in each country. Not all had a speculative boom, so the opportunity for such dealings outside the US, UK, Ireland and Spain was limited. The points here are not an attack on anyone who buys a property, but on the protestations of victimhood from those whose rationale in doing so was to speculate on the property market.
[6] A common internet scam of a few years ago, mainly sourced from Nigeria.
[7] The three main ratings agencies Moody’s, Standard & Poor’s and Fitch Ratings have 95% of the global market. The accuracy of their views has been justly ridiculed, but that has not (yet) reduced their importance. Up to now, they have always given the US government the top, triple-A rating, which reduces its cost of borrowing. However, this is more a reflection of US imperial power than an assessment of the US economy. The scale of US indebtedness is now so huge that even the compliant ratings agencies can no longer pretend it is not a (‘potential’) credit risk.
[8] See Kenneth Rogoff and Carmen Reinhart, ‘Banking Crises: An Equal Opportunity Menace’, NBER paper, December 2008.
[9] John Stuart Mill, Principles of Political Economy, 1848. Cited in Charles P Kindleberger, Manias, Panics and Crashes, A History of Financial Crises, 4th edition 2000, p34.
[10] The most systematic account of Marx’s theory of the falling rate of profit and the relationship to speculation and crisis, including an assessment of ‘counteracting tendencies’, is to be found in Henryk Grossmann’s The Law of Accumulation and Breakdown of the Capitalist System. This was first published in Leipzig in 1929, and was reprinted in English (in abridged form) by Pluto Press from a translation by Jairus Banaji in 1979. The abridged English translation is available on the following site: http://www.marxists.org/archive/grossman/1929/breakdown/index.htm. The German edition, much longer, includes a final chapter that puts paid to any notion that Grossmann’s analysis was mechanistic, or that he expected an automatic collapse of the capitalist system.
[11] A rejection of previous so-called ‘Keynesian’ economic policies and the promotion of finance started before the Thatcher and Reagan years, though it accelerated after 1979. Some UK-related examples are given in my previous article on this blog, ‘The economics of British imperialism’, 22 May 2011.
[12] I have been guided in the use of US economic statistics by the valuable work of Andrew Kliman and Alan Freeman, who have covered the question of the long-term decline in the US rate of profit in detail. The calculations here are my own. US domestic profits will have been boosted to some extent by from expanded trade with China and other countries from the early1980s, aside from an attack on working class living standards, but this impact is difficult to estimate.
[13] There were also profit gains on the post-tax measure resulting from corporate tax cuts. The measured rate of profit here is based on corporate profits divided by fixed capital assets. Strictly speaking, the values of wages advanced and raw materials should also be included in the denominator to get a better measure of the rate of profit, but this is not possible to calculate. Many other adjustments to the data should be made to better approximate a ‘Marxist rate of profit’, but these involve progressively more arguable assumptions, and the data do not exist to make such adjustments. I do not argue that a fall in the rate of profit in one year produces a crisis in the next. The point is that the overall downtrend creates conditions for speculative activity to flourish, since more productive forms of capital investment are unattractive.
[14] In 2001-2003, economic growth in the OECD area as a whole was less than 2% compared to an average 3% in the previous 15 years. US growth was close to these averages; German and Japanese growth fell even more sharply to weaker levels. See the OECD ‘Economic Outlook’, May 2010, Annex Table 1.
[15] My view is that the overall rate of profit on capitalist investment tends to fall over time. It will move in cycles, depending on a wide range of factors, but the long-term downtrend will remain in place unless brought to a halt by a destruction of capital in war and a revaluation of investment assets that boosts the rate of profit. The chart does not show the pre-1945 data, but in the early 1930s, before World War 2, the US rate of profit ranged from –2% to +5%!
[16] The UK financial relationship with the rest of the world is discussed in detail in my article ‘The Economics of British Imperialism’, 22 May 2011, on this blog.
[17] Data taken from the Bank for International Settlements Quarterly Review, December 2010.

Friday, 1 July 2011

Ireland’s Imperial Tithe


(some text corrected on 18 Oct 2012 to clarify the GDP-income gap)

A tithe is a form of tax or levy that is paid to the church, usually amounting to a tenth of a person’s income. In Ireland, the Roman Catholic church has an important role in society, with up to 90% of the population identifying themselves as Catholic. But the Irish people pay a tithe to imperialism, not to the church.

Ireland is one of the few countries in the world where the value of what is produced is far above the income that residents earn. The difference between production and income goes abroad, to foreign investors, and this gap is a bigger share of the economy than for any other developed country.[1]

In economic statistics, GDP (Gross Domestic Product) measures the gross value of output produced in the domestic economy. It is the most common measure used to compare countries. But this can be very misleading when the country is paying out a large income from what it produces to the foreign owners of assets held in the country. A separate Gross National Income measure of the economy makes an allowance for this, and for all cross-border flows of revenue.

Data just released for Ireland’s economy in 2010 show that GDP amounted to €156 billion. However, from this sum a net income amounting to nearly €28 billion was paid in wages, profits, interest and dividends to foreigners. Ireland did receive €1.5bn of EU subsidies, but against this it paid the EU €400m in taxes. Gross National Income accruing to Irish residents totalled €129.3bn, 17% less than the value of output in the domestic economy. So, nearly one-fifth – or two tithes! – from Ireland’s annual output was paid to foreign investors. Owing to this factor, domestic incomes also tend to grow by an average of 0.5% less than that of output.[2]

Chart 1: The Irish Tithe, 1995-2010





 Source: Central Statistics Office Ireland, and author’s calculations

This deduction from Ireland’s product has been a longstanding feature of the Irish economy, not a consequence of the latest crisis. It results from Irish government policy to attract foreign capital by offering low tax rates and other deals. However, the financial crisis has seen a bigger share of output flow to foreigners as the economy has shrunk while the payments have continued to rise. Chart 1 shows how the share of the ‘tithe’ has changed over the past 15 years.

Ireland’s combination of low tax rates for foreign corporations and EU grants for poor countries enabled it to emerge from the status of backward ex-British colony to be dubbed a ‘Celtic Tiger’. Generating fast growth, building a financial centre in Dublin and looking a lot more euro-sensible than the Brits, Ireland seemed to have it made. The Irish thought so too. Prompted by low interest rates following euro entry in 1999, and participating fully in the later speculative bubble - like their counterparts elsewhere - the Irish banks began to finance a property boom and Irish people bought into it. When property prices in Dublin began to rival those in central London, only a few academics protested that the bubble would surely burst.[3] National average house prices rose threefold between 1997 and the start of 2007, and by four times in Dublin. They have since fallen by some 35-40%.[4]

So, in addition to suffering a drop in income from the financial crisis, Ireland also has to work more than one day per week in order to pay the regular tithe to foreign investors.


Tony Norfield, 1 July 2011



[1] See the comparative data for 32 countries in the Eurostat Yearbook, 2010, Table 1.15, p136. On these data, the net outflow of income amounted to 14.4% of Irish GDP in 2008. Only Luxembourg had a higher 30% net outflow, but it is a special case as a banking centre and Luxembourg has a bigger 53% net inflow of ‘services’ income. Ireland’s services account, by contrast, shows a net outflow of revenue.
[2] Author’s calculations from Ireland’s Central Statistics Office data, http://www.cso.ie/statistics/nationalacc.htm Even with the recent fall in GDP, of 10% since 2007, the 12% fall in national income was even steeper!
[3] An excellent account of the Irish property bubble and bust is given by Michael Lewis in an article in Vanity Fair, ‘When Irish Eyes Are Crying’, 8 February 2011. See