World Politics

Sixty Years of Global Economic Expansion Ending?

By Nat Weinstein

You load sixteen tons, and what do you get?

Another day older and deeper in debt.

Saint Peter, don’t you call me, ‘cause I can’t go;

I owe my soul to the company store.1

I was struck by the number of unusually pessimistic reports on the deplorable state of the American and world capitalist economy in the July 20 New York Times. But in the days following, the bad news only got worse.

The first of these reports was a front-page story bearing the title, “Given a Shove, Digging Deeper into Debt,” by Gretchen Morgenson. Her story focused on the human side of the housing crisis as personified by Diane McLeod, a typical victim of the mortgage mess who is now awaiting eviction from her small, two bedroom ranch house in suburban Philadelphia.

The author describes her as having been “a dream customer for lenders; until she hit the wall financially, she juggled not one but two mortgages, both with interest rates that rose over time, and a car loan and high-cost credit cards debt.”

This story gets down to the nitty-gritty tale of woe suffered by a growing numbers of working people faced with a major assault on their dream of finally getting a home of their own.

Later Morgenson also takes up the larger economic picture underlying her report on the life-wrecking impact of the mortgage fiasco on ordinary working people. In a piece titled, “Work Out Problems with Lenders? Try to Find Them,” she explains why they can’t:

“In times past, when a borrower fell behind on a mortgage, the lender was likely to try to help work out the delinquency.

“But as many troubled borrowers are discovering, today’s lenders often sell the loans they make to investors, making it nearly impossible for homeowners to discover whom they should contact for a workout.

“And the companies to which borrowers send their mortgage payments—known as loan servicers—are often hard to reach or unwilling to modify a loan that is delinquent.

“As a result, one missed mortgage payment can quickly generate so many extra fees and charges that within a few months, a borrower can fall far behind and ultimately lose his home.”

Another report by Morgenson titled, “Borrowers and Bankers: A Great Divide,” appeared on the front page of the National section of the same edition of the Times. This one went a lot further than most toward putting the lion’s share of the blame where it belongs—on the bankers who make sub-prime and other risky loans that they would not make if they could not package them and sell them to other, larger banks to worry about the likelihood of borrowers defaulting.

This situation began when it first became legal and acceptable for governments to systematically print enough purely paper dollars to balance their budgets and keep the wheels of the global capitalist economy turning. Thus, every worthless dollar, pound or euro, put into circulation, dilutes the value of the given currency. And, of course, it results in the mass of public and private debt growing at a much higher rate—generating new loans and multiplying total indebtedness.

Making bad matters worse, the American superpower, with the largest and richest economy in the world, is able to sell its growing mountain of debt to the rest of the world, seemingly to an endless extent.

But there’s a limit to everything: Thus, presently, when a debtor is forced to take out new loans to pay interest on his debts, the debtor is in big trouble.

Fannie Mae, Freddy Mac and the credit crunch

Even with the printing presses running fast enough to provide enough new money to be added to both public and private debt for seemingly limitless investment opportunities, there inevitably comes a time when most available capital gets tied up in an ever-growing number of mortgages. Thus, “collateralized mortgages” are piled on top of millions of existing mortgages. But there is not nearly enough real new wealth to keep the cycles of investment, production, profits and sales going. Thus, the economy, which has been expanding for more than 60 years, is no longer growing.

That’s why Congress created the government-backed, trillion-dollar for-private-profit lending institutions to keep the profit-driven capitalist economy running at top speed. This was for the benefit of Fannie Mae’s and Freddy Mac’s stockholders and the managers with their multi-million-dollar salaries, bonuses and other benefits.

But for it to work for maximum effect, the government was forced to leave unchallenged the implication that the profitability and solvency of the two government-sponsored enterprises were guaranteed by the U.S. Treasury and its taxpayers—leading inexorably to today’s credit crunch!

However, it did the job for which it was created. It enabled Fannie Mae and Freddy Mac to create more trillions of dollars of credit, adding more than $5 trillion to the now, 12 trillion-dollar total U.S. mortgage debt. But this debt was accrued without sufficient capital reserves to finance the possibility of hundreds of billions of dollars in losses which will also inevitably result in a staggeringly larger bailout—perhaps in the trillions.

Thus, “the two financial giants who now own or underwrite nearly 80 percent of all new mortgages in the U.S.” were, for all practical purposes, created out of thin air.

Therefore, the CEOs of these two giant lenders began making exceedingly risky investments, raking in fabulous profits without, necessarily, personally suffering the consequences when borrowers began defaulting on a massive scale.

Morgenson again points the finger of blame for the whole sorry business where it belongs. She writes:

“...[W]e are in dangerous territory today where bailouts are concerned, and not only because they feed Americans’ suspicions that only the rich and powerful get help in our country.... So asking Main Street to bail out Wall Street leads to this inevitable question: Weren’t the financial folks the ones who helped create the mess we are in?...

“Which returns us to the dispiriting divide between those who receive help and those who don’t....

“‘The banks are too big to fail and the man in the street is too small to bail,’ said John C. Bogle, the founder of the Vanguard Group, the mutual funds giant who is a philosopher of finance.”

Neither do the powers-that-be need worry too much about its impact on the richest taxpayers—supposedly taxed at a higher rate than most, but in reality, at lower rates than wage earners on all levels of the economic ladder.

For instance, “Warren Buffett, the third-richest man in the world, has criticized the U.S. tax system for allowing him to pay a lower rate than his secretary and his cleaner. (From The Times, of London, June 28, 2008.)”

Meanwhile, the justification for everything from bailouts to government subsidies to troubled giant corporations is the bipartisan capitalist government’s rationalization, “they’re too big to fail”!

The most obvious refutation of this absurdity is the Great Depression. After all, everyone knows that the entire global capitalist economy collapsed and remained stagnant until World War II, proving that nothing is too big to fail.

Let’s take a closer look at the reasons why enterprises “too big to fail” are now no less likely to fail—but with a bigger bang than ever-before.

Wikipedia, the online encyclopedia, provides us with the damning arithmetic underlying the process:

“For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street’s biggest broker-dealers could hardly bear to look themselves in the mirror if they didn’t extend themselves three times further. At the end of 2007, Goldman Sachs had $26 of assets for every dollar of equity. Merrill Lynch had $32, Bear Stearns $34, Morgan Stanley $33 and Lehman Brothers $31. On average, then, about $3 in equity capital per $100 of assets.

“Leverage,” as the laying-on of debt is known in the trade, is the Hamburger Helper of finance. It makes a little capital go a long way, often much farther than it safely should. Managing balance sheets, as highly leveraged as Wall Street’s, requires a keen eye and superb judgment. The rub is that human beings err.”

More bad news

This takes us to the next of these unusually pessimistic reports for a mainstream publication. This one was featured on the front page of its Business section of the same July 20 edition of the Times. The story, written by Peter S. Goodman was revealingly titled, “Too Big to Fail.” He writes:

“In the narrative that has governed American commercial life for the last quarter-century, saving companies from their own mistakes was not supposed to be part of the government’s job description. Economic policy makers in the United States took swaggering pride in the cutthroat but lucrative form of capitalism that was supposedly indigenous to their frontier nation.

“Through this uniquely American lens, saving businesses from collapse was the sort of thing that happened on other shores, where sentimental commitments to social welfare trumped sharp-edged competition. Week-kneed European and Asian leaders were too frightened to endure the animal instincts of a real market, the story went. So they intervened time and again using government largess to lift inefficient firms to safety, sparing jobs and limiting pain but keeping their economies from reaching full potential. [Emphasis added.]”

His point about European and Asian capitalists saving companies from their own mistakes, and their American counterparts taking pride in their own “cutthroat but lucrative form of capitalism,” is certainly true—but only so far.

The very same can be said about all capitalist governments. They all consider their job description to include saving their “too-big-to-fail capitalists” from their own mistakes when the system goes out of whack. But they also consider their job description to include cutthroat and lucrative capitalist tactics whenever the opportunity arises to rake in bigger than normal profits.

However, it’s not easy to understand why capitalists do what they do without keeping in mind what Adam Smith, one of capitalism’s most insightful political scientists taught about the laws of capitalist economy.

Adam Smith’s contribution
to capitalist economic theory

Adam Smith, the Godfather of capitalist economics was the first to explain the basic laws governing capitalist economic relations in great detail and how the self-regulating mechanism of the profit-driven economic system works.

It’s virtually impossible to live and function in the capitalist world without having gained some familiarity with the A-B-Cs of every-day capitalist economic relations—the law of supply and demand. On the other hand, it’s one thing to understand the basic “arithmetic,” as it were, of everyday economic relationships, but it’s something else again to understand the “higher mathematics” of its interaction with human social and economic relations. This, of course, is because of the huge number of factors involved in any manageable algebraic economic formula involving, literally, millions and billions of variables—producers and consumers in the national and global capitalist economy.

We must rely, rather, on the “higher mathematics” of the vastly complicated human mind and brain when dealing with the business of billions of people engaged day-in and day-out in producing, buying and selling commodities in order to live and work in the capitalist world.

It will prove useful to take a closer look at the laws of supply and demand. In order to better see its limits, and thus be better prepared for the higher laws of capitalist economy.

First, let’s look at the reference to lower and higher mathematics.

The laws of gravity as metaphor

Everyone on this planet believed they knew the basic laws of gravity—what goes up must come down. Then Galileo came along in the early 17th century and proved that all things, from feathers to cannon balls— irrespective of weight and shape—fell at the same rate of acceleration—in a vacuum, greatly refining the understanding of gravity.

From the early 17th century on, it became possible for people to know how gravity really works.

Even so, later in the 17th century, after Isaac Newton discovered the dynamic between Galileo’s three laws of motion and their interaction with the force of gravity (that is, an iron ball fired from a cannon falls at the same rate of acceleration as an iron ball dropped from the Tower of Pisa)—thus, people’s understanding got even deeper.

Then, with the help of the even higher mathematics of Isaac Newton’s insight and his invention of the calculus, he proved that the same laws governed the orbits of all bodies in the universe—at least as far as science and technology had advanced in the late 17th century.

Adam Smith’s laws of supply and demand

It will prove helpful to lay out the fundamentals of the laws of supply and demand, which together with our metaphoric reference to the laws of gravity will serve as preparation for the “higher mathematics” of capitalist economic relations as discovered by Karl Marx.

Adam Smith’s arithmetical ABCs go like this:

• When demand is greater than supply, a cycle of economic expansion begins. It ends when the market is saturated with unsold goods.

• Saturation becomes problematic after supply matches demand, because like all other things in motion, the momentum of economic expansion carries it far beyond its intended goal of balancing supply with the given level of demand—resulting in a mass of unsold goods and the beginning of another cycle of creative destruction.

• But this cycle also forces the least productive capitalists into bankruptcy. Thus, with a smaller relative proportion of more productive and profitable surviving capitalists—each gains the possibility of grabbing a larger proportion of the growing marketplace vacated by their bankrupted competitors.

• Supply and demand also forces ever-larger sections of the middle classes into the ranks of the working class. But at the same time, it also forces a higher proportion of the expanding work force who have been replaced by ever more sophisticated machines, into the ranks of the “reserve army of the unemployed.”

• That, in turn, serves to intensify the competition for jobs, which tends to force wages down—also in accord with the laws of supply and demand.

• Consequently, when demand again exceeds supply, another cycle of creative expansion of the productive forces begins, with each succeeding cycle reaching new heights of efficiency, productivity and, therefore, higher absolute profits. This is followed, by another excessive expansion of the productive forces; after which, the cycle of creative destruction begins all over again.

Smith, and the economic experts who consistently followed in his footsteps, had argued that any attempt to interfere with the “invisible hand” guiding the self-regulating mechanism of capitalist economy, would do more harm than good—resulting in a more profound crisis of creative destruction!

While the logic of Smith’s argumentation was scientifically correct as far as he and those following in his footsteps went, they never fully explained why.

Marx, however, in his three volumes of Capital having benefited from what Smith and his most sophisticated followers had previously discovered, was able to confirm those generalizations he found in accord with the facts, and reject those that were not. But he also explained what they couldn’t explain. This takes us to one of Marx’s most important discoveries—why the average rate of profit tends to fall over time. Marx’s discovery is closely related to Smith’s, but it’s the only one that fully explains why the “invisible hand” of capitalism cannot be forced to do what it cannot do.

But if anyone does find a way to fool wise old Adam’s invisible hand for a time, the destructive force of the cycle of “creative destruction” will be proportionally greater.

The Keynesian revolution “refutes”
both Smith and Marx

The 60-plus years of uninterrupted global economic expansion (something that has never before occurred in the over 500 year history of capitalism) has led most bourgeois economic experts to the conclusion that both Smith and Marx were wrong about the counterproductive efforts to interfere with the self-correcting workings of capitalism’s “invisible hand”!

Economists like John Maynard Keynes, however, after witnessing the Great Depression and doing their best to extricate the system from its biggest, longest and deepest of all previous cycles of creative destruction, began having second thoughts. That is, they came to understand that the only “solution” for their dilemma was the mass destruction of surplus goods. This mass destruction can be done profitably only by war on a global scale, preparations for war, and the production of the tools, materials and weapons of mass destruction that comes with the horrendous cost in human life, limb and property.

Moreover, Keynes was able to convince those attending a meeting between the soon-to-be victors of the Second World War at Bretton Woods, New Hampshire, in 1944. They decided that the Keynesian “solution” was the only way to prevent an even more destructive economic collapse at the end of the next big boom-bust cycle. This Keynesian “solution” would require a radical separation of the global capitalist economy from the dictatorship of the gold-based monetary and trading system, a system thousands of years old.

That is, by creating a faith-based monetary system, termed “fiat money,” based on purely paper currencies, they allowed the exponential expansion of credit and opened the door to unprecedented levels of credit. This new system would theoretically allow an expansion of the world capitalist economy for decades (instead of years) and avoid the kind of destructive crisis of overproduction detonated by the stock-market crash of October 1929.

Keynes and most others searching for a way out of another Great Depression had come to the conclusion that the capitalist world could not survive another one of those catastrophic episodes of not-so-creative destruction—unless a way could be found permitting the laws of capitalism to be radically stretched to a previously unattainable level of public and private debt.

Thus, the Keynesians, had come to the conclusion that without such a fundamental change in the global monetary system, (as Keynes had been the first to propose), a solution could not be found within the framework of the system. It would have been impossible to postpone the inevitable downward cycle for decades rather than years—but not indefinitely.

Or as Keynes famously answered a critical student who pointed to the consequent growth of public and private debt to unsustainable proportions: “By that time we’ll all be dead!” History has already confirmed the first part of Keynes’s conclusion, and society is now poised on the edge of the confirmation of its second side.

The Keynesian system has already given birth to permanent war, permanent preparations for war, an ever-expanding debt burden, and an accelerating rate of global inflation in most of the capitalist world.

Tweaking Adam Smith’s invisible hand

There are a number of indirect ways that Keynesianism allows the Federal Reserve Bank chairman, in conjunction with the U.S. Treasury secretary, to intervene to keep the U.S. economy on an even keel. They can tinker with, and otherwise manipulate, the Keynesian monetary system, albeit to a very limited extent. And each postponement, as both Smith and Marx warned, makes the inevitable economic collapse that much worse.

Those assigned by Congress to help Smith’s “invisible hand” maintain economic equilibrium, have already gone a long way toward loosening the grip over its monetary system, a system which, for thousands of years, had rigidly and ruthlessly enforced capitalism’s laws of supply and demand.

This little miracle, when viewed from the standpoint of history, was made possible by Keynes’s invention of fiat money; that is money whose value relative to other currencies and the world of commodities, has no objectively-determined economic foundation.

Rather, fiat money’s purely relative value is now determined not by the traditional universal equivalent—gold or some other precious metal—which undergoes continual changes in the exchange value of every commodity in the world marketplace. Thus, the totality of changing relative and absolute exchange values tests and readjusts them in accord with the varied and changing value of all commodities based on the changing proportion of socially necessary labor power incorporated in each commodity. And, because gold, acting as universal equivalent, is exchanged billions of times more frequently than any other commodity, its value was tested and proven billions of times more frequently than all the others.

That’s something that cannot possibly be done with fiat money; simply because it is what it is. In the final analysis, its real value is equal only to the value of the paper it’s printed on!

That’s why the tinkering with interest rates and otherwise deflating the real value of fiat money results in the printing of many more paper dollars, euros, pounds and yen than the value of most of these nations’ Gross Domestic Product. And it especially holds true for the U.S. dollar!

But the short and happy life of the global capitalist order has been extended by 60-plus years of expansion. The paper currency substitution for gold has done what it was designed to do. It has accomplished this little miracle by ending each cycle of rapid expansion with a slowdown of the rate of expansion, rather than in a destructive contraction. Until now.

Now, however, the mass news media has been scaring the daylights out of the world’s capitalists, as well as their most vulnerable victims who will suffer most from any recession. Even more frightening are the increasing number of economic commentators who have, one after another, been characterizing pieces of unusually bad news—and there have been plenty of those lately, as “something we haven’t seen since the Great Depression.”

Whether it turns out that way or not, it has become evident that the U.S. and the global capitalist economy, is now poised on the brink of another, even more destructive economic, financial and monetary crisis than we have seen since the terrible years of the 1930s.

This is the end result of the unending technological process that constantly replaces less efficient factories with state-of-the-art plants and machines. Thus, those capitalists that modernize, tend to realize a higher rate of profit than their competitors who are unable to match their higher level of productivity at lower cost in human labor power.

But this long-term environment in which there is the tendency toward ever-lower profit rates, is, in the final analysis, responsible for the boom-bust cycles of the capitalist mode of production. A growing portion of the least productive enterprises must either catch up and surpass those who were the first to introduce the most productive labor-saving machines, or die.

Because labor-saving machines keep getting more sophisticated, and therefore more productive and profitable, the greater proportion of workers who are replaced by machines, shrinks the world market. This explains why capitalism, as a social and economic system, is doomed by its own internal contradictions.

In other words, in direct relation with this overall, long-term process, as each capitalist earns a higher profit rate than the rest, the average rate of profit is proportionately reduced by competition.

Behind the falling rate of profit

We come now to the fatal contradiction between the two components of invested capital, which Marx calls constant and variable capital. The tendency of the rate of profit to fall is the fundamental contradiction that will bring the entire structure of world capitalism tumbling down. Here is how the contradiction is manifested.

Constant capital; that is, the portion of capital invested in factory buildings, machines, and raw materials, is merely reproduced in commodities, but does not create any new—that is, added value—or what Marx calls, “surplus value.”

On the other hand, variable capital—the portion spent on labor power (wages), both reproduces itself and adds new value to the commodities produced — surplus value.

In other words, even fully “automatic” machines cannot produce commodities without the human labor that may be required to maintain, repair, adjust, and turn them on and off. This is the hidden reason why the rate of profit is doomed to fall at the same pace as the rate at which new labor-saving machines replaces human labor power!

Thus, when completely or almost completely automatic factories are eventually created—as they must, logically, do—the rate of profit falls close to zero. In other words, if machines do away entirely with the need for human labor power, then zero workers, equals zero surplus value and zero profit!

After all, if surplus value is zero, it means that there are close to no workers receiving paychecks. This leaves nearly no one with money enough to pay for the product of automatic factories—no one, that is, except capitalists themselves. But that, of course is an absurdity. More practically speaking, it means that close to no money is in circulation to pay for the great mass of goods produced “for sale.” And that, in turn, will end capitalist production along with society divided by class. That too proves that capitalist economy must die either naturally or unnaturally.

But long before such a contradiction becomes a reality, something far more important must be set into motion. And that,is as German Marxist Rosa Luxemburg predicted, capitalism must be forcibly overthrown by an increasingly rebellious working class, followed by either successful socialist revolution or the end of civilization as we know it.

In other words, as Rosa sloganized it, it must end either in “Socialism or Barbarism!”

1 “Sixteen Tons,” hit song made famous by country singer, Tennessee Ernie Ford, was written by Merle Travis.