Roller Coaster Markets

Debt & Capital – a Confluence of Factors

The last month has seen a swoon in the global stock and bond markets – a drop that was to be expected given the endless financial ‘gas’ from corporate profits and government central bank policies drifting upward into the ‘stockosphere’ since 2009.  On another “Black Monday,” August 24^th, the U.S. Dow Jones fell 1,100 points.  Program trading is driving the volatility, but beneath it is something else. Debt is the immediate culprit if you look, but beyond that it is a stagnant profit outlook from actual production.

Don't use this card, don't use this card, don't ...

The destruction of Greece in the interests of the European Central Bank (ECB) and the German and French bankers over the debt issue served as a prelude to the latest mini-heart attack in the markets.  The action of the ECB to cut off daily transaction abilities of Greek banks to enforce the Troika’s demands was unprecedented but expected.  It crushed Syriza, which has now gone through a left-split, with “Popular Unity” emerging out of the social-democratic shell of Syriza’s leadership.  The social-democrats found out the ECB does not negotiate.  The markets rose after this slaughter.

Spain, Portugal, Italy and Ireland, take note.

But now Puerto Rico has begun the path to default.  Puerto Rican bonds, bought by many retirement pension funds and 401k outfits, are the subject of many lawsuits across the U.S., especially in Florida.  Puerto Rico engaged in the same heavy borrowing as was encouraged on many other municipalities by Wall Street.  Prominent capitalists in the U.S. like the ‘sage of Omaha,’ Warren Buffet, are calling for ‘staying the course’ in making Puerto Rico bleed.  No haircuts here.  No jubilees, no way.

No one remembers that back in 2008 the Chinese government (which the writers at Bloomberg.com understand controls the ‘commanding heights of the economy,’ even if some Marxists don’t) floated the world economy through one of the biggest building booms in history – making the pyramids look like a day’s work.  Chinese growth continued through that whole sorry capitalist episode.  New cities, ship and air ports, roads and freeways, apartments and office buildings went up.  China ‘grew’ through the Great Recession and helped pull the capitalist world out of its debt crisis  - a crisis brought on by the domino effect of bogus securitized mortgages and unpaid credit default swaps that nearly brought down world finance.  I.E. debt.

Yet that situation is not over.  Last year China accounted for almost 40% of world growth.  But this year the chickens have come home to roost, especially in China.  Many of those built facilities are empty or unused. Due to the large debt overhang from over-building and real-estate speculation, according to McKinsey it quadrupled Chinese debt.  In response, the yuan was devalued by the government.  The private Chinese ‘shadow’ banking system is in trouble for the same reason.  The Chinese stock market, the Shanghai composite, took an enormous drop.  In response the People’s Bank of China – the main state bank - is propping up the market every day by buying shares, just as the U.S. central bank has done for many years in the U.S. through cheap money. 

Many commentators in the U.S. are saying – so who cares about China!  Well, China has been the cheap labor production site for world capital for many years.  It has been one of the chief importers of basic commodities like steel, cement, oil and rubber.  If it starts pulling back, retrenching and focusing on its own domestic market – and perhaps paying Chinese workers more – that puts a wrench in the model.  Since the 1980s the Chinese oriented to neo-liberalism and the ‘world market’ and have followed that path to a T.   

When Yellen’s Fed made noises about ‘cheap money’ becoming more expensive in the U.S., it also contributed to the U.S. market drop.  They are now putting this off for another month.  The Federal Reserve is basically floating Wall Street through cheap money, which Wall Street and various corporations use to loan money to us at higher rates – rates civilians then have to pay.  The ECB and the Bank of Japan are doing the same thing.  Corporations use this money for buying other companies or buying their own stock back.  Now the Fed could loan money directly to people at these rates – but that would be ‘socialism!’  So they funnel it through capitalist corporations so someone can buy a yacht.  The Fed is also buying up U.S. bonds to make them more expensive, so it will force people back to the markets.  They call it ‘quantitative easing’ – around $4.5 trillion according to Bloomberg since 2008.  It makes the 2008 $800K U.S. government ‘bailout’ of Wall Street look like a teaser. 

The Chinese state bank is doing the same thing – flooding the Shanghai market with financial support every day at 2 P.M. to cover the debts of all the ‘get rich quick’ Chinese speculators who trade stocks in their bathrobes.   Capital in China has just gotten a black eye.  China has also cut interest rates and loosened borrowing limits – yet wants to avoid more debt at the same time!  Schizophrenia.  As many have pointed out, once money is almost free and the markets are freeer from ‘moral hazard’ - what can a government do if the markets continue to drop?  Some of the largest bullets are then gone from ‘monetary’ policy.  This behavior by the Chinese central bank endangers the real Chinese economy.  Of course they have a mountain of cash they too are sitting on.

The stock, bond and commodity markets are the thermometer of capitalist health – and they are basically casinos at bottom.  Every time there is a panic, as the high speed computers trade millions of shares in split seconds, it only proves this. 

Commodities are also taking a beating.  The oil and coal industries are clocking out, while other commodities are dropping in value due to slowing economies.  Oil is again at record lows on the spot markets – below $40 a barrel.  This reflects a possible approaching recession, both around China and countries like Canada, our biggest trading partner.  The Saudi’s and OPEC have intentionally not limited oil production for political reasons – to hurt the Russian and Venezuelan economies.  Smaller U.S. oil / fracking outfits are idled or going bankrupt.  The ‘boom’ in North Dakota is being tempered.  One of the largest coal companies in the U.S. has recently declared bankruptcy, as solar and wind can compete economically.  No one is crying about that except the miners that are out of work – as capital has no plan to retrain them for another job.  Welcome to the ‘free’ market.

What are the capitalist corporations doing with their ocean of cash?  Stock buy-backs.  Not investing in plant, equipment or people – mostly just stock buy-backs, sitting on it or speculation in markets or real estate.  This is because the production of actual commodities – not financial commodities – is no longer profitable enough.  Build another factory?  Pshaw!  Labor productivity – which has helped corporations for many years make more money – has leveled off or is declining.  I.E. they have worked people’s brains and bones enough.  The environmental issue is also weighing on capital.  Basically it no longer sees a long-term future for its basic model, but can’t admit it.  The model is too rigid to change, so it just plunges ahead. 

This is the face of stagnation.  Everywhere you look both real and hidden debt is acting like a giant set of concrete shoes.  This mountain of debt – corporate, civilian and lastly government – is a sign that capital has no outlet in actual commodity production anymore.  It is instead as if a giant Hoover vacuum cleaner has sucked all the money up out of many municipalities, countries, workers, like a bloodsucker that needs a host.  What happens when the host is drying up?  The vampire bloodsucker can’t stop  - the system cannot ‘reform’ itself. 

Debt now reflects our almost French Revolution level of class stratification, as Piketty might point out.  Those below the top 10% of the society owe the most – if they have anything to owe, that is.  Now what did Marx say about debt?  Famously he described national debt as part of the ‘primitive accumulation’ process of capital. (in Capital, Vol.1)   He contended that ‘public’ debt was concomitant with the existence and growth of capitalism. 

“National debts, i.e., the alienation of the state – whether despotic, constitutional or republican – marked with its stamp the capitalistic era.” - Marx

As to corporate / capitalist debt, he early identified credit as an absolutely necessary part of the circulation of capital, as the capitalist needed a bridge loan between the production of commodities and the realization of profits.  Hence credit had to become part of the ‘fictitious capital’ generated by the system.  Minsky, going Keynes one up, argued that financial capital had built-in boom-busts based on credit and debt.   This sounds suspiciously like Marx talking about production and over-production in the actual commodity economy.

Another form of debt is debt peonage for people (debt slavery) – and for whole nations.  See Greece.  The globalization of credit and debt is upon us. 

Lastly is individual debt.  Debt is now intimately intertwined with private property.  When Marx wrote Capital, the credit card, the mortgage and the auto loan were unknown.  So he does not focus on individual debt - but it fits the understanding quite easily.  Later Marxists have pointed out that capital engenders debt like a snake puts out venom.  Debt is now closely entwined with the population – through student loans, car loans, house loans, equipment or business loans and credit card debt.  This is because, as Monthly Review might point out, excess capital must find a use – and the use is to put everyone else in debt by issuing these loans. Which is why you see late night TV handing out loans on lawsuits or giving payday loans over the internet.  

As the British Marxist David Harvey said,
“The perpetual accumulation of capital and of wealth is therefore crucially dependent upon the perpetual accumulation and expansion of debt.”

Debt has grown as wages and salaries have failed to keep pace with prices.  For workers, a loan of some kind became essential to survival.  So actually debt slavery is a bi-product of wage slavery, the commodity economy and the profit system - not some ahistorical issue.  Debt leads to the control and subsequent exploitation of labor.  This is not the position of anarchists like David Graeber, who think debt slavery came first and is essentially primary.  U.S. household debt was $12.8 trillion in 2006.  Imagine what it is now.

Without a program to cancel all debts to the banks this situation will only get worse.  Of course, that would bring down the capital system.  Exactly.

Reviews of "Debt" by David Graeber and "Flash Boys," by Michael Lewis, and commentaries on modern slavery, below.  

Red Frog

September 3, 2015