The recent announcement of Q3 (further Quantitive Easing), by Ben Bernanke of the US Federal Reserve, indicated that at least his part of the US establishment saw the solution in the same way. They think sorting out the current crisis can be achieved by printing more paper money and distributing it via various financial institutions. This announcement in the US came only weeks after a similar statement had been made in Europe by Mario Draghi. Both, in slightly different words, are prepared to ‘do as much as it takes’ in this direction.
Measures such as these are being collectively proposed and implemented because the top political and financial players do not fully understand their system and therefore have no other solution but to deal with appearances. Such is their ignorance of the basic structure of the capitalist mode of production, that they mistake appearances for the underlying reality. It ‘appears’ to them that the problem on the one hand is lack of ’animal spirits’ among investors (according to Mervyn King Governor of the Bank of England) and on the other hand (various pundits) insufficient demand. For this reason it also ‘appears’ to them that the solution is to print more money so as to increase demand. But extra money can only increase demand if it gets into consumers hands and if access to this is via interest-bearing loans then given the current economic crisis, very few consumers want extra loans.
In reality, beneath the appearances, the present situation of low economic activity, is the result of a previous situation in which a general level of insolvency emerged as the main problem, following the collapse of a housing bubble. Financial institutions and businesses, were caught out holding too much debt and when the sub-prime housing debacle finally burst in 2007, a long chain of due payments could not be made. A further knock-on effect of this collapse was the chain of banking failures and near failures in 2008 which in turn saw these institutions being bailed-out by various governments. In the USA much of this was done under Troubled Asset Relief Program (TARP). In the UK the Long term Refinancing Operation (LTRO). For example; in just one case only, the US government bailed out American International Group to the tune of $182.3 billion.
Now it should be obvious that too much debt is only the other side of the balance sheet to too much lending. No one can borrow (ie acquire debt) without some body else lending (or extending credit) the amounts borrowed. A crisis of high levels of debt is therefore the result (the other side of the coin so to speak) of previous high levels of lending. And, of course, no one could have lent for the eventual risky purposes if there was not plenty of spare money looking for an investment opportunity. In this regard, there are still trillions of £’s, $’s and euros of outstanding loans – so why would these debtors want to borrow more and take on more debt?
High levels of lending, borrowing and debt indicate that the underlying problem was not at all caused by a lack of liquidity. There had been so much money (liquidity in all its forms) swilling around the financial institutions in the lead-up to the crisis, that after all the ‘safe’ investment opportunities had been taken up, much of the surplus spilled over into dodgy forms of speculation. To soak up this vast pool of finance capital, special financial instruments were concocted out of every possible association with value, (Derivatives) no matter how limited or how far removed it was from its originating asset source. Then these instruments were leveraged scores of times over, creating vast amounts of fictitious capital. All of which was swilling around and among the savings, loans, insurance and pension schemes who became caught up in them. Immediately after the solvency crisis, these various institutions, the ones too big to fail, were bailed out by writing off debt, re-scheduling it and printing even more money. The others went to the wall.
But banks and manufacturers were not the only institutions who were continuing business by spending more than the income they received. Capitalist state institutions were also following a similar financial model to some of the participants active in the financial markets. They too were borrowing large amounts of money on the promise to pay it back in the future. This is exactly what financial speculators do only there is an essential difference in how these borrowings are used. Speculators bet on the future value of financial instruments in the hope that they will be either worth more or less than their current value. If they get it right, they repay the loan and pocket any surplus. If wrong, they lose all or a part of their bet.
Government agencies rarely speculate in this fashion, but they do continually borrow large amounts which they are not able to fully repay and must raise taxes in order to meet the repayments as they become due. A majority of western governments are now so much in debt that if they were a business they would be declared bankrupt and those in charge not allowed to run anything in the future. However, capitalist governments and their elites, are able to avoid such outcomes and by their control of government, raise taxes, print more money and hope in this way to reduce their borrowing. In the European Common Market, they can also agree to bail-out each others government by again printing money and guaranteeing government bonds.
But as should be obvious in all sectors, liquidity is not the answer to insolvency. If the extra money does not get to all those in debt then many will continue to be in debt and thus be insolvent or potentially insolvent. Nor is printing money the answer to economic recovery. If the extra cash does not get taken up by the manufacturing sector, – under capitalism, the drivers of economic production, – then there can be no more value created to enter into the supply or demand parts of the capitalist economy. Equally obvious is the fact that extra printed money will not be taken up by capitalist manufacturing capacity, if they do not see the market will sooner rather than later, be able to absorb their extra production. But will the new money stay in the banks?
The extra printed money, noted above, will be delivered by the government managed central banks to the banking sector at a very low interest rate. The banks, at least for the short term, will be even more reluctant to lend it for economic production, or financial speculation. This reluctance will be motivated by the toxic nature of the financial instruments available and the rise in unemployment and the fall off in demand. Similarly those businesses, dependent upon buoyant demand will be reluctant to increase production using borrowed funds. Even those businesses who have good current balances and don’t need to borrow will be reluctant, under austerity to increase production and may reduce productive capacity, rather than increase it.
The finance capital sector are perhaps the main ones most likely to take advantage of the cheap cash made available by quantitative easing, but their use of it will not necessarily create economic growth, since the markets they frequent feed off surplus value created in the productive realms of the capitalist system. Their investments are more likely to continue to be bets on the paper increases and decreases (shorting) in financial instruments, bets on share prices, currency exchange differences and on future prices of commodities. It is what they have done in the past and are doing in the present. The likelihood is they will continue to do so in the future.
The printing of money and pumping it into the banks is based upon a mistaken view that the crisis is one of insufficient demand rather than the results of a crisis of relative over-production of commodities, fixed capital and surplus value. The banks have already been bailed out several times and huge tranches of money have been lent to them by central banks at close to zero interest. They have had plenty of liquidity in the past but this monetary priming did not result in any sustained economic activity. How could it? Nor will it in the immediate future. Money is only borrowed by the economic elite for two purposes. The first is to invest in financial instruments and the second is to invest directly or indirectly in businesses for development or expansion purposes. Investment for business expansion, however, will in general only be undertaken during buoyant market conditions.
Since there is no such buoyancy or sufficient general market demand this quantitive easing will not result in further investment in productive capacity, but the opposite. There is currently a scaling down of productive capacity in many places and in many countries. Where new production is instigated in certain niches it will add to the relative over-production in two ways. First it will create more competition in a shrinking market situation and second; new production facilities are generally more productive than previously levels. New production, in general, therefore uses relatively less labour than older forms of production. Less labour employed means less purchasing power via wages entering the markets, than has been displaced elsewhere, by closures as austerity measures are implemented.
As noted earlier, some of the new cheap money made available to banks may find its way into the financial sectors, but even here the financial market is depressed where it is not already in crisis. Finance capital is increasingly looking for safe places to preserve its existing value, and has largely given up searching for places to expand the existing value of their holdings. Some of the safe places will continue to be in staple raw materials, such as food-stuffs, metals, essential infrastructure projects, energy sources and delivery systems. The consequent frantic search for safe places in these categories is already forcing up the costs of basic requirements and thus taking more demand out of all other categories of commodity production. Since food, transport, light, heat and housing, however, cheaply they are reduced, are the first requirements of survival so the purchase of other items will be progressively given up.
The announcement of a new UK business bank by the Con/Lib coalition is a belated recognition that the existing banking system is not fulfilling the purpose of economic development. We can see from the above economic conditions why this is so. However, on a UK coalition wing and a prayer, £1 billion of UK tax-payer money plus an undisclosed amount of private capital is to be collected together in a new institution. The money however, in this case will not be given directly to the banks. Although it will take some time to become operational it is worth considering its proposed pattern for it reveals the sterile and counter-productive nature of the proposal. And of course, it will not increase productive economic activity.
The existing banks will be encouraged to lend money to businesses and these loans will be underwritten or purchased by the Business Bank, which will then package these into parcels (ie more derivative instruments) and sell them off to private investors. In other words the whole basis of leveraged derivatives will be pump-primed again, this time by direct Government initiative, rather than the private sector, malpractice. In other words it will be sucked up into the already over-bloated finance sector with all that that entails. Which will be another twist in a downward spiral. Of course, some of it will find its way into the bond-market and some will fuel further financial bubbles – both of which are the subject of the next posting in a weeks time.
Roy Ratcliffe (September 2012)