Capitalism: the sub-prime economy

For weeks now the financial markets have been in turmoil and equity prices have fallen steeply. Bourses across the world have taken big hits, but it's not just private equity that's been affected. All the major banks have been affected by losses and bad debts and, at the time of writing, the problems are spreading from ‘leveraged (credit based) buy-outs‘', hedge funds (obscure and complex gambling based on debt) into high-grade corporate bonds normally seen as ‘safe havens'. There is a long way for this particular phase of the economic crisis to go yet. For the last ten or twenty years, workers in all the richest capitalist countries have been told how well, how strong, how resilient the economy is. What's happening? Why have billions been wiped off stock market values? Why are the major national banks injecting hundreds of billions into their national economies (with amounts described as "unprecedented" in The Guardian)? Where have these sudden problems come from? These problems are neither sudden nor transitory but are rather systemic to a capitalism in decay and have been so for over a century now. They don't show a ‘strong economy‘', even a ‘liberal economy‘', but a crisis of the state capitalist economy.

Over a month ago, the bourgeoisie told us, with the matey economic language and personalities that they use on such occasions, that the problem was "sub-prime lending in the US housing market", that is to say, the riskier end of mortgage lending to people with poor credit ratings. Then it was that equity markets were overvalued - an element of obvious truth in both cases. Two weeks later, and the scribblers were telling us what a good thing it all was; it was ‘positive‘' that dodgy lending had been curtailed, the fall in the market was ‘a necessary correction‘' and now we can get back to normal. The International Monetary Fund, equally whistling in the dark, said last month that the crisis was "manageable" and that "the fundamentals supporting global growth remain in place"(The Guardian 15/8/7). There's nothing so stupid as a bourgeois economist[1], because they are the spokespeople of an economic system that is fundamentally irrational and fundamentally bankrupt.

Here in Britain, Gordon Brown has been elected Prime Minister on the back of a so-called ‘strong economy‘', but Britain, like all economies, is subject to the crisis of endebtment. Sub-prime borrowing in the UK has grown 28% in recent years and is measured in tens of billions of pounds. Insolvencies are up 25% and house repossessions are at an eight year high. Over the last 10 years, UK debt - mortgages, overdrafts and credit cards - has risen to up £1345 billion pounds. That figure is now sailing past GDP, and bear in mind that GDP itself is not all real production, but includes such amounts as payments for the police, prison officers, armed forces and other such parasitic elements of the unproductive sector. And also bear in mind that 85% of this amount, £1.15 trillion, of British debt is secured against property prices, which themselves are part of a fictitious bubble. Such amounts make the UKLtd. "technically bankrupt", according to Stephan Gifford, Grant Thorton's chief economist (Guardian, 23/8/7).

Sub-prime borrowing or stock markets are not the cause of this crisis - they are just particular and secondary expressions of it. They tried to tell us similar lies in the 2001/2 recession which was supposed to be due to 9/11, whereas economic activity was severely weakening a year before with the collapse of the speculative IT bubble[2]. And likewise for the five major previous recessions going back to the mid 1960s, which were all supposed to have specific, particular, external causes. But all six recessions have a common cause, as symptoms of the fundamental crisis of capitalism - its overproduction, relative to what can be purchased, its lack of solvent markets - and all six recessions have tended to be longer and deeper than the previous one (see ‘The descent into the abyss‘', International Review no. 121, Spring, 2005). In the same article we read how the US economy, the world's economic locomotive, lives on credit from the rest of the world because the countries that receive an excess of dollars from their trade surpluses with the USA invest them on the money markets. Gross US debt to the rest of the world has increased by a factor of 4 from 1980 to 2003, and the net debt of the US to the rest of the world has gone from negative in 1985 to a positive (negative for the US economy) of 40% in the same period. The expansion of credit and debt, a deliberate policy of state capitalism from the mid-eighties, has only increased the fragility and fundamental weakness of the capitalist economy overall and has become essential for the day-to-day running of capitalism. But the bourgeoisie are not omnipotent and in control of their economy; capitalism is a blind and irrational economic system. The best that the bourgeoisie can do is try to manage the deepening crisis, to attenuate its worst effects; and this is becoming increasingly difficult with vast amounts of fictitious capital washing around the system, much of it hidden from view. This task is made even more difficult as each nation state tries to protect its position at the trough or spoil it for others. Thus we have already seen tensions mounting between the US Federal Reserve and the Bank of England over current ‘interventions'. Overall, this particular expression of the economic crisis, this ‘turmoil', is pointing to a new recession and the consequences for the world economy - including the ‘economic miracles' of China and India - are dire. This is not ‘the same old thing' and then ‘we can get back to normal', as the bourgeoisie tell us. On the contrary, the working class will suffer. Across the industrial world hundreds of thousands of workers and their families are already losing their homes (and still have a lifetime's debt). Pensions funds will be hard hit, factories will close and jobs will be lost, prices will rise, as will taxes, and the social wage will be cut further and faster. And everywhere, absolute pauperisation will increase.

While the last 30 years has seen a massive and unsustainable swelling of credit and debt - and this in itself shows the extension and also the weakening of state capitalism. The recourse to fictitious capital has long been a policy of capitalism in crisis. Trotsky, who himself was very clear about the decadence of the capitalist mode of production early on last century, wrote in the ‘Report on the economic crisis' to the Third Congress of the Communist International: "Capitalism as an economic system is, you know, full of contradictions. During the war years these contradictions have reached monstrous proportions. To obtain the resources required for war, the state resorted primarily to two measures: first, issuance of paper money; second, flotation of loans. Thus an ever-increasing amount of the so-called ‘valuable paper‘' (securities) entered into circulation, as the means whereby the state pumped real material values out of the country in order to destroy them in the war. The greater the sums expended by the state, i.e. the more real values it destroyed, the larger the amount of pseudo-wealth, of fictitious values accumulated in the country. State-loan paper has piled up mountain-high. Superficially it might seem that a country had grown extremely rich, but in reality the ground was being cut under the economic foundation, shaking it apart, bringing it to the verge of collapse. State debts have climbed to approximately 1,000 billion gold marks, which adds up to 62% of the present national wealth of the belligerent countries. Before the war, the world total of paper and credit money approximated 28 billion gold marks, today the amount is between 220 and 280 billion, i.e. ten times as much. And this of course, does not include Russia, for we are discussing only the capitalist world. All this applies primarily, if not exclusively, to European countries, mainly continental Europe.... Becoming encased in every-thicker layers of paper values, or what is known as fictitious capital. This fictitious capital-paper currency, treasury notes, war bonds, bank notes and so on - represent either mementoes of deceased capital or expectations of capital yet to come. But at the present time they are in no way commensurate to genuine existing capital. However, they function as capital and as money and this tends to give an incredibly distorted picture of society and modern economy as a whole. The poorer this economy becomes all the richer is the image reflected by this mirror of fictitious capital. At the same time, the creation of this fictitious capital signifies, as we shall see, that the classes share in different ways in the distribution of the gradually constricting national income and wealth. National income, too, has become constricted, but not to the same extent as the national wealth. The explanation for this is quite simple: the candle of capitalist economy was being burnt at both ends".

Trotsky's point, whatever the ups and downs of the present ‘turmoil' in the financial markets, shows the fundamental problems of the flight of decaying capitalism into debt, credit and ‘funny money', and it applies in spades to the ‘richest' countries in the world today. These tendencies of credit and debt themselves could for a while alleviate the immediate problems of the restricted market but, used in the larger and larger doses they have been, they can only become poisonous. Capitalism is no longer a positive, expanding system which can continue to always put off its contradictions to a higher level. The capitalist economy cannot continue to ‘burn the candle at both ends'. Baboon, 26.8.7

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[1] Undoubtedly there are high level bourgeois who are fully aware of the real depths of the crisis and others whose task it is to obscure this from the working class.

 

[2] Enron, one of the biggest corporations in the US and the world, collapsed well before the Twin Towers.