Friday 1 February 2008

Essential contradiction of consumer capitalism – keep wages low but keep spending high

by Ondine Green Henry Ford's genius was to get workers to buy into the system as consumers, by using mass production to make consumer goods affordable. Wages at Ford's factories were set to make sure that a worker could buy one of the cars they made within a reasonable amount of time. However, by introducing the contradiction that the health of capitalism was dependent on workers' purchasing power, the system was made less stable in the long run. The Great Depression was a cycle of attempts to restore profits by cutting wages, thus depressing demand, thus reducing profits. Only massive public works – including rearmament for WW2, especially in USA and Germany – broke the cycle. The next time world capitalism decided to smash the crap out of worker's wages – the huge retrenchment of social spending and union-bashing in the 80s and early 90s (the Reagan/Thatcher/Douglas period) – things were a bit different. There was now a mass middle-class consumer market. Being able to effectively smash workers power meant a big inflation in the ranks of managers, marketing experts, and all the other mechanisms of control that corporate capitalism uses to keep people docile and cowed. Crucially, these people don't have to save to invest like capitalists do. They don't really have an economic function other than consuming. To some degree, part of the increased surplus was siphoned off to these guys, hence the explosion in luxury consumer goods in that period – the whole “yuppie” phenomenon, which is really still with us although more understated. But that wouldn't keep the whole ship afloat. Ford's legacy is still with us. Karl Marx said that in his time the natural wage of the working class was enough to keep them barely alive and able to put in 14 hours in the coal mines or wherever. But the modern capitalist system still relies on the working class – 80% of the nation in advanced countries – buying consumer goods. Crucially, and disturbingly, it's probably no longer true that the floor of possible wage rates is keeping body and soul barely together. The evidence for this is that while the American GDP per head has near to tripled over the last thirty years – the nation is producing three times as much wealth, in other words – real wages for American workers have actually fallen slightly. The only reason incomes have increased is that the hours of work have increased, to the point where they're massively greater than in any other Western country. Just as an example: American workers only get 2 weeks annual leave, if they're lucky. Think about that. In the current era, American workers are worse off than they were in the days of Richard Nixon. So how is the system kept afloat? They can't export all their consumer goods. Their middle classes can't spend that much... so? Credit! In the short term, credit is the answer to all the contradictions and problems of capitalism. In the long run, it just makes everything worse. As Marx wrote in Capital Volume 3, credit greatly expands the "scale of production, and enterprises which would be impossible for individual capitalists." This accelerated the development of capitalism, by eliminating the need for all transactions to directly involve the exchange of money. This sped up the rate at which commodities could circulate in the economy, something that was essential for the growth of a world market. The expansion of what later Marxists called "finance capital" created what Marx called "money capitalists", investors who have no direct relationship to the actual production of goods. Finance capital played a decisive role in the creation of modern corporations a century ago by organizing the mergers that led to monopolisation of entire industries. The credit system, according to Marx, "reproduces a new financial aristocracy, a new kind of parasite in the guise of company promoters, speculators and merely nominal directors; an entire system of swindling and cheating with respect to the promotion of companies, issue of shares and share dealing. It is private production unchecked by private ownership." In the years after Marx, of course, this wonderous magical potion called “credit” has moved from stopping the gaps in production, to smoothing out the troughs in production. And most crucially, filling the gap between wages and the level of consumption necessary to keep profits high and the system going. It's worth noting that there has been a consistent government ideological effort since the early 90s to train all young people into believing that taking on huge debts is an essential part of life: student loans schemes, for instance. It is vital for modern capitalism that the masses consume as they work. In the wake of the World Trade Centre attacks, Dubya Bush went on TV and said “SPEND SPEND SPEND or the terrorists win”. (It's worth noting that at a time when Americans' living standards and personal freedoms are under attack, there's always some war to sell them to keep them afraid, docile, isolated, passive, and SPENDING.) How are you going to spend with no money? Your credit card. Where do you go when rack-renters drive you out of your convenient apartment? To a nice house in the suburbs (and remember this is the USA, if you think Auckland's urban sprawl is bad, Atlanta will blow your mind, the suburbs go on halfway to the Grand Canyon) paid for by a mortgage company. To help with all this, the Federal Reserve in the US dropped interest rates to a staggering level. Banks, credit card companies, and the inevitable shady dealers had no problems getting as much as they wanted to lend out and hopefully make a tidy profit on. It's important to remember that this simply wouldn't have happened in another era, where growth was spurred by raises in real wages and credit was not for the likes of “Joe Sixpack”. I remember in the early 90s how difficult it was to even get a credit card. Now they send you ones uninvited in the mail, and raise your limit. In these conditions of mega-cheap credit, the housing market became more and more exciting. In countries with high levels of home ownership, like the US and New Zealand, the demand for new homes outstripped the supply, meaning the prices of existing homes rose and rose, meaning the owners of those home suddenly had much more credit at the bank without having had to work or even ask for it. This was an important part of the credit boom as well, supporting the middle classes in their spending on luxury commodity items. So what this all added up to, was that to keep the system running the working-classes, and to some extent the middle-classes, had to be spending more than 100% of their actual income. Anyone with half a brain in their head could tell you that that's not sustainable in the long term. Of course, no investment capitalist has even half a functioning brain when there's money to be made. But where was all this pretend money actually coming from? Now that's the other side of the question: the insane growth of the whole “pretend money” industry – derivatives, financial capitalism, call it what you will. As Bismarck said about laws, capitalist booms are like sausages, you're much happier with them if you don't understand how they're made. Capitalist booms are pretty much a huge confidence trick, a systematic campaign of denying reality and ignoring the evidence for as long as the fantasy world can be sustained. Marx and Lenin both saw more than a hundred years ago that credit, which evolved as a way to smooth over imbalances in the productive capitalist economy, was becoming a kind of parasitic growth form, warping its parent organism to its own needs. After the great trauma of the 1930s Depression and WW2 some controls were put on this entity. It's almost difficult to explain to young people today that there used to be a thing called “foreign exchange controls”. You had to ask special permission from the Reserve Bank to convert more than a few hundred into a foreign currency. And this was standard in all the capitalist nations. But it was propped up by a gold-standard currency system called Bretton Woods. That collapsed in 1973 when the Americans deliberately inflated their currency breaking the link to gold to pay for the Vietnam War. In the traumatic years of inflation and stagnation that followed the neo-liberals saw their chance. In all the Western countries we saw the whole idea of foreign exchange controls thrown out the window, along with pretty much any other regulations or controls over the financial industry. Soon these people were making untold billions doing nothing but shifting “hot money” as they call it around the world. In some cases – Britain in 1992 – they managed to cause the collapse of an entire economy policy that they didn't agree with. It's important to remember that all this “hot money” is essentially imaginary – that is, it isn't backed by any real life goods or services or other forms of useful wealth. It's based on nothing more than what John Maynard Keynes called the “animal spirits” of traders – their confidence, their willingness to believe, their trust. And no government was going to rock the boat regulating these guys as long as they were managing to double their imaginary money, and then bring it back into circulation to cover the gaps in the real economy. If lies are profitable, they will go unchallenged. Actually, in modern Western economies, the pretend economy is many times bigger than the productive economy. In a Marxist analysis, of course, the real creation of surplus value goes on in the factories of the world – increasingly based in places like China and the Pacific Rim, and only the profits get repatriated to the Western countries. Without a serious real industrial base to fall back on of course the various Governments would give Wall Street, the City of London, the “top end of town” anything they wanted. In fact, in countries like Britain an entire industrial base was sacrificed to keep the money-go-round in action. During the debt bubble years, 2001-2008 we'll call it, these people had even more pretend money than ever to play around with. Traders were given bonuses equivalent to perhaps 20 times the entire salary of the people who cleaned their offices for creating the biggest quantity of pretend money. So there was a huge incentive to create as much imaginary money as possible, and worry about the ramifications in the real world tomorrow, if at all. Deregulation in the US resulted in the creation of a “shadow banking system” that handles US$10 trillion of financial activities – equal in size to the traditional, regulated banking system. Much of the shadow banking system revolves around so-called “hedge funds”, which allow pools of private investors to speculate on various trends in the economy – movements in the value of national currencies, interest rates and more. Many hedge funds specialise in trading “derivatives”, financial instruments that are “derived” from the value of an underlying stock, bond or other security. For a long time, it seemed as if nothing could go seriously wrong as the Wall Street banks pulled in enormous profits in these new unregulated markets. One crisis was averted in 1998 when a hedge fund, Long Term Capital Management, made a bad bet on derivatives related to the Russia ruble, and went bankrupt. The US Federal Reserve had to line up several big Wall Street banks to bail out the fund and avoid a freeze-up of the credit system. Almost exactly 10 years later, however, the credit markets are once more freezing up. Again, the reason is a series of bad bets by traders of derivatives. Only this time, almost every big US and European bank is involved, with potentially devastating consequences for the world economy. Here’s where the housing bubble comes in. Millions of people borrowed by taking out a second mortgages on their homes – a figure equal to $1.1 trillion by early 2008. By the end of 2007, mortgage debt was $10.5 trillion, more than twice that in 2000. Mortgage lenders saw this as a can’t-lose proposition. They were able to sell the huge volume of loans to Wall Street banks, which bundled them into bonds known as mortgage-backed securities. These securities could then be sold off to other banks and investors around the world. “Subprime” mortgages (made to people who didn't have a hope in hell of paying them back) were bundled with other better debts so they could be hidden on everyone's balance sheets. This was essentially a massive long-term project of the market lying to itself, in order to keep the pretend-money-creation spiral going. In the circumstances it was inevitable that the expansion of credit would end up going far beyond any realms of sanity and begin lending money that would only be repaid in the Magical World of Lollipops. Bubbles aren't stable. Either they keep expanding, or they pop. If one trader gets rich lending money on bad credit, soon everyone is going to want to do it, and on worse and worse credit. Reality, in the trader's world, is what you can get away with. And in a situation where an entire industry is systematically deluding itself that the golden weather will continue forever it was inevitable that something like these dodgy derivatives would start to exist. Systematic lying would start to extend to the accountants rather than just the marketing guys. Remember, a speculative boom is what happens when people “think positive” so much that they begin to live in a fantasy world. As long as everyone keeps believing that the market will rise and everyone will get richer, the market does rise and everyone gets richer. A very good metaphor for this is caffeine. You can drink four cups of coffee and stay up all night. If you begin to believe that if you drink 28 cups of coffee you can stay up all week, then you by god are in for a rude awakening. And yet that's precisely how the markets work. Every time they think that the good times will last forever. Every time they're wrong. The scheme was bound to run into trouble at some point – when the market was flooded with too many houses or a recession cut into homeowners’ ability to make mortgage payments. But the problem was greatly magnified by the role of the shadow banking system. It worked like this: traders created a totally unregulated market in derivatives based on the value of mortgage-backed securities. The most important of these were “credit default swaps” – a form of insurance for those who invested in mortgage-backed securities. If the mortgage-backed securities declined in value the company that sold the credit default swap was obliged to cover those losses. By early 2008, the value of credit default swaps was an estimated $62 trillion – nearly five times the annual output of the US economy. Once the US housing market went into free fall the companies that sold these credit default swaps, like the insurance giant AIG, were on the hook, because they don’t have the money to cover the losses. That’s why the supposedly free-market conservative Bush administration stepped in to nationalise AIG. But the bad debt is everywhere, and it goes far beyond housing. Governments in the US and Europe have been forced to nationalise banks to avoid a chain reaction that could take down the entire financial system. The markets are only now beginning to realise how elegantly they had allowed Lehman Bros and the other creators of these bullshit derivatives to pull the wool over their eyes. They really have no idea how much of the world's huge quantity of financial instruments are totally worthless paper backed by less than nothing, which means that the whole world financial system is suspect. We have flipped from the era of trust and confidence and the expanding bubble to panic on Wall Street and in the City of London. And of course both attitudes are equally irrational. But this isn't just a disease of a few hot-blooded moneymen who ruined it for the rest of us. The “confidence game” is inherent in the nature of monopolised, imperialist capitalism. No government anywhere will tell the truth about anything if they think it'll “spook the market” into taking their pretend money somewhere else where the government won't make them face stupid reality, as Homer Simpson might have said. We agree to lie to ourselves. In fact, this huge “confidence game” is how the American economy as a whole kept itself going all through the last decade – trading on the ideology that as the “world's only superpower”, the American state would always be able to back up all this debt finance in the last resort. This shows how military force is the “iron fist in the velvet glove” of financial economics. Since America lost its dominant economic position in the 1980s what has been keeping its economy afloat is the idea that its overwhelming military superiority will allow it to “redraw the world map” to its own advantage if they needed to. I think we've seen the end of that fond illusion in Iraq and Afghanistan, and even the Chinese banks, who've been keeping the Americans buying Chinese exports for so long, seem to have twigged. And just to square the circle, since the subprime crisis exploded last year the collapse in the debt bubble has begun to have its effect in the real world. With only their actual income to spend – and interest to pay – the chickens are coming home to roost for the consumer economy. To some degree we've moved on from the old crisis to the new crisis. The credit crisis has been addressed to some extent, but now there's the recession, unemployment, and rising manufacturing costs in the pike. So now the Bush administration has gotten congressional approval to spend $700 billion of US taxpayer money to buy up bad debts from US banks – a colossal robbery of workers by the minority of wealthy parasites who presided over this catastrophe. Leaving the issue of fraud aside, the bail out scam is also doomed to fail because it avoids diagnosis and dodges the heart of the problem: the inability of more than five million homeowners to pay their fraudulently ballooned mortgage obligations. The first major problem is that the current financial disaster is not really a liquidity problem – that means “cashflow” – as it’s repeatedly portrayed to be. It’s a problem of faith and trust, or lack thereof, which in turn stems from the disproportionately large amount of junk assets or mortgages relative to real assets. The second major problem with the bailout scheme is that it is simply unfeasible and ineffectual because there is just not enough good money to redeem all the bad money that has ballooned or bubbled to a multiple of the good money and/or real assets. Third, instead of trying to salvage the threatened real assets or homes and save their owners from becoming homeless, the bailout scheme is trying to salvage the phoney or fictitious assets of the Wall Street gambler and reward their sins by sending taxpayers’ good money after gamblers bad money. It focuses on the wrong end of the problem. But it's interesting to note that the only real resistance to the bailout in Congress came from the right wing Republicans – people who actually really believe in the ideals of the free market, unlike Dubya and his mates who believe in anything that will mean they get more money. On the other hand Democratic leaders Barney Frank and House Speaker Nancy Pelosi said, in effect, “If you don’t give Wall Street firms enough money to cover their losses so that everyone wins, they’ll kill the economy until they get their way.” Basically, the banks have said “give us what we want or we'll crash the economy”. It’s the logic of an investment strike. It’s the logic that gets pulled out every time that the corporate sector suspects that its every whim won’t be catered to by a government. And as the Canadian economist Michael Lebowitz – now advising the revolutionary government in Venezuela says – when the corporate sector starts talking like that, you got two choices: give in, or move in. And by “move in” we need call their bluff, nationalise, let them go to the wall. Bail out the people not the speculators. We have to move to an international economic order based on rationality, not on maintaining “the markets” in a fantasy world where they are the masters of the universe. As long as people’s real lives are based on pretend money games, this will keep happening again and again as regular as clockwork. It’s worth noting that Venezuela is likely to be effected very little by this financial insanity, for two reasons. Unlike most of the world, Venezuela still has a fixed exchanged rate: 2.15 bolivares to the $US. Of course, there's a black market, but extremely small. Something like 90% of forex trade goes at the official rate. The other factor is the recent nationalisations of productive industry in Venezuela, which have taken most of the scope out of shifts on the Caracas stock exchange to screw anything up in the real world. It also helps that Venezuela isn’t devoting trillions of dollars every year to continuing unpopular occupations in foreign lands. Much like Vietnam caused the last big shake-up in the world financial system in the 70s – Nixon inflated the economy to pay for it – this “bailout” is coming up against the need to feed and equip the occupation forces in Iraq and Afghanistan. Soldiers aren’t going to want to be paid in pretend money. If the American financial system tanks, in the sense that the world wakes up and refuses to trade real wealth for fake money, then the only place in which America is actually still concretely the superior nation on the earth (its bloated war machine) could undergo its very own “house of cards” moment. Not much use having a flash nuclear submarine if the sailors mutiny for pay. So, perhaps here we have the basis of coming up with a few transitional demands i.e. demands which intersect with how real people are feeling about things in the real world, but point the way towards a system change. And that is of course how RAM works. Our current “protect our people” campaign is at least putting the idea that we don't have to do everything the financial system says up front, with emphasis on 3% home loans for first-time buyers, giving them an advantage against the shifters of imaginary money. But I think we must realise that it's early days yet. Preliminary indications seem to be that the financial crisis seen from the streets of Aotearoa is still a bit distant and foreign. It's not yet a real and pressing social phenomenon like it is in the States, where foreclosures are running rampant, with their accompanying social dislocation. Not a week goes by that you don't hear of another person snapping under the stress and committing any number of desperate acts, up to and including murder/suicide. A 90-year-old Ohio widow shoots herself in the chest as authorities arrive to evict her from the modest house she called home for 38 years. In Massachusetts, a housewife who had hidden her family's mounting financial crisis from her husband sends a note to the mortgage company warning: "By the time you foreclose on my house, I'll be dead." Then Carlene Balderrama shot herself to death, leaving an insurance policy and a suicide note on a table. In Ocala, Florida, Roland Gore shot his wife and dog in March and then set fire to the couple's home, which had been in foreclosure, before killing himself. His case was one of several in which people killed spouses or pets, destroyed property or attacked police before taking their own lives. Dr Edward Charlesworth, a clinical psychologist in Houston, said the current crisis was breeding a sense of chronic anxiety among people who felt helpless and panic-stricken, as well as angry that their Government had let them down. New Zealand has the advantage/disadvantage that we're generally a year or so out of sync with the global economy, which means that we can guess that by October 2009, the crisis will be becoming a real thing out there in Otara, in Porirua, in the working class suburbs, when the credit that's all that keeps most people afloat starts getting cut off in earnest. We have that amount of time to plant a flag for RAM as the only political party which really cares about the impact of shenanigans with pretend money on real people with real jobs. Our campaign can do this, but we have to keep it going after the election. We need to be raising the idea of regulation of the hot money men – fixed exchange rates, bank nationalisations, the financial transaction tax, anything up to mass cancellation of debts – everything to put speed-bumps in the financial highway, to force our medium of exchange and investment to conform to the needs of real people in the real world. Their system is based on systematic lying, we need an economy based on truth.

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