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the chicken and the egg iii
by slothrop
What interests me, though, are the structural causes (if any) of the steady decline in savings and investment rates in the industrialized countries – and why those trends have saddled the global economy with such enormous imbalances. So that will be the subject of the next installment in this series.
billmon: the chicken and the egg ii
what follows is my own contribution to the political economy of capitalist globalization., invited by billmon’s failure to answer his own question in the unwritten third installment of his “chicken and egg” entries.
now, i’m basically an english major who has read a few macro-econ books. this is not so much a proviso needed to excuse a bad analysis, but a defiance that any social science can be accounted for by those of us willing to step into the rhetoric the dismal science uses to justify itself.
a prolegomenon to subsequent tendentious oversimplifications
right off the bat, there are structural reasons for the decline of
savings and investment in the g-7 economies. secondly, these
“imbalances” in the global economy (really, the “global market for
goods, services, and finance”) are both usual effects of the ebb and
flow of the business cycle made analytically complex by the shifting
social relations created by the mobility of a global capitalist class
unfettered by vestigially national barriers on investment and
accumulation. the product of this shift is nothing special from what
has gone on throughout the postwar period. typically, the
core/periphery paradigm of comprador ripoff in which “third-world”
vassal states exported capital and imported finished goods from the
industrialized north, has been complicated for a handful of newly
industrializing zones: coastal china, southern india, coastal brazil,
moscow and st. petersburg, etc. – complicated because the
core/periphery relation is fragmented by globalization so that economic
growth occurs in eruptions in places in which the return on investment
is assured by low variable costs of production (labor, transaction
costs). rather than the core nations absorbing capital created by cheap
labor elsewhere, more and more, the flows of surplus are captured by a
semi-stateless capitalist class. the “core” is a virtual power of
financiers. the “periphery” is the globalizing workforce. the tradeoff
for the industrialized core is painful: underemployment, inflation,
stagnant and falling wages, crumbling healthcare and infrastructure.
but the ostensible benefits to these industrializing zones (not
countries, but zones) is uneven and precarious for reasons explained in
more detail below. thus, “the structural reasons for the decline of
investment” are better understood as the effects of the usual
contradictions of capitalist accumulation expressed by the virtual
formation of a global capitalist class.
an english major’s take on the business cycle
the fundamental contradiction of capitalist development is the problem
of excessive production. because the capitalist mode of production
(MoP: generalized commodity production, generalized wage-labor,
generalized competition among many capitals) unfairly distributes
productive factors and surpluses, production of commodities exceeds the
ability of consumers to consume. the result of this overaccumulation
of surpluses is declining profits, declining wages, and recession. the
business cycle recovers when the surplus is finally depleted, and
surviving companies can then invest what surplus is needed to begin
another cycle. it seems there’s no way to manage the prevailing MoP to
avert recession.
the division of the social product between consumption (wages+benefits)
and investment (profits) has historically been 65% wages, 35% profit.
one obvious way to smooth the turbulence of the cycle is to fairly
distribute wages and profits. this would help to stabilize aggregate
expenditures and demand, while more rationally directing investment.
but this is not what capitalists do, of course. rather, in order to
avert painful adjustment needed to jumpstart the cycle, including
creative destruction of independent capitals (no fun there),
capitalists have tried all kinds of tricks: increasing government
expenditure and aggregate demand (Keynesianism), militarism as a way to
boost expenditure (bushism), theft (another bushism), bubble economy in
which “correction” militates favorably to capitalists, austerity
policies (good old fashioned capitalism for the “developing world”).
this last form of recovery is the most efficient. but in the
(de)industrialized world, austerity is political suicide, and socially
destabilizing, as recent experience in argentina shows. so, savvy
politicians have turned to policies prolonging the inevitable:
permanent inflation. in the effort to sustain profits and expansion of
markets, capitalists resort to expansion of credit needed for
investment and consumption. for monetarists, this leads to inflation:
prices move up and down depending of the quantity of money. too much
money increases demand and supply of commodities beyond what people can
pay. inflation is bad because the value of holding money decreases.
savings decline, and because of uncertainty about the future, fewer
investments are made to resume robust growth. the result for workers is
stagnant wages and rising prices, and for capital a decline in profits.
things are made still worse by growing trade deficit spurred by the
inflationary induced demand for commodities. indeed, for capital, the
rate of profit among the 500 largest tncs has plummeted from nearly
three times what it was in the early 50s (tendential fall in the rate
of profit, comrades). inflation-inducing policies detain recession, but
the cost of doing so is overaccumulation, lack of investment, and
underconsumption solved only by more inflation-inducing debt. sound
familiar?
an old wine in a new bottle: neoliberal globalization
but prolonging the inevitable only makes things worse. and such
prolongation of gain, without too much pain, is the sine qua non of the
latest trick: globalization. the interrelation of national northern
economies was defined in the postwar period by american dominance. as
the defacto creditor for Europe, the u.s. remained the dejure center of
economic power via pegging the value of the dollar to a fixed price on
gold and use of the dollar as a global reserve currency (the bretton
woods agreement). this arrangement worked well until the sixties when
the costs of vietnam and increasing international competition from
revived production in europe and japan made the dollar a less desirable
asset. the system collapsed in ’71. from then on, most currencies are
valued according to a floating exchange rate, effectively removing
control of valuation from single countries and removing the regime of
cooperation that to a large extent managed the usual crises of
overproduction and underconsumption. in this arrangement, the rest of
the capitalist world would have to absorb u.s. debt by holding the fiat
currency of the dollar. needless to say, this often resulted in capital
flight as wealth circulated through the u.s. bond market and wall
street rather than domestic investment into struggling economies—a
winning solution for a burgeoning international capitalist class
retaining excellent lawyers and brokers.
this shift opened up the financialization of global capital. by
“finance” is meant the ways in which the value is created from already
existing value, via speculative investment. the solution to stagnating
investment in productive capital has since especially the clinton era
to create “instruments” of investment (all those “derivatives”) which
expand liquidity used for speculation. this “whorehouse capitalism” was
further accommodated by “liberalization” of foreign
economies—multilateral trade agreements like gatt and later the
wto—which opened up member economies to foreign direct investment and
ownership. the explosion of finance capital penetrated new markets in
especially the far east, but the surfeit of investment proved to be
unsustainable. the crash of the mexican peso followed by the collapse
of asian economies were owed in large part to imf elimination of
capital control needed to open economies to investment. the great
swindle was also manifested in the market capitalization of information
technologies culminating in the bubble burst of 2000-01 and $7 trillion
of “paper” wealth gone, just like that.
so, financialization of global capital has made matters worse. and the
extraordinary growth of credit continues, as any read through one of
prudentbear’s mitonic screeds will prove. all that investment poured
into asian production, and still more credit needed to absorb the
surfeit of commodities in the west. a fool’s pursuit because investment
only leads to mountains of goods consumed at lower prices strangling
profits, and foolish because in places like china, the surplus cannot
be absorbed by domestic market whose growth depends on low wage labor
not expanded consumption. the global economy is plagued by the usual
contradiction of
overinvestment—overproduction—underconsumption—recession. and waylaying
the needed adjustments painful recession brings is the inflationary
expansion of credit needed to induce more consumption. what a trap.
again, you link does not say that what he claims is fiction, beyond the person who hired him at Main, where he did, in fact work, and in his role he also worked as an economist, as he said, and he worked in nations he claims he did. from your link:
Part of the book’s core message is demonstrably true. As chief economist for Chas T. Main, an engineering firm that has since gone out of business, Perkins was in a position to observe the economic policies that ensnared developing nations in a web of debt. The countries borrowed money from the World Bank and other international lenders to embark on ambitious infrastructure projects in the name of modernization: they built hydroelectric dams, port facilities, airports and highways. But they didn’t reap the economic rewards expected, and soon the countries’ leaders were forced to cut spending on social programs in order to keep up with interest payments on the loans.
Perkins certainly cites some damning examples. In Ecuador, he writes, “Since 1970, during the period known euphemistically as the Oil Boom, the official poverty level grew from 50 to 70 percent, and public debt increased from $240 million to $16 billion. Meanwhile, the share of national resources allocated to the poorest segments of the population declined from 20 to 6 percent.”
But here his story veers into dubious territory. The international lenders wanted the countries to default on their loans, he writes, to put them in a position of subservience. When a nation defaults, the US, acting through the World Bank, can demand control over United Nations votes, the installation of military bases, or access to oil and other precious resources. Perkins says it was his job to come up with bogus economic projections that would convince these developing countries to take out the loans.
the issue in the article you linked to is not about what *happened* with IMF loans. the issue is whether or not the intent was good gone wrong or intentionally sabotaging economies in places like central america.
the author in the article you note also debunks Perkins by noting “the company he keeps” when he was giving a speech…these ppl were 9-11 conspiracists. the author also debunks his audience as “frizzy-haired berkeley types.”
as a book written without sources cited, yes, there are questions. but, again, his basic premise does not contradict recent “lost history,” and in fact, it is somewhat less drastic than CIA/contra cocaine (the frogmen, as Webb reported) coming into the US.
Stiglitz, who shared a nobel prize in economics, noted that the US is the only nation that has veto power with the IMF. And the “debt forgiveness” the US site claims might be a bit misleading if the original debt was created to pay for US companies to get paid to do biz in those other countries… so, they’re saying, okay, we’re forgiving the money launderer…thanks for your help?
so, yes, I can google around. I’ve yet to find anyone who can dismiss his claims beyond doubting the company he keeps, or his whacked religious beliefs, or his boss who, if Main was a CIA front, would also have an interest in denying the malicious nature of the IMF’s actions.
sorry if I upset you, but your initial claim that it was total fiction was very misleading. I think the outcome of questioning your claim is more clarity.
his claims are much less outrageous concerning central america than Gary Webb’s were…and Webb was also telling the truth and he was also debunked by big news orgs. like the LA Times, etc. again, as Robert Parry noted on Consortium News.
Posted by: fauxreal | Dec 27 2006 8:13 utc | 30
thanks slothrop- i’m no economist either, but then it’s not really a science, and your remark that ‘it depends on how it is explained’ is basically what i was thinking of when i read that figure & what got me curious. it would seem to me that tnc’s are making more money than ever while (relative) net income for workers has been sliding downwards. maybe the diff is taken up in overhead & expenses, etc (inc astronomical ceo salaries). but i’d imagine that, just as profits can be exaggerated (ala enron et al), they can also be hidden thru creative acctng so as to reduce tax liability or mask skimming. my impression from reading a variety of sources over the years is that there are more tricks out there now than there ever have been before, since so much in the world of finance is pure speculation nowadays & depends on whether there’s enough suckers out there. so figures can usually mean whatever one wants to read into them.
what i think would be interesting is to keep tabs on the big oil companies & see how much they pay in taxes on these record-earnings they’re declaring. and also to widely publish the names & all contact information for every official and board member of each of these companies, just so all curious citizens jaw w/ them on it.
here’s an interesting passage from r.t. naylor’s book hot money and the politics of debt
By the late 1960s Pentagon Capitalism had brought the financial world to the brink. The ultimate acceptability of the US dollar as the medium for effecting international payments lay in its convertability into gold. But the world’s stock of gold was relatively fixed, while the worldwide volume of outstanding US government financial obligations grew as overseas military expenditures rose. Once the foreign total of US dollar obligations exceeded the official domestic value of the US gold reserves (then valued at $35 per troy ounce) it was evident that all claims could not be met if a ‘run’ occurred. In that eventuality, either only the earliest claims would be repaid in gold, or gold would have to be revalued upward. Both possibilities meant that a propensity to speculate against the US dollar and to cash dollars in for gold at the earliest opportunity was built into the system. The potential was particularly alarming after the French government of Charles De Gaulle started protesting American policy in Southeast Asia by demanding gold for its dollar holdings.
By 1971, on top of the war-induced capital outflow, the US economy saw its first commodity-trade deficit since the Second World War. That finally forced the US to stop all conversions of its currency into gold (a partial suspension that had been in force since 1968), and to submit to the political indignity of devaluation. In effect, the world passed from a dollar standard backed by gold to a US dollar standard backed by US dollars, and a massive flight of capital from the US followed. The capital fligh eased in 1972, but accelerated again the next year, forcing another major devaluation. But by then the US government had found another standard to which the dollar could be pegged.
In 1973, after years of bickering and ineffectuality, OPEC finally agreed to quadruple the world price of oil. There were two distinct elements involved: the largely symbolic, and virtually ineffectual, Arab embargo of the US because of its support for Israel during the October 1973 war; and the closing of OPEC ranks behind the traditional price hawks, Venezuela and Iran.
The success of the price hawks had less to do with immediate Middle Eastern politics than with long-term economic trends. For nearly three decades after the Second World War, the developing countries suffered a steady deterioration of their terms of trade with the West. The prices of their commoditity exports from alumina to zinc rose, but the price of manufactured goods from the industrialized countries taken in exchange rose even faster.
For oil exporters the situation was worse; oil was the only major commodity to fall in absolute as well as relative price during the twenty-five years that followed the Second World War. And unlike avocados, bananas, and coffee, oil was nonrenewable. Thus, oil producers were consuming their national wealth to meet the demand of the West for cheap energy. Much of the rapid economic growth and rise in living standards in the postwar West was directly due to the free ride, or at least cheap trip, that the industrialized world enjoyed at the expense of the oil-producing countries.
Furthermore, as oil was traded largely (and, after 1975, exclusively) for dollars, its relative price dropped even further when the US dollar was devalued in the early 1970s. If oil’s real purchasing power vis-a-vis essential Western-supplied goods had kept pace with that of other major commodities, its price would have reached just about the level that a tight market permitted the oil-exporting countries to push it to in 1973. Even so, the leading Arab producer, Saudi Arabia, lobbied in 1974 to try to push down the world price of oil, only to have its efforts apparently sabotaged by certain American interest groups.
While the oil-price hike was painful for most consumers and producers in the US, it did confer on some interest groups a number of economic, financial, and political advantages. Until 1973, American industry depended largely on domestically produced oil. But because of import restrictions, domestic oil cost more in the US than the Middle Eastern oil that the big US and British oil companies sold throughout the world. With the balance of payments under seige and American exports being increasingly threatened by the products of Japan and West Germany, the difference in energy costs was a luxury that the US could no longer afford. The 1973 price changes eliminated the differential that had long disadvantaged American industry in export markets.
The major oil companies were not inclined to protest, as profits per barrel reportedly doubled. Those profits were justified in public by the insistence that they allowed the oil companies to finance the development of alternative sources of energy, thereby freeing middle America from the grasp of rapacious A-Rabs. In reality the profits funded a huge asset grab, as the big oil companies bought up vast existing holdings of coal, uranium, copper, and other minerals at home and abroad. [pp.48-9]
and here’s one somewhat relevant to the first paragaph of your old wine, new bottle section
During the Vietnam War, the US had faced the problem of the war-bloated budget deficit and the gap in the balance of payments caused by US direct foreign investment and military expenditure overseas. The answer lay in the transformation of the international financial system, shifting it to a US-dollar standard and forcing the central banks of the major Western countries to accumulate unwanted inventories of US treasury bills.
…
During the Reagan era, the US merchandise-trade deficit deepened. Exports to developing countries plummeted as a result of the debt crisis, and falling oil prices hurt US markets among the OPEC group. Much of the former strong surplus in ‘service’ items dried up. Yet the US dollar continued to appreciate, rising by 80% against a basket of other major convertible currencies between 1980 and the end of 1984. Not until well into 1985 did the US and other major Western central banks coax and bludgeon it down again. The perverse performance of the dollar reflected the fact that the US currency unit had added to its traditional role of the main international medium of trade and financial flows increased demand as the currency of refuge.
Between 1977 and 1982 US banks had been net capital exporters of $140 billion; in 1983 they became net importers of more than $26 billion. Developing debtor countries saw their foreign exchange reserves depleted by flows of hot money into the US. Other financing came from the savings of industrialized countries: during the 1970s central banks of Western Europe, Canada, and Japan had bought up huge amounts of surplus US dollars and recycled them into US treasury bills; but by the early 1980s, the movement of funds into the US, into public- and private-sector securities and in direct investment, came increasingly from private investors abroad. Despite strong trade surpluses with the US, major Western countries found their foreign-exchange reserves stagnant, as they sold off billions of dollars to combat the rise of US currency against their own. The dollars sold were then recycled by private investors back to the US.
From January 1980 to June 1984 an estimated $417 billion in foreign capital flowed into the US, from Europe, Canada, Japan, and the developing countries. The share of Japan, and of the developing countries, was rising fastest. After all, according to a top-level Moonies, between 1975 and 1984 the sect moved no less than $800 million from Japan to the US. In 1984 Japan financed nearly half the US trade-balance deficit, pouring into the US $33 to $50 billion per annum; much of it moved into US treasury debt.
Than led to a new Yellow Peril to compete with the Islamic Hordes as a threat to the American Dream. Fed Chief Paul Volcker warned of America’s ‘addiction’ to foreign capital. CIA chief William Casey denounced Japanese investment in the US computer industry as a Trojan horse. GOvernor Richard Lamm of Colorado told American to as themselves, ‘How much can we afford?’ without suggesting the rest of the world do likewise. WIlliam Proxmire, the ranking Democrat on the Senate Banking Committee, adopted the philosophy of the radical left in Latin America: ‘As time goes on,’ Proxmire intoned, ‘as foreign investors get a larger and larger share of the national debt, they get into a position where they can impose tough terms or cut off credit. You lose part of your sovereignty under those circumstances. You lose your independence.’ To these sentiments Felix Rohatyn, of the Lazard Freres merchant-banking firm, added the fear than Japan could suddenly yank out its money, causing the US dollar to plummet, and the return to buy up American industry at fire-sale prices. Perhaps he had been observing the activities of US commercial banks in the Latin America.
In reality, the percentage of foreign-held to total US government debt was no larger in the mid-1980s than it had been a decade before – perhaps smaller. Less than 1% of US tangible assets and real estate were in foreign hands, along with 5% of all private and public securities. And the US was the world’s only ‘debtor’ country that could pay off its foreign debt simply by cranking out more paper. Irving Kristol of the American Enterprise Institute called for the Federal Reserve to accomodate the demand for US dollar assets: ‘If foreigners are so eager to buy dollars, a commodity we can produce very cheaply, why should we obstinately frustrate them.’ [p.275-7]
still looking for that omnipotent “international capitalist class”. i’ll let you know what i find.
Posted by: b real | Dec 28 2006 5:06 utc | 61
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