Michael Roberts: Covid and fictitious capital

by Michael Roberts

During the year of the COVID, output, investment and employment in nearly all the economies of the world plummeted, as lockdowns, social isolation and collapsing international trade contracted output and spending.  And yet the opposite was the case for the stock and bond markets of the major economies.  The US stock market indexes (along with others) ended 2020 at all-time highs.  After the initial shock of the COVID pandemic and the ensuing lockdowns, when the US stock market indexes plunged by 40%, markets then made a dramatic recovery, eventually surpassing pre-pandemic levels.

It is clear why this happened.  It was the injection of credit money into economies. The Federal Reserve and other major banks injected huge quantities of cash/credit into the banking system and even directly into corporations through the purchase of government bonds from the banks and corporate bonds; as well as through direct government-backed COVID loans to businesses.  Interest rates on this credit fell towards zero and, with so-called ‘safe assets’ like government bonds, interest rates even went negative.  Bond purchasers were paying governments interest in order to buy their paper!

Much of this credit largesse was not used to keep staff in pay and employment or to sustain corporate operations.  Instead, the loans have been used as very cheap or near zero-cost borrowing to speculate in financial assets.  What is called ‘margin debt’ measures how much of stock market purchases have been made by borrowing.  The latest margin debt level is up 7.7% month-over-month and is at a record high.

Marx called financial assets, stocks and bonds, ‘fictitious capital’.  Engels first composed this term in his early economic work, the Umrisse; and Marx developed it further in Capital Volume 3 (Chapters 25 and 29), where he defined it as the accumulated claims or legal titles, to future earnings in capitalist production; in other words, claims on ‘real’ capital, ie capital actually invested in physical means of production and workers; or money capital, cash funds being held. A company raises funds for investment etc by issuing stocks and/or bonds. The owners of the shares or bonds then have a claim on the future earnings of the company. There is a ‘secondary’ market for these claims, ie buying and selling these existing shares or bonds; a market for the circulation of these property rights.

Stocks and bonds do not function as real capital; they are merely a claim on future profits, so “the capital-value of such paper is…wholly illusory… The paper serves as title of ownership which represents this capital.” As Marx put it: “While the stocks of railways, mines, navigation companies, and the like, represent actual capital, namely, the capital invested and functioning in such enterprises, or the amount of money advanced by the stockholders for the purpose of being used as capital in such enterprises…; this capital does not exist twice, once as the capital-value of titles of ownership (stocks) on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises.” The capital “exists only in the latter form“, while the stock or share “is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it”.

Investors (speculators) in financial markets buy and sell these financial assets, driving prices up and down.  If cash (liquidity) is flush, share and bond prices can rocket, while banks and financial institutions invent ever new financial ‘instruments’ to invest in.  As Marx put it: “With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands. The greater portion of this ‘money-capital’ is purely fictitious.”

The central banks become key drivers of any financial asset boom  Again, as Marx put it some 150 years ago, “Inasmuch as the Bank issues notes that are not backed by the metal reserve in its vaults, it creates tokens of value that are not only means of circulation, but also forms additional – even if fictitious – capital for it to the nominal value of these fiduciary notes, and this extra capital yields it an extra profit.”  The creation or ‘printing’ of money by central banks provides the liquidity for speculation in the stock and bond markets – as we have seen in the year of the COVID.

Marx reckoned that what drives stock market prices is the difference between interest rates and the overall rate of profit. As profitability fel in 2020, what kept stock market prices rising was the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world.  ‘Quantitative easing’ (buying financial assets with credit injections), has doubled and tripled in this year of the COVID.  So the gap between returns on investing in the stock market and the cost of borrowing has been maintained.

But here is the rub.  The share price of a company must eventually bear some relation to the profits made or the profits likely to be made over a period of time. Investors measure the value of a company by the share price divided by annual profits. If you add up all the shares issued by a company and multiply it by the share price, you get the ‘market capitalisation’ of the company — in other words what the market thinks the company is worth.  This ‘market cap’ can be ten, 20, 30 or even more times annual earnings.  If a company’s market cap is 20 times earnings and you bought its shares, you assume that you would have to wait  to reap 20 years of profits in dividends to match the price of your investment.

You can see from this (CAPE Shiller) graph below that, as long term interest rates have fallen, the market cap price of corporate shares relative to profits (earnings) has risen.  Currently, it is at levels only surpassed in 1929 and during the dot.com boom of 2000.

If profits drive the share prices of companies, then we would expect that, when the rate of profit in capitalism rises or falls, so would stock prices. To measure that, we can get a sort of average price of all the company shares on a stock market by using a basket of share prices from a range of companies and index it. That gives us a stock market index.

So does the stock market price index move up and down with the rate of profit under capitalism? The answer is that it does, over the longer term — namely over the length of the profit cycle, but that can be as long as 15-20 years.  In the shorter term, the stock market cycle does not necessarily coincide with the profit cycle.  Indeed, financial markets can reach extreme price levels relative to the underlying profits being engendered in an economy.

The most popular way of gauging how far the stock market is out of line with the real economy and profits in productive investment is by measuring the market capitalisation of companies against the accumulated real assets that companies have. This measure is called Tobin’s Q named after the leftist economist, James Tobin. It takes the ‘market capitalisation’ of the companies in the stock market (say, of the top 500 companies in what is called the S&P-500 index) and divides that by the replacement value of tangible assets accumulated by those companies. The replacement value is the price that companies would have to pay to replace all the tangible (and ‘intangible’?) assets that they own (plant, equipment, software etc).

For the last 100 years or so, the average mean Q Ratio is about 0.78. The Q ratio high was at a peak of the tech bubble in 2000 reaching 2.17 — or 174% above the historic average. The lows were in the slumps of 1921, 1932 and 1982 at around 0.28, or 62% below average.  But in this year of the COVID, Tobin’s Q has reached 233% above the mean – a new record.

Another useful measure of the value of the stock market relative to the real economy is the Buffett index.  Named after famed billionaire financial investor who uses this index as his guide, it measures the money value of all stocks and shares against the current national output in the real economy (GDP).  Again, this shows that in the year of the COVID, the stock market has reached record high relative to the ‘real economy’.

Indeed, financial speculators remain in total ‘euphoria’ as they continue to expect central banks to plough yet more loans and cash into the banks and institutions, along with a likely subsidence of the COVID pandemic in 2021 as vaccinations are distributed.  The belief is that corporate earnings will recover sharply to justify the current record highs in stock prices.

Citi Research has a “Euphoria/Panic” index that combines a bunch of market mood indicators. Since 1987, the market has typically topped out when this index approached the Euphoria line. The two exceptions were in the turn-of-the-century technology boom, when it spent about three years in the euphoric zone, and right now.

This ‘euphoria’ index complements the views of the world’s most powerful investment bank, Goldman Sachs. Their experts forecast another 15% rise in the US stock market in 2021.

But as Marx explained, eventually investment in financial assets will have to come into line with earnings in the real economy.  In the year of the COVID, profits in most corporations plunged by 25-30%.

Goldmans and other investor speculators seem convinced that profits will bounce back this year, to make sure that the price of fictitious capital does not turn out to be fictitious. But that seems unlikely.  COVID-19 is not yet over and the vaccination distribution will take well into this year to reach levels of necessary so-called ‘herd immunity’, and that assumes the vaccines can also deal with the new COVID variants.

Moreover, the stock market boom of 2020 was really confined to just a few companies. In the year of the COVID, the S&P 500 index rose 18.4%, but the portfolio of FAAAM (Facebook, Alphabet, Amazon, Apple, Microsoft) plus Netflix rose 55%. The contribution of that latter group to the S&P 500’s growth was 14.35%. So the rest of the S&P companies gained only 4.05%.

Most companies lost money in 2020.  And there is a swathe of businesses, mostly outside the top 500, but not entirely, which are in deep trouble.  Earnings are low or negative and even with the cost of borrowing near zero, these ‘zombie’ companies are not earning enough to cover even the interest on existing and new loans.  These ‘financially challenged’ zombies constitute about 20% of companies in most economies.

Even before the pandemic, the zombie companies were contributing to a significant slowdown in corporate investment levels. With so many companies in trouble, there is little prospect of a huge jump back in investment and earnings this year.

Central banks will go on providing yet more ‘liquidity’ for banks and corporations to speculate in financial markets. So fictitious capital will continue to expand – after all, as Engels first said, speculating in financial markets is a major counteracting factor to falling profitability in the ‘real economy’.

But all good things must come to an end.  Probably in the second half of 2021, governments will attempt to rein in their fiscal spending and central banks will slow the pace of their largesse.  Then the extreme levels of stock and bond prices relative to earnings and tangible capital are likely to reverse, like a yo-yo does when the string is pulled back to the reality of being fixed to a holder (real capital).

 

Review: The Invention of the White Race and the political origins of White Supremacy

This book review was originally published on the UK Socialist Website. Left Horizons

 

Review: the Invention of the White Race

By Hilary Barker, Penrith and the Borders CLP member*

The Invention of The White Race, by Theodore W Allen, is a large book in two volumes, but don’t let the thickness of this book put you off. The author spent twenty plus years studying in detail, the records of Virginia, from the first settlers onwards, and he concludes with his thoughts on how we got to the twenty-first century and how attitudes of racial superiority were created as a form of social control by the ruling elites of the time.

His underlying theory is that the “White race" was invented in response to an early rebellion/civil war known as Bacon's Rebellion (1676-77). Prior to this rebellion there were no “white people", in Virginia. He clarifies this by explaining that none of the official records make mention of the word ‘white’ as a description of any member of the population.  It only becomes relevant once skin colour becomes a symbol of social status. White identity had to be taught because prior to that people were considered English, Irish, African or Indian.

Plantation labourers

Allen starts in 1607 at Jamestown, Virginia, and the problems of securing labour and establishing social control of said labour. Other European countries did not employ Europeans as plantation labourers, but the English did, and it is this difference which ultimately led to the origins of white racial oppression and eventually racial slavery.

He explains this difference as resulting from the end of the English Wars of the Roses (1450-85) and the rise of the cloth industry. This resulted in the launch of a cloth-making industry which transformed English economics through the accumulation of capital and the beginnings of a capitalist economic society.  The price of wool rose faster than the price of grain and so began the replacement of arable land to pasture which required fewer labourers. 

The later dissolution of the monasteries furthered this displacement, and the unemployment of labourers began to be a problem. There was a surplus of unemployed ex-soldiers and labourers. The proportion of people receiving poor relief was greater in this period (1631-40), than at any other time before or since.

‘Vagabonds’ turned into slaves

And so, one way of relieving the problem would be to make use of surplus workers by sending them to the colony of Virginia.  They went as ‘bonded’ labourers, effectively as slaves.  Any man found guilty of being a ‘vagabond’ by a law of 1547 was branded with a ‘V’ and made a bonded labourer for a period of two years for whoever had informed on him to the magistrates. He was to be fed only bread and water and scraps. He was to be chained and beaten and should he be caught after running away, branded with a letter ‘S’ and made a slave for life to the same owner he had tried to run away from. A second escape attempt was punishable by death.

Some were taken on as “apprentices" in the new Virginia colony, which was another form of bondage. Some even paid for their own passage on the promise of land after working as a ‘bondsman’ (ie for free, being only paid board) for a set period of time. Most did not survive because the death rate was incredibly high. It was little short of murder or suicide. Very few females made the journey and, anyway, bonded labourers were not allowed to marry or have children. Those men and women who did mix socially – it being a natural inclination – were severely punished, unless, that is, it was the master who did the ‘mixing’.

Basically, they were enslaved, but this was disguised by giving it another name, ‘bonded’ labour.

Skin colour as a means of social control

The native Americans refused on the whole to work in the plantations, as they saw no benefit or need. They had the whole hinterland of the continent in which to move and make a life. This led to some British and Irish bonded labourers running away to live with the Indians, and this, too, was severely punished, if escapees were caught.

Allen describes how later, after the Bacon Rebellion – which involved White and Black (ie English, Irish and African) bonded labourers in a common struggle – the very powerful ruling elite developed a system of social control that consciously and deliberately set the White bonded labourers against the Black labourers. In the latter case, their ‘bondage’ was extended by stages, first to ‘life bondage’ and ultimately to slavery.

He also describes how the ‘abolition’ of slavery, following the American Civil War, straight-forward terror, massacre and intimidation were used to make sure the Black population in the Southern states were battered into submission. So much so, that they were effectively no better off than they had been before ‘emancipation’ in terms of a political voice or economic prospects.

There is so much in this amazing book that it can’t be said in a short review.  You will just have to read it for yourselves.  I can't do it justice here.  It is very well-researched. I loved this aspect of it, as I learned so much; but although  it is an ‘academic’ work it is still very readable. I admit to taking a long time to read it, but I did it in bite-sized chunks, which made it more manageable. I thoroughly recommend it. 

Don’t let the size of the book put you off: only 259 pages out of 410 are the main body of the book, the rest are footnotes and appendices that you can read or not.

The Invention of the White Race is published by Verso and is available here.

* CLP refers to Constituency Labor Party

Video: Irish Parliament Statement's on the Mother's and Baby Homes Report

 

Facts For Working People has followed this issue that has caused a real crisis in Ireland and many of us here in the United States and around the world may be familiar with the  it due to films like The Magdalen Laundries and Philomena.

The Irish State and the Catholic Church and individuals within these institutions are guilty of mass murder and torture. Growing up in England in the 1960's I am all too familiar with the power that the Catholic Church with complete support of the state, had over people's lives. This is a thoroughly rotten institution. 

The Biden/Harris Administration Will Be No Picnic.

They'll help Folks see what socialism is and what It Isn't

 

Richard Mellor

Afscme Local 444, retired

1-20-21

It was in the debate with Hilary Clinton in 2016 that I recall the first time Trump publicly threatened that he might not accept the results of the election if he lost. This was amid all his claims of the electoral process being rigged and his further attacks on the “swamp” in reference to the US body politic. I could hear a collective gasp from the US ruling class as Trump’s statement was a direct assault on the electoral process, an integral and sacrosanct part of democracy, or what is more accurately, bourgeois or capitalist democracy.

And what of the so-called Supreme Court? This is just a bunch of old lawyers promoted to judges by politicians that represent the interests of capital and capitalism. Yes, we live in a Democracy, a capitalist Democracy. Greece was a Democracy and we were taught in schools it was the world’s first. Who knows, but I know that the slaves couldn’t vote because it was a slaveowner’s democracy. Capitalist democracy yielding to pressure from below, instituted universal suffrage for difference sections of society at different times. But the set-up is such that you can’t vote capitalism away and you can’t make it fair at the ballot box.

 

Capitalism is inherently unfair, it is a ruthless and violent system of production. The whole political structure is designed to maintain the status quo. Every state has class content. The state in medieval Europe was a feudal state so in the last analysis, the state is an organ of class rule. And the present ruling class, capitalists, were forced to overthrow it and create new structures although this is better kept among themselves as it might catch on.

 

The structure of any state is such that it defends this set up, the economic system on which it rests and the class that built it.

 

Millions of Americans, US Americans that is, are so disgusted with Congress, that they draw the false conclusion that all politics and politicians are bad. They are crooks or simply evil men and women. Trump has fed on this. This is why he is dangerous, he has undermined the institutions of capitalism from the government to the media, the universities which are capitalist think tanks and so on. The US ruling class doesn’t care whether he is a rapist or a racist but the institutions that give the system legitimacy must not be undermined.

 

It’s not an accident that Mitch McConnell refused to initiate the 25^th Amendment even though the CEO of the National Association of Manufacturers supported it. It was a concession to Trump giving him a little more time to perhaps pardon some of his friends, a small debt of gratitude if you like. The invasion of the Capitol by Trump supporters whose intent was to kidnap and perhaps execute members of the US Congress including Pence and McConnell who they consider turncoats, was the last straw for many corporate heads and they too leapt from the sinking ship in droves.

 

It is somewhat sickening to listen to Biden and his surrogates talking about the need for “unity” and “healing”. Heal what? Trump didn’t cause the divisions and conflict in US society; he simply used them for his own aims. All was not well before Trump. Biden has asked that nasty piece of work Pence to his inauguration. Why would he not? Biden and Pence have the same general view about society. Same with Mitch McConnell who now says that Trump incited the attack on the Capitol. These two have spent four years backing Trump’s agenda, his defense of fascists and white nationalists and his misogyny.

 

There is much elation over the Democratic Party winning control of the Senate through the victories in Georgia, but it’s not the first time this Party of Wall Street has had control of both houses and the Presidency and in California we have what is often referred to as a one party state the Democrats have such power; but we have little to show for it. The. Democrats found themselves in this position during the Carter years yet not one piece of legislation crucial to labor was passed and Carter used the Taft Hartley against the miners in 1978. In the first two years of the Clinton administration the same situation arose and Clinton went on to throw working class women off welfare, often in to union jobs without the pay and benefits, brought us NAFTA and also supported the repeal of the Glass Steagall Act in 1999.

 

The US Senate is a thoroughly undemocratic electoral institution the aim of which is to protect the wealthy against the more populous and overwhelmingly urban working class. Each state has two representatives regardless of population which gives small rural states more power. In the 2018 primaries, Democrats received 10 million more votes than the Republicans but this did not lead to any significant  change in the balance of power in the senate as collectively small states with two Senators each were able to keep the more populous urban states at bay.

 

Washington DC, which has a population of around four million also has a large black population who are also denied equal representation as they are nationally being largely centered in the urban centers. There is a movement for statehood for Washington DC as there is for Puerto Rico, a US colony in the Caribbean. In some ways the Senate is not unlike Britain’s unelected House of Lords and James Madison noted this pointing out that the US Senate should function in a similar manner to, “…protect the minority of the opulent against the majority.”

 

Despite having a slim majority in the Senate, the filibuster will undoubtedly be used to obstruct any aspect of Biden’s agenda that Wall Street objects to and some Democrats will participate willingly. We should not forget the Democratic Party was originally the party of the Slaveocracy . The filibuster, like the Senate itself, was a useful tool for southern slaveholding states says Adam Jentleson, author of Kill Switch: The rise of the Modern Senate “It arose as the need to maintain slavery led southerners to search for new ways to defy the majority.” * During the 20^th century it was used “almost exclusively” to stop civil rights legislation.

 

Bloomberg BusinessWeek points out that during the Obama presidency, Mitch Mconnell used the,  “filibuster to block or limit almost every bit of legislation” as anything but the “most popular” legislation has to overcome the 60 vote threshold. Unlike Biden, Jentleson, a former aide to Senator Harry Reid of Nevada has a far more realistic assessment of McConnell, “It’s remarkable how, despite everything we’ve seen over the last 10 years, Democrats will still engage with McConnell in the very next negotiation as if he’s a good-faith negotiating partner,” Jentleson tells Business Week ,and that old school politicians like Biden, “…refuse to see McConnell for the savvy, cold-blooded realist they believe he is.”

 

Jentleson argues that “Any path to a functional Senate……entails eliminating or reforming the filibuster to restore the framers’ vision of a place where votes are decided on a majority rule basis.”.

 

This is all well and good from Jentleson’s point of view, but his objection is that the present political crisis as it is being played out in the Senate is bad for business, is counter to a stable environment for profit making. Making it more “democratic” does not change its inherently undemocratic nature and purpose as far as working-class people are concerned. The role of the Electoral College is also to protect against the mass of the population in this representative democracy to make sure the “right” people are represented.

 

The most important issue for working class people is grasping the reality that it’s not just the Senate or the Electoral College that prevents legislation that serves our economic and social interests form becoming law; it is the entire structure of government or the state. It’s not crookery or flawed character that drives the politicians to do what they do or why they lie; it is the policy of the parties that they represent. The Democratic and Republican parties are capitalist parties. Yes they are different and have also changed in time but in the last analysis these parties have class content and they represent the interests of capital not labor; the purchaser of labor power not the seller of it.

The term, “workers of the world unite” strikes such fear in the minds of the capitalists, the bankers, industrialists and coupon clippers who control the two parties, because workers uniting leads to all sorts of problems for them. We begin to question not just individual aspects of society but the system of production itself. We don’t always arrive at that conclusion easily, normally through the experience of struggling for reform. Martin Luther King himself began to draw that conclusion through his life experiences saying in a speech to the Southern Christian leadership Conference in Atlanta Georgia on August 16, 1967:

 

“And one day we must ask the question, ‘Why are there forty million poor people in America? And when you begin to ask that question, you are raising questions about the economic system, about a broader distribution of wealth.’ When you ask that question, you begin to question the capitalistic economy. And I’m simply saying that more and more, we’ve got to begin to ask questions about the whole society…”

 

The battles in the US body politic in the coming period is between different sections of the ruling elite over how best to continue the plunder of society and exploitation of the worker, both at home and internationally, in the most stable way possible while maintaining profits and the present state of affairs. Let's not forget that Biden made it clear up to this point that for business, nothing will fundamentally change and on China he reminded us that the American worker has to become more competitive. We know what that means. With no political party of the working class to engage this process at this point, no major opposing position will be present and it's quite likely we will see a more organized right wing political party. The Trump support will seek organizational expression at some point.

 

The other more explosive battles will be in the streets, workplaces and working class communities of the country. This is a battle workers engage in and where we have the advantage as we have the numbers and are well situated in the economic life of society to stop the economy from functioning. This is how we have won what we have so far. While we must defend the right to vote as we won that from them as well, we have won very little from the ballot box. All the social legislation of the 1930’s and 1950’s and 60’s came about after it was already won on the ground through the great labor struggles and occupations of the 1930’s and the Black revolt and Civil Rights movement that followed. But be sure, in the aftermath of the Capitol invasion we can except increased surveillance, the continued build up of state security forces and a curbing of civil rights in the name of fighting terrorism.

 

Returning to the rich and militant class struggles that makes up the history of the US working class and all exploited people is what will open the door to real change in the future. It's the only option.

 

*Kill Switch, by Adam Jentleson. Quoted in Business Week 1-18-21

Michael Roberts: Biden’s four years

It’s inauguration day.  There is a new president in the US, the most powerful capitalist economy and state in the world.  Joe Biden’s four-year term begins today, as Donald Trump slinks off to his Florida estate and golf course, after saying that his “movement is just beginning”.

What is the state of the United States as Biden takes over?  The COVID-19 pandemic has reaped huge damage on the lives and livelihoods of millions of Americans.  Its impact has been far worse than it might have been for several reasons.  First, the US government, just like the other governments, had done nothing to prepare for the COVID-19 pandemic.  As previous posts have explained, governments had been warned that pathogens dangerous to human life for which there was no immunity were becoming more prevalent, leading to a wave of epidemics before COVID-19.  But most governments did not spend on prevention (research into vaccinations) or on protection (robust health resources and testing and trace systems).  On the contrary, governments had been cutting back on health spending, privatising and outsourcing it, and in the case of the US, operating a private health insurance system that left a sizeable minority of Americans with no protection at all, and the rest paying out huge premiums for health cover.

And in the US and other countries, like the UK, Sweden and Brazil, there was an open refusal of governments to recognise the deadly nature of the virus and to take action to save lives.  For these governments, keeping businesses going, particularly big business, was more important.  This attitude led to late lockdowns and social isolation measures, then ‘light’ lockdowns that did not suppress the spread of the virus ;and then too early relaxations, leading to a revival of the pandemic.

So as Biden takes his oath at the inauguration ceremony, Americans are still faced with near record levels of COVID cases and deaths.  At the same time, economic activity and people mobility remains well below pre-pandemic levels.  According to the latest Google mobility report, US economic activity is still some 20-25% below where it was this time last year.

Indeed, the economic cost of the pandemic during 2020 has been equivalent to 80% of US 2020 real GDP output, if you take into account the lost GDP, premature deaths, long-term health impairment and mental health.

So the outgoing US government (like many others) failed to save lives and also failed to save livelihoods.  And this is particularly the case for the lowest paid, often unable to work from home, forced to work in dangerous conditions or being laid off; and that mainly means, black and other ethnic minorities, women and young people.

Overall, the US economy has shrunk by about 4-5% in 2020.  That is the largest contraction since the early 1930s – or 90 years ago!  Employment has fallen by over 25m, with millions now on emergency benefits, unemployment benefits or given up.  Swathes of American businesses, mainly in the services sector but not just there, have been closed and will not return as the economy recovers (once the vaccinations reach enough Americans).

All the evidence suggests that there has been permanent ‘scarring’ to the economy in employment, investment and incomes.  Most studies suggest that the US economy in GDP terms will not return to the levels of 2019 before the end of 2022 at the earliest, and certainly not to the levels that GDP would have reached if there had been no pandemic slump.

So there will be no V-shaped recovery as was hoped – indeed of the major economies globally, only China is achieving that.  Instead, there is what I have called a ‘reverse square root’ recovery where output falls but then does not recover to the same trajectory of economic growth that was there before. That output is lost forever, as the forecast for the US from Oxford Economics below shows.

But what about the economic policy actions adopted during the pandemic slump under the Trump administration and those that are planned by Biden during 2021 and beyond?  Will they not restore the US economy to ‘business as usual’?

In the last year, there has been the biggest injection in history of credit into the monetary system through Federal Reserve Bank purchases of government and corporate debt and loans to businesses. The Fed’s balance sheet has nearly doubled in one year, to reach nearly 40% of US GDP and is set to rise further this year.  Has it saved businesses from bankruptcy?  Well, yes to some extent, but mainly the large travel, auto and fossil fuel industries, while many small businesses are going bust.

With interest rates more or less at zero and the Fed pumping yet more credit into the coffers of banks and businesses, will this largesse help to get the US economy going at a fast pace in 2021?  Well, the evidence is against it.  The history of what is called ‘quantitative easing’ (where it is the quantity of credit money that is injected, not reducing cost of this money in interest, that matters) has proved that it fails to restore the productive sectors of the capitalist economy.  As empirical study concluded: “output and inflation, in contrast with some previous studies, show an insignificant impact providing evidence of the limitations of the central bank’s programmes” and “the reason for the negligible economic stimulus of QE is that the money injected funded financial asset price growth more than consumption and investments.” balatti17.pdf (free.fr)

Indeed, what has happened to all these credit injections is that they have been used by banks and big businesses to speculate in the stock and bond markets rather than to pay wages, preserve jobs or raise investment.  After the initial panic of the pandemic in March, the US stock market has gone on an unparalleled binge.

It is now at all-time highs and, relative to earnings and productive assets, is at extreme levels.  Yet with more Fed support to come, financial markets may well go rolling on up for a while longer.  So all monetary policy has done is to keep businesses on life support, while boosting the wealth of the very rich.

The ineffectiveness of monetary policy to restore the US economy has meant that mainstream economists are “all Keynesians now”.  The merits of increased government spending while running ‘emergency’ budget deficits are proclaimed by the IMF, the World Bank, the OECD and of course, the incoming Biden administration.  Janet Yellen, the former Federal Reserve chief under Obama, is taking over as Treasury Secretary under Biden.  Yellen made it clear in her testimony to US Congress where she stood. “We need to act big” because while “economists don’t always agree, but I think there is a consensus now: without further action, we risk a longer, more painful recession now – and long-term scarring of the economy later.”

Thus we have Biden’s new fiscal stimulus package to come in 2021.  The main elements of Biden’s stimulus plan include payments to individuals of up to $1,400 each; more aid to state and local governments; the extension of emergency jobless benefits of $400 per week; funds to help schools and universities to reopen; financing of vaccinations, testing and tracing; more child tax credit; and raising the minimum wage.

At first sight this looks big, to use Yellen’s words, taking the total fiscal injection up to 25% of GDP.  However, it is not really.  First, many of these measures may not get through the US Congress despite the narrow majority that the Democrats now hold.  Also, even this level of fiscal support is way short of what is needed keep 25m Americans from destitution or for local governments not to be forced into jobs and spending cuts to ‘balance their books’.  Moreover, raising the minimum wage to $15 an hour would still mean that those on the minimum would be well behind average median wage.  And Biden is not intending to implement this rise immediately but spread it over time.

Biden also plans a post-pandemic package that he calls “Build Back Better Recovery Plan” which encompasses $2trn in investment stimulus, much tilted towards green initiatives, with a Buy America government procurement, more investment in R&D, and infrastructure.  Again, this is spread over the four-year term and adds up to about a maximum of 1% of GDP increase in government investment if fully implemented.

And here is the rub.  On average, government investment to GDP in most major capitalist economies is about 3% of GDP, while capitalist investment is around 20% of GDP on average.  So a revival of investment, growth and jobs in a capitalist economy ultimately depends on capitalist, not government, investment.  Sure, Biden’s investment plan will ‘spill over’ into the capitalist sector, but not by much.  Most recent studies show that the ‘multiplier effect’ of government spending on real GDP growth is no more than 1% point, and on average half that. So Biden’s plan would likely add, at best,1% point to the US growth, more likely half that.  Given that the average growth rate of the US economy has been little more than 2% a year before COVID and even less per capita, then the Biden investment plan is not going to do much to achieve sustained and higher real GDP and employment growth over the next four years.

The problem is that the capitalist sector of the US economy is very reluctant to invest and the principal reason is that the profitability of such investment is so low.  Indeed, the rate of profit of US capital is at a post-1945 low.

Sure, we hear all about the huge profits made by the likes of Amazon, Google, Netflix and the big banks during the 2020 pandemic slump, but the profits of the FAANGS are the exception to the rule.  Total corporate profits (after government handouts are removed) have dropped by some 30%.  And according to Bloomberg, in the US, almost 200 big corporations have joined the ranks of so-called ‘zombie’ firms since the onset of the pandemic.  They now account for 20% of the top 3000 largest publicly-traded companies, with debts of $1.36 trillion. That means 527 of the 3000 companies didn’t earn enough to meet their interest payments! So there remains a significant risk of a credit crunch and financial crash down the road, perhaps in 2021, when the Fed largesse is curtailed.

And then there is the debate about the size of the public debt and inflation.  US public sector debt has rocketed during the pandemic to over 110% of US GDP.

Now the current consensus view is that 1) governments have no alternative to spend more and run up their debt levels, otherwise there will be no recovery after the pandemic; and 2) it does not matter if debt levels rise because the cost of servicing those debts (interest) is really low and as real GDP recovers, government revenues will rise, emergency spending will taper off, and the cost of debt servicing will be manageable.  The economy can grow its way out of the debt burden as it did after WW2.

There is no doubt that net interest on government debt is very low historically, only slightly more than 1% of GDP a year compared to a GDP growth rate of 2-3% a year ahead.  But some mainstream studies are less sanguine. The Peterson Institute argues that those “who believe that rates will almost certainly not rise are too confident in their own views. The forces that have contributed to lower rates are universally difficult to predict, and, as noted above, even modest changes in rates can produce sizable movements in net interest as a share of the economy in the future.”

As the above table shows, just a 50bp rise in average interest costs on government debt would take interest costs above the likely growth rate.  Moreover, if the average repayment term on government bonds falls (and it is falling), then the government would soon enter the territory of expanding debt to pay the cost and repayment of existing debt or alternatively have to make significant cuts in government spending, such as on medicare, social security or most likely, on so-called ‘discretionary spending’ like education, public services etc.  It may be the debate on whether austerity is necessary or not may have been kicked down the road like the proverbial can.  But the can is still on the surface of the road.

Of course, the suggestion that the US government will eventually need to stop running budget deficits and deal with rising debt has been strongly rejected by exponents of Modern Monetary Theory.  MMT supporters argue that Biden can and should run permanent budget deficits until full employment is reached.  There is no need to finance these annual deficits by issuing more government bonds.  Because the government controls the unit of account, the dollar, which everybody must use, the Federal Reserve can just ‘print’ dollars to fund the deficits as the Treasury requires.  Full employment and growth will follow.

I have discussed in detail the flaws in the MMT argument in other posts, but the key concern here is that government spending, however financed, may not achieve the necessary investment and employment increases.  That’s because MMT does not take the decision-making on investment and jobs out of the hands of the capitalist sector.  The bulk of investment and employment remains under the control of capitalism, not the state.  And as I have argued above, that depends on the expected profitability of capital.

Let me repeat the words of Michael Pettis, a firm Keynesian economist: “the bottom line is this: if the government can spend additional funds in ways that make GDP grow faster than debt, politicians don’t have to worry about runaway inflation or the piling up of debt. But if this money isn’t used productively, the opposite is true.”  That’s because “creating or borrowing money does not increase a country’s wealth unless doing so results directly or indirectly in an increase in productive investment…If US companies are reluctant to invest not because the cost of capital is high but rather because expected profitability is low, they are unlikely to respond ….by investing more.”

In a major slump, businesses go to the wall, unemployment rises and investment in means of production stops. Total profits fall, but the conditions have been created for a rise in the rate of profit as costs fall and the strong devour the weak.  Joseph Schumpeter of the Austrian school of economists called this ‘creative destruction’, following Marx who argued that slumps eventually provide the environment for rising profitability and expansion – thus we get the cycle of boom, slump and boom.

The pandemic slump of 2020 matches that of the 1930s, so it should eventually provide a boost to profitability.  But it required a world war to end the Great Depression of the 1930s.  And if the Fed goes on ploughing credit into businesses to prop up the ‘zombies’ at the expense of productive investment, then the US economy under Biden will just return to the low growth, low investment, low wage growth economy of the last ten years since the Great Recession.

And if disillusionment in Biden’s policies rises, that could lay the political base for the return of something like Trumpism, which according to the Donald is “just beginning.”

Martin Luther King and Malcolm X:American Socialists

Richard Mellor

Afscme Local 444, retired

This video above is ection of a longer speech but it so clearly, without complication, personal attacks or verbiage, explains what history is and why it matters. Any discussion about the situation Black working class communities face should start with this. Imagine the advantage this gave to some and disadvantage to others. It was not a decision based on the white racist ruling class love for the white poor of Europe that were brought here, it was a solid political decision, a decision that was good for business.; a classic divide and rule decision.  It was this taking land from one group and giving to another, while also barring another from participating in the benefits of it. In truth, the entire working class has been harmed by it and the damage cannot be rectified within the framework of capitalist and the so-called free market. Both Martin Luther King and Malcolm X drew this conclusion toward the end of their lives as the quotes below show.

Along with his ability to mobilize hundreds of thousands of people from all different backgrounds Martin Luther King was so dangerous because he was saying dangerous things and expressing ideas that if taken up by masses of people threaten the position of the ruling class and their exploitative brutal system. 

Where MLK was a real threat to this white racist ruling class was his bringing together all oppressed peoples and toward the end of his life talking about the need to change the system. and talking of socialism. Martin Luther King led a mass movement against exploitation and injustice. His approach united the working class against oppression. This is what made him so dangerous, the concept of working class unity. 

In a letter to Coretta Scott in July 1952 King wrote:
“I imagine you already know that I am much more socialistic in my economic theory than capitalistic… [Capitalism] started out with a noble and high motive… but like most human systems it fell victim to the very thing it was revolting against. So today capitalism has out-lived its usefulness.”

In a speech to his staff in 1966 he said:
“You can’t talk about solving the economic problem of the Negro without talking about billions of dollars. You can’t talk about ending the slums without first saying profit must be taken out of slums. You’re really tampering and getting on dangerous ground because you are messing with folk then. You are messing with captains of industry. Now this means that we are treading in difficult water, because it really means that we are saying that something is wrong with capitalism.”

“[W]e are saying that something is wrong … with capitalism…. There must be better distribution of wealth and maybe America must move toward a democratic socialism.”

And in a speech to the Southern Christian leadership Conference  in Atlanta Georgia on August 16, 1967 he said:
“And one day we must ask the question, ‘Why are there forty million poor people in America? And when you begin to ask that question, you are raising questions about the economic system, about a broader distribution of wealth.’ When you ask that question, you begin to question the capitalistic economy. And I’m simply saying that more and more, we’ve got to begin to ask questions about the whole society…”  

 He said to New York Times  reporter José Iglesias in 1968:
 “In a sense, you could say we’re involved in the class struggle.” 

Malcolm X
Same with Malcolm X who was increasingly moving toward the socialist alternative to capital. And both men were also moving closer to organized labor as well speaking at rallies strikes and labor events. They spoke in class terms.

Malcolm X said that "You can't have capitalism without racism".  What is that but a condemnation of a social system. It is far more dangerous than going around saying all white people are devils. Malcolm X was not  killed by the state when he was saying that, he was useful to the white racist ruling class who are not afraid of nationalism or separatists that make no class distinctions at all between groups.

Toward the end of his life he was questioning the concept of black nationalism and what it meant. He said:  “I believe that there will ultimately be a clash between the oppressed and those who do the oppressing. I believe that there will be a clash between those who want freedom, justice and equality for everyone and those who want to continue the system of exploitation. I believe that there will be that kind of clash, but I don't think it will be based on the color of the skin...” It is inconceivable that this statement from Malcolm X, who, along with Martin Luther King is one of the great US revolutionaries of the 20th century, did not terrify the white racist ruling class in this country. It is a statement which opens a path to him and his ideas for millions upon millions of oppressed and exploited people,

In a January 19, 1965, Toronto television interview, Pierre Berton asked Malcolm X whether he still advocated a Black state in North America he said he didn't and that, “I believe in a society in which people can live like human beings on the basis of equality.”

In the same interview he told of meeting the Algerian ambassador when he was visiting Ghana in 1964, a man who he respected, the issue of black nationalism came up.  Malcolm X said, the ambassador asked him, “Well, where did that leave him? Because he was white. He was an African, but he was Algerian, and to all appearances, he was a white man. And he said if I define my objective as the victory of Black nationalism, where does that leave him? Where does that leave revolutionaries in Morocco, Egypt, Iraq, Mauritania? So he showed me where I was alienating people who were true revolutionaries dedicated to overturning the system of exploitation that exists on this earth by any means necessary.” Malcolm X The Final Speeches. Pathfinder Press

The struggle for working class unity does not negate the struggle for black liberation or the liberation of any specially oppressed section of society----it strengthens it.