Five days ago the Bank of Japan finally increased its interest rate from 0 to 0.25 percent. The famous carry trade, borrowing in Yen for near zero interest to invest in well paying U.S. dollar 'assets', started to unravel.
Worse than expected U.S. economic data, the Fed's unwillingness to lower interest rates and an escalating crisis in the Middle East, added to the insecurity.
All global markets are dropping or expected to drop. The most insincere 'assets' though are dropping the fastest:
Source: Coinmarketcap
Top token Bitcoin traded 11% lower at $52,680 as of 8:39 a.m. in London, adding to a 13.1% drop last week that was the worst since the period when the FTX exchange imploded. Ether shed over a fifth of its value before paring some of the slide to change hands at $2,342. Most major coins nursed losses.
The declines come as a global stock selloff intensifies, reflecting concerns about the economic outlook and questions over whether heavy investment into artificial intelligence will live up to the hype surrounding the technology. Geopolitical tension is rising in the Middle East, adding to investor skittishness.
...
Digital assets are a victim in part of the unwinding yen carry trade, as speculators adjust to higher interest rates in Japan, according to Hayden Hughes, head of crypto investments at family office Evergreen Growth.
“Those investors are also fighting a drastic increase in hedging costs based on the volatility in the US dollar-Japanese yen trading pair,” Hughes said.
Another hype that finally receives much deserved scrutiny are the glorified but unreliable machine learning algorithms currently marketed as 'Artificial Intelligence'. No profitable use-case has been made for billions of bad investments in these.
Source: Sherwood
Pre-market NVIDIA shares are down 10%.
Another banking crisis is coming up in the U.S. where the value of commercial real estate has drastically decreased:
Banks are the largest lenders to commercial real estate (CRE) and have grown the business in the past decade. These loans are coming due amid decade-high interest rates and a drop in demand for office space stemming from hybrid work—upending a traditionally lower-risk business for banks. Financial institutions have yet to fully come to terms with their losses; the reckoning is coming.
Geopolitical risk has increased too. The 'West' is losing its proxy war in Ukraine. There is no chance for it to unsettle a Russia which is steadily gaining strength.
The conflict in the Middle East is threatening to develop into an escalating spiral of retaliation strikes and counter-strikes designed in part to pull the U.S. in:
Israel has been bracing for potential retaliation on multiple fronts since two incidents last week: Israel was blamed by Hamas and Iran for the killing of Ismail Haniyeh, Hamas’s top political leader, while an Israeli airstrike killed a Hezbollah senior commander and five other people in Lebanon. Israel has declined to comment on Haniyeh’s death.
...
Israeli Prime Minister Benjamin Netanyahu held a meeting of his security cabinet on Sunday to discuss preparations for any counterstrike.
More retaliatory resistance strikes would follow those Israeli counter-strikes and on and on.
The market slump, as well as the geopolitical issues, have great potentials to explode.
Posted by b on August 5, 2024 at 10:35 UTC | Permalink
Unequal exchange of labour in the world economy
Jason Hickel, Morena Hanbury Lemos & Felix Barbour
Nature Communications volume 15, Article number: 6298 (2024) Cite this article
Abstract
Researchers have argued that wealthy nations rely on a large net appropriation of labour and resources from the rest of the world through unequal exchange in international trade and global commodity chains. Here we assess this empirically by measuring flows of embodied labour in the world economy from 1995–2021, accounting for skill levels, sectors and wages. We find that, in 2021, the economies of the global North net-appropriated 826 billion hours of embodied labour from the global South, across all skill levels and sectors. The wage value of this net-appropriated labour was equivalent to €16.9 trillion in Northern prices, accounting for skill level. This appropriation roughly doubles the labour that is available for Northern consumption but drains the South of productive capacity that could be used instead for local human needs and development. Unequal exchange is understood to be driven in part by systematic wage inequalities. We find Southern wages are 87–95% lower than Northern wages for work of equal skill. While Southern workers contribute 90% of the labour that powers the world economy, they receive only 21% of global income.
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Introduction
Scholars of international political economy have argued that growth and capital accumulation in the wealthy ‘core’ states of the global North relies on the appropriation of value—labour, resources and goods—from the ‘peripheries’ and ‘semi-peripheries’ of the global South1,2,3,4,5,6,7,8. In the contemporary world economy, this appropriation occurs in large part through what scholars have defined as ‘unequal exchange’ in international trade9,10,11,12. Literature in this field has described how core states and firms leverage their geopolitical and commercial power to compress wages, prices and profits in the global South, both at the level of national economies as well as within global commodity chains (which account for more than 70% of trade), such that Southern prices are systematically lower relative to Northern prices13,14. Price inequalities compel Southern states and producers to export more labour and resources embodied in traded goods to the global North each year in order to pay for any given level of imports, enabling Northern economies to net-appropriate value to the benefit of Northern capital and consumers.
Dynamics of unequal exchange are understood to have intensified in the 1980s and 1990s with the imposition of structural adjustment programmes (SAPs) across the global South15. SAPs devalued Southern currencies, cut public employment and removed labour and environmental protections, imposing downward pressure on wages and prices. They also curtailed industrial policy and state-led investment in technological development and compelled Southern governments to prioritise ‘export-oriented’ production in highly competitive sectors and in subordinate positions within global commodity chains1,16,17,18. At the same time, lead firms in the core states have shifted industrial production to the global South to take direct advantage of cheaper wages and production costs, while leveraging their dominance within global commodity chains to squeeze the wages and profits of Southern producers13,14,19. These interventions have further increased the North’s relative purchasing power over Southern labour and goods15.
Several studies have sought to quantify the scale of appropriation through unequal exchange indirectly by adjusting monetary trade volumes for North–South disparities in wages9,20 or general prices15,21. More recent research has used environmentally extended multi-regional input-output (EEMRIO) models, which enable us to track the flows of resources embodied in each nation’s final consumption. These studies demonstrate empirically that the core economies rely on a physical net appropriation of embodied labour and resources from the global South22,23,24. However, this research has so far not directly analyzed price dynamics associated with the labour time embodied in North–South trade. It has also been unable to answer questions about the extent to which North–South wage disparities and unequal exchange may be an effect of differences in the type of labour being performed, such as in terms of skill level or sector (for instance, if wage inequalities arise because the South trades low-skilled labour for high-skilled labour, or primary goods for secondary goods).
In this study, we use the EEMRIO model EXIOBASE to track flows of embodied labour between North and South, for the first time accounting directly for sectors, wages and skill levels (as defined by the International Labour Organisation, ILO, described in Methods). This enables us to define the scale of labour appropriation through unequal exchange in terms of physical labour time, while also representing it in terms of wage value, in a manner that accounts for the skill level composition of labour embodied in North–South trade. Our category for the global North approximates the IMF list of ‘advanced economies’, with the South comprising all emerging and developing economies (see Methods). All monetary units are in constant 2005 Euros, corrected for inflation, represented in market exchange rates (MER), which is appropriate for international comparisons of income purchasing power in the global economy (see Methods).
We arrive at several major conclusions. (1) We find that the labour of production in the world economy, across all skill levels and all sectors, is overwhelmingly performed in the global South (on average 90–91%), but the yields of production are disproportionately captured in the global North. (2) The North net-appropriated 826 billion hours of embodied labour from the global South in 2021 (in other words, net of trade). This net appropriation occurs across all skill categories and sectors, including a large net appropriation of high-skilled labour. (3) The wage value of net-appropriated labour was €16.9 trillion in 2021, represented in Northern wages, accounting for skill level. In wage-value terms, the drain of labour from the South has more than doubled since 1995. 4) North–South wage gaps have increased dramatically over the period, across all skill categories and sectors, despite a small improvement in the South’s relative position. Southern wages are 87–95% lower than Northern wages for work of equal skill as of 2021, and 83–98% lower for work of equal skill within the same sector. (5) Workers’ share of GDP has generally declined over the period, by 1.3 percentage points in the global North and 1.6 percentage points in the global South.
Results
Contributions to global production
We find that, in 2021, the final year of data, 9.6 trillion hours of labour went into producing for the global economy. Of that, 90% was contributed by the global South (Fig. 1). The South contributed the majority of labour across all skill levels: 76% of all high-skilled labour, 91% of medium-skilled labour and 96% of low-skilled labour. In the same year, 2.1 trillion hours of labour went into the production of internationally traded goods (our use of ‘traded goods’ in this paper refers to both goods and services). The relative North–South contribution to the production of traded goods is similar to that of total production, with the South contributing 91% of all labour (73% of all high-skilled labour, 93% of medium-skilled labour, and 96% of low-skilled labour). Note the latter figures are underestimates, given that most global South countries are aggregated into regions in EXIOBASE (see Supplementary Table 1) and trade within these regions is not represented.
Fig. 1: Relative contributions of labour (hours) to global production by region and skill level, 1995–2021.
Blue indicates labour rendered by workers in the global North, while orange indicates labour rendered by workers in the global South. Skill levels are shaded from lighter (low-skilled) to darker (high-skilled). Panel a shows contributions to total production of all goods and services. Panel b shows contributions to production of traded goods and services only.
The South’s contribution to total global production has increased steadily over the period since 1995, across all skill categories. The largest increase has occurred in the high-skill category, with the South’s contribution to high-skill production increasing from 66% of the world’s total in 1995 (1.9x more than the North) to 76% in 2021 (3.2x more than the North). In fact, the South now contributes more high-skilled labour to the world economy (1124 billion hours in 2021) than all the high-, medium- and low-skilled labour contributions of the global North combined (971 billion hours in 2021). The South also contributes the overwhelming majority of labour across all aggregated sector groupings we derived from EXIOBASE, including agriculture (99%), mining (99%), manufacturing (93%), services (80%) and ‘other’ (89%). See Methods for sector aggregations.
Despite contributing 90–91% of the total labour that goes into global production and the production of traded goods in 2021, including the majority of high-skilled labour, the global South received less than half (44%) of global income, and Southern workers received only 21% of global income in that year. In other words, while global production is overwhelmingly performed in the global South, the yields are disproportionately captured in the global North, indicating a disproportionate command of the global product.
Table 1 shows that the total number of employed workers and total number of hours worked has increased in both the North and the South from 1995 to 2021, with the increase substantially larger in the global South. The final rows illustrate several interesting points. First, we see that workers in the global South consistently render more labour per worker than in the North, by large margins. In the final year of data, Southern workers worked on average 466 h more than their Northern counterparts (26% more). Second, we see that in the North, labour time per worker has decreased by 7% over the period, while in the South it has increased by 1%. To the extent that increased labour time has contributed to global economic growth over the past 25 years, this burden has been shouldered overwhelmingly by people in the global South.
Why Poverty Reduction Under Capitalism Is a Myth
Posted on August 29, 2024 by Yves Smith
Yves here. This is a very strong form criticism of the notion that capitalism has helped the poor. I have some problems with his argument. One is that he attempts to deny that labor organization is part of capitalism. The capitalists may hate hate hate it but labor attempting to set its price and terms is philosophically a lot like (as even Adam Smith decried) merchants colluding in what we would today see as oligopoly or monopoly behavior.
One way to read Karl Polanyi’s The Great Transformation is that the operation of unfettered capitalism become so destructive to societies that it elicits pushback to moderate its operation, in a dialectic of sorts.
A second issue is that is it hard to envisage how a system without markets to set prices would allocate goods and influence investments. Famed investor Jim Rogers, in his book Investment Biker, had visited the USSR in 1994 and so memories of Soviet practices were fresh. He gave several examples of how administered prices has been wildly off and had produced great distortions in demand and production.
(Of course Rogers as an investor was totally unbiased...bp)
Your truly has not attempted to read systematically about how the USSR performed under communism. However, the USSR and China were both the only two significant economies to industrialize within a generation, something no capitalist country had done. That success of Communist Russia freaked out Western policy-makers, since it suggested a command and control economy could out-do a free enterprise system. It is also the reason economists became the only social scientists to have a seat at the policy table. Government officials came to believe they needed their guidance to steer the economy better so as to compete with those Commies.
Your truly read of a study, but sadly I cannot find it given the state of search, that the Communist system, particularly of production targets for various sectors and entities, worked well for about a generation. Then bureaucrats started gaming the system by finding ways to make their targets unduly low and other scheming like hiding inventories. Our reader GM, who lived in his early years in one of the Warsaw Pact states, claims that Communism was much better than capitalism for 95% of the population, that free housing and free health care were very important benefits. However, a significant portion of the 5% met with people from outside the USSR for work, as Putin did on his KGB assignment in Germany; Eugene Luttwak has described dealing with and even dining often with him then. Those elite professionals and bureaucrats got a sense of how their standard of living was lower than their peers in the West (Luttwak seemed to find it important to say what terrible suits Putin wore then). GM claims that that resentment was a significant driver of the turn against the Communist system. I can’t corroborate that and would be curious to get informed reader input.(Which is why limiting our criticism of the '1%' is inadequate. bp)
By Richard D. Wolff, professor of economics emeritus at the University of Massachusetts, Amherst, and a visiting professor in the Graduate Program in International Affairs of the New School University, in New York. Wolff’s weekly show, “Economic Update,” is syndicated by more than 100 radio stations and goes to millions via several TV networks and YouTube. His most recent book with Democracy at Work is Understanding Capitalism (2024), which responds to requests from readers of his earlier books: Understanding Socialism and Understanding Marxism. Adapted and excerpted from Richard D. Wolff’s book Understanding Capitalism (Democracy at Work, 2024); produced by Economy for All, a project of the Independent Media Institute
From its beginnings, the capitalist economic system produced both critics and celebrants, those who felt victimized and those who felt blessed. Where victims and critics developed analyses, demands, and proposals for change, beneficiaries, and celebrants developed alternative discourses defending the system.
Certain kinds of arguments proved widely effective against capitalism’s critics and in obtaining mass support. These became capitalism’s basic supportive myths. One such myth is that capitalism created prosperity and reduced poverty.
Capitalists and their biggest fans have long argued that the system is an engine of wealth creation. Capitalism’s early boosters, such as Adam Smith and David Ricardo, and likewise capitalism’s early critics such as Karl Marx, recognized that fact. Capitalism is a system built to grow.
Because of market competition among capitalist employers, “growing the business” is necessary, most of the time, for it to survive. Capitalism is a system driven to grow wealth, but wealth creation is not unique to capitalism. The idea that only capitalism creates wealth or that it does so more than other systems is a myth.
What else causes wealth production? There are a whole host of other contributors to wealth. It’s never only the economic system, whether capitalist or feudal or slave or socialist. Wealth creation depends on all kinds of circumstances in history (such as raw materials, weather, or inventions) that determine if and how fast wealth is created. All of those factors play roles alongside that of the particular economic system in place.
When the USSR imploded in 1989, some claimed that capitalism had “defeated” its only real competitor—socialism—proving that capitalism was the greatest possible creator of wealth. The “end of history” had been reached, it was said, at least in relation to economic systems. Once and for all, nothing better than capitalism could be imagined, let alone achieved.
The myth here is a common mistake and grossly overused. While wealth was created in significant quantities over the last few centuries as capitalism spread globally, that does not prove it was capitalism that caused the growth in wealth. Maybe wealth grew despite capitalism. Maybe it would have grown faster with some other system. Evidence for that possibility includes two important facts. First, the fastest economic growth (as measured by GDP) in the 20th century was that achieved by the USSR. And second, the fastest growth in wealth in the 21st century so far is that of the People’s Republic of China. Both of those societies rejected capitalism and proudly defined themselves as socialist.
Another version of this myth, especially popular in recent years, claims capitalism deserves credit for bringing many millions out of poverty over the last 200 to 300 years. In this story, capitalism’s wealth creation brought everyone a higher standard of living with better food, wages, job conditions, medicine and health care, education, and scientific advancements. Capitalism supposedly gave huge gifts to the poorest among us and deserves our applause for such magnificent social contributions.
The problem with this myth is like that with the wealth-creation myth discussed above. Just because millions escaped poverty during capitalism’s global spread does not prove that capitalism is the reason for this change. Alternative systems could have enabled an escape from poverty during the same period of time, or for more people more quickly, because they organized production and distribution differently.
Capitalism’s profit focus has often held back the distribution of products to drive up their prices and, therefore, profits. Patents and trademarks of profit-seeking businesses effectively slow the distribution of all sorts of products. We cannot know whether capitalism’s incentive effects outweigh its slowing effects. Claims that, overall, capitalism promotes rather than slows progress are pure ideological assertions. Different economic systems—capitalism included—promote and delay development in different ways at different speeds in their different parts.
Capitalists and their supporters have almost always opposed measures designed to lessen or eliminate poverty. They blocked minimum wage laws often for many years, and when such laws were passed, they blocked raising the minimums (as they have done in the United States since 2009). Capitalists similarly opposed laws outlawing or limiting child labor, reducing the length of the working day, providing unemployment compensation, establishing government pension systems such as Social Security, providing a national health insurance system, challenging gender and racial discrimination against women and people of color, or providing a universal basic income. Capitalists have led opposition to progressive tax systems, occupational safety and health systems, and free universal education from preschool through university. Capitalists have opposed unions for the last 150 years and likewise restricted collective bargaining for large classes of workers. They have opposed socialist, communist, and anarchist organizations aimed at organizing the poor to demand relief from poverty.
The truth is this: to the extent that poverty has been reduced, it has happened despite the opposition of capitalists. To credit capitalists and capitalism for the reduction in global poverty is to invert the truth. When capitalists try to take credit for the poverty reduction that was achieved against their efforts, they count on their audiences not knowing the history of fighting poverty in capitalism.
Recent claims that capitalism overcame poverty are often based on misinterpretations of certain data. For example, the United Nations defines extreme poverty as an income of under $1.97 per day. The number of poor people living on under $1.97 per day has decreased markedly in the last century. But one country, China—the world’s largest by population—has experienced one of the greatest escapes from poverty in the world in the last century, and therefore, has an outsized influence on all totals. Given China’s huge influence on poverty measures, one could claim that reduced global poverty in recent decades results from an economic system that insists it is not capitalist but rather socialist.
Economic systems are eventually evaluated according to how well or not they serve the society in which they exist. How each system organizes the production and distribution of goods and services determines how well it meets its population’s basic needs for health, safety, sufficient food, clothing, shelter, transport, education, and leisure to lead a decent, productive work-life balance. How well is modern capitalism performing in that sense?
Modern capitalism has now accumulated around 100 individuals in the world who together own more wealth than the bottom half of this planet’s population (over 3.5 billion people). Those hundred richest people’s financial decisions have as much influence over how the world’s resources are used as the financial decisions of 3.5 billion, the poorest half of this planet’s population. That is why the poor die early in a world of modern medicine, suffer from diseases that we know how to cure, starve when we produce more than enough food, lack education when we have plenty of teachers, and experience so much more tragedy. Is this what reducing poverty looks like?
Crediting capitalism for poverty reduction is another myth. Poverty was reduced by the poor’s struggle against a poverty reproduced systemically by capitalism and capitalists. Moreover, the poor’s battles were often aided by militant working-class organizations, including pointedly anti-capitalist organizations.
Fiscal transfers to capitalists
By Prabhat Patnaik (Posted Nov 23, 2024)
Originally published: Peoples Democracy on November 24, 2024 (more by Peoples Democracy) |
IT is common for governments these days to provide fiscal transfers to capitalists, whether through reduced corporate tax rates, or by providing direct cash subsidies, to encourage greater investment by them and thereby stimulate the economy. During Donald Trump’s first presidency there had been a cut in corporate tax rate with this objective in mind. In India the Modi government, as is well-known, has given massive tax concessions with the same objective. Even a minimum knowledge of economics however would show that such transfers to capitalists are counter-productive in a neoliberal regime.
This is because such a regime is characterised by “fiscal responsibility” legislation that fixes the upper limit to the fiscal deficit as a percentage of the gross domestic product, and normally the government operates at this ceiling; transfers to the capitalists therefore have to be matched by reductions in expenditure elsewhere, typically in welfare expenditures undertaken for the working poor, or by an equivalent increase in tax revenue garnered from the working poor. Now, the effect of handing over, say, Rs 100 to the capitalists by reducing transfers to the workers by Rs 100, is to reduce the level of aggregate demand and hence employment and output; far from reviving the economy, transfers to capitalists have the effect of further contracting the economy. The way in which this comes about is the following.
Investment undertaken in any period is the result of investment orders given earlier, and hence of investment decisions taken in the past; this is so because investment projects have long gestation periods and it is as true of private investment as of public investment. If the tempo of investment is to be stepped up, then a decision for doing so will be taken in the current period and the actual tempo will increase only subsequently. Hence investment in any period must be taken as a given magnitude that does not change during the period in question. What does change during the period in question is the level of consumption; and here, because the workers consume a higher share of their incomes than the capitalists, any shift of purchasing power from workers to capitalists has the effect of lowering consumption (the same happens if the government reduces its consumption in order to make transfers to capitalists).
What is more, transfers from workers to capitalists (and even from the government to capitalists) have the effect of reducing net exports (that is, the excess of exports over imports), since capitalists’ consumption is more import-intensive. But let us deliberately understate our argument by assuming that transfers to capitalists, that are financed at the expense of the workers, do not change net exports. Since the gross national income, Y, of a country must equal the sum of consumption C, investment I, government expenditure G, and the surplus on the current account of its balance of payments (X-M), that is,
Y = C+ I + G + (X-M) …… (i)
transfers to capitalists, by lowering C, lower the right-hand side, which depicts the level of aggregate demand. The equality in the above equation therefore can be restored only through a fall in Y, that is, through a reduction in output and employment.
When this happens, the degree of unutilised capacity in the economy increases, which has the effect of lowering the investment decisions of the capitalists taken in the current period and hence their actual investment in the subsequent period. The economy, therefore, far from getting stimulated, actually contracts.
But the story does not end there. Any such contraction in itself, that is, if other things remain the same, has the effect of reducing profits. Thus while transfers to capitalists as such, have the effect of increasing profits, the fact that such transfers are obtained by reducing the purchasing power of the workers, have the opposite effect, of reducing profits. And under fairly realistic assumptions, these two effects cancel each other out exactly, so that total profits of the capitalists remain exactly the same as would have obtained without the transfers. The assumption under which this result holds is that the working people consume their entire income.
This is a fairly realistic assumption because the proportion of the total wealth of the economy that is owned by the bottom segment of the population is quite minuscule. In India for instance the bottom 50 per cent own only 2 per cent of the total wealth of the country; since all wealth necessarily arises from savings, this only shows that they scarcely save anything at all. Hence our assumption that the working people do not save and that the entire savings in the economy come from the rich, apart from the government, is quite realistic.
Let us, only for a moment, assume that the rich, in this case the capitalists, save their entire income; then private savings equal profits. Since in any economy, total domestic savings must equal total domestic investment minus the inflow of foreign savings, and since government investment minus government savings is what is called the fiscal deficit, this amounts to saying that private savings, and hence profits, in the economy, must necessarily equal private investment plus the fiscal deficit minus foreign savings F coming into the economy during the period; that is,
Profits = Private Investment + Fiscal Deficit—F …… (ii)
Since we have argued that private investment and the inflow of foreign savings (which is the just the negative of X-M above) will remain unchanged during the period, as will the fiscal deficit because of the “fiscal responsibility” legislation, profits must remain the same despite the transfers to capitalists.
Dropping the assumption that all profits are saved makes no difference to the above argument. If a proportion α of profits is saved, then equation (ii) simply becomes:
Profits = Private Investment + Fiscal Deficit—F ….. (iii)
If the right-hand side of (iii) remains unchanged, for reasons we have just discussed, then profits must also remain unchanged even if α is not equal to one.
Budgetary transfers to the capitalists in short, in a neoliberal regime where the fiscal deficit cannot be increased to finance such transfers and where, therefore, workers’ incomes have to be reduced correspondingly, have the effect not only of precipitating a contraction in output and employment, but of not even increasing the magnitude of capitalists’ income if the workers consume their entire income.
Budgetary transfers to the capitalists in other words cause inequality to increase in an economy without even increasing the capitalists’ income, because they cause an output contraction that negates the profit-increasing effects of such transfers.
They do however have one other important effect which is the real reason why the government resorts to them, and that is to change the distribution of profits among the capitalists in favour of the monopoly stratum, away from non-monopoly capitalists. This is so for the following reason. We have seen that total profits remain unchanged despite budgetary transfers to capitalists because while transfers are an addition to profits, the fact that they are associated with taking away incomes from the workers, and reducing aggregate demand, lowers profits to an exactly equal extent; but while this is true in the aggregate, the capitalists who face reduced demand and the capitalists to whom the bulk of the transfers accrue are not the same. In particular, large capitalists are not affected much by the reduction in workers’ consumption demand; but they get the lion’s share of the budgetary transfers. They are therefore net gainers, while smaller capitalists whose presence is more pronounced in the market for workers’ consumption goods, become net losers, even when total profits remain unchanged at the aggregate level.
Budgetary transfers to the capitalists are thus a means of aiding what Marx had called “centralisation of capital”, of hastening the replacement of smaller capitals (or even petty producers who produce goods for workers’ consumption) by large capitals. This is what its “crony capitalists” want and the government obliges them. Such transfers are undertaken in the name of stimulating the economy, but they do nothing of the sort; on the contrary they succeed only in contracting the economy, but even in such a contracting economy, they strengthen the position of the monopoly capitalists.
There is some recognition in the media and among opposition parties that small producers in the country were harmed by demonetisation and the introduction of the Goods and Services Tax. There is however less recognition of the harm done to them by the tax concessions and other forms of budgetary transfers made to the capitalists.
While ‘patriotic millionaires’ consider a wealth tax a no-brainer, Labour party ‘socialists’ are horrified at the very thought.
Ella Rule
Friday 1 November 2024
It seems the Labour government of Keir Starmer would rather cut pensioners’s winter fuel allowance and child benefit for the poorest families than consider asking the billionaires to cough up even a little of their ill-gotten gains in the ‘national interest’.
The Labour government proposes to try to close Britain’s fiscal deficit by a combination of raising taxes on the working class and middle class on the one hand, and cutting public services on the other.
What is going to prove very painful for the working and middle class is expected to raise £40bn. The Labour government has, to date, ruled out levying a wealth tax on Britain’s billionaires.
The richest 250 households in the UK, however, have a combined wealth of £748bn, and according to an open letter to the chancellor from “economists, charities and ‘patriotic millionaires’” published in the Times of 24 October 2024, “Greenpeace has previously supported a temporary 2.5 percent tax on all individual wealth above £10m, affecting fewer than 75,000 people in Britain, which the climate campaign group has claimed could raise a minimum of £130bn for the government over the next five years.”
If Greenpeace’s suggestions were taken up, not only would far more money be raised for the purpose of putting Britain’s economy to rights, but the rich would not be left starving or homeless, or indeed suffering deprivation of any kind.
It’s such a no-brainer that even a number of Britain’s ultra-rich support the idea! But not, it would appear, the ‘socialists’ of Britain’s ‘Labour’ government!
Debt-based speculation surges
By John Clarke (Posted Dec 06, 2024)
Originally published: Counterfire on November 29, 2024 (more by Counterfire) |
It is well-known that shaky sub-prime mortgages, bundled up into highly toxic bond packages, played a decisive role in triggering the devastating financial crisis of 2008. The shock that the financial system and the global economy experienced in this situation was of historic proportions and only a truly massive infusion of public resources was able to restore a level of stability to the workings of global capitalism.
A recent article in the Guardian explains that, following this grim experience, regulators ‘introduced new rules that could help ensure that asset-backed securities—once allegedly referred to as “crack cocaine of the financial services industry” by the billionaire Guy Hands—would never again spark such a massive meltdown.’
Reckless and dangerous
However, it becomes clear that reckless and dangerous forms of investment are not so easy to prevent and that regulatory dictates can be worked around. New ‘risks are emerging’ and ‘they are linked to highly indebted companies backed by private equity firms, which are part of the growing but opaque portion of the financial system known as the shadow banking sector.’ This sphere of activity involves ‘financial firms that face little to no regulation compared with traditional lenders.’
This return to methods of ‘securitisation’ has now reached vast proportions. ‘Today, the global securitisation market covers about £4.7tn of assets, according to estimates by analysts at RBC Capital.’ About £300bn of these investments are taking place in the UK, with some £120bn occurring within the shadow banking system, which involves ‘an under-appreciated risk, given the lack of regulation in that space and the complexities of the instruments that are being held there.’
The article makes clear, however, that the supposedly safer and more respectable ‘public securities market warrants close review.’ Such scrutiny would have to include ‘risks related to collateralised loan obligations (CLOs). These are types of securities that are backed by a pool of debt, including loans to companies with low credit ratings, or struggling businesses that have been snapped up by private equity firms with the help of big loans, in what are known as leveraged buyouts.’
The private-equity firms that engage in this activity ‘invest in companies that are almost failing, and in order to make these companies survive, they load them up with debt. These loans end up being repackaged as well, a little bit like the junk mortgages before the 2008 crisis.’ It is clear from this that the near death experience of 2008 didn’t eliminate the kind of high-risk behaviour that preceded it.
It is also apparent that speculative zeal is not such an easy quality to contain. The article quotes Natacha Postel-Vinay, an assistant professor at the London School of Economics and expert in regulation and financial history, who observes that: ‘It’s a game of whack-a-mole. You regulate stuff, but then the financial system finds ways around the regulation very quickly.’
For its part, the Bank of England is presently ‘in the midst of compiling the results of its first stress test involving the shadow banking sector’ and it has already raised general concerns on high-risk forms of investment. Its financial policy committee has noted that vulnerabilities ‘from high leverage, opacity around valuations, variable risk management practices and strong interconnections with riskier credit markets mean the sector has the potential to generate losses for banks and institutional investors.’
As shocking and serious as this proliferation of asset-backed securities is, the failure to prevent or contain it is hardly surprising. Writing after the failure of Silicon Valley Bank in 2023, which took regulators by surprise and led to a serious international banking crisis, Michael Roberts took stock of ‘the total failure of bank regulation to avoid crises.’ He quoted a ‘bank legal expert’ who had concluded that the ‘enormous legal edifice to govern financial institutions’ that had been created after 2008 was actually of little worth. ‘What good does it do to have a massive set of regulations … if they aren’t enforced?”
With productive investment generally sluggish since the financial crisis and the Great Recession that followed it, a major turn to parasitic forms of speculation has been in evidence. As Roberts explained in an earlier article: ‘Low profitability explains above all else why corporate investment has been so weak since 2009. What profits have been made have been switched into financial speculations: mergers and acquisitions, share buybacks and dividend payouts.’
Housing speculation
In a wide range of countries, a great deal of this speculative activity has been devoted to investment in housing. In Toronto, where I live, the ‘housing market continues to rank among the top global real estate bubbles.’ This assessment is largely based on the fact ‘that home prices are heavily disconnected from local incomes and rents … In other words, most residents cannot afford to buy homes based on their earnings, a hallmark of a housing bubble.’
The upscale redevelopment that has driven up rents and caused so much hardship in Toronto communities has largely been focused on the condominium market. The luxury condo tower has become an emblem of the gentrifying process and rampant social inequality. To an astounding degree, this has been driven by investors rather than actual housing needs. ‘According to StatsCan, investors owned 65% of Toronto’s smaller condo units (under 600 sq. ft) when data was last collected in 2022. In comparison, investors only owned 44% of units that were over 800 sq. ft.’
Storey’s Real Estate News explains that ‘investors enable the construction of condominium projects as the main purchasers of presale units, in turn, allowing the developer to secure financing for the project. And they don’t buy the units with the intent of living in them, they buy them to rent out or to sell for a profit down the line. In fact, in 2022, nearly 40% of all Toronto condo units were investment properties.’
This pattern has created a situation where ‘condos are shrinking. In the 90s, for example, the median living area of a Toronto condo was 947 sq. ft, compared with 640 square feet for those built after 2016.’ However, ‘people don’t actually want to live in a 600 sq. ft box, and where families are involved, they couldn’t live in one even if they wanted to.’
Marx explained long ago that, while commodities are most certainly sold in order to realise profits, they must also have a ‘use-value’ that makes someone want to buy them. In the case of the Toronto housing market, the building process has actually come to be so focused on the appetites of investors that it has become seriously detached from real and actual housing needs. Inevitably, with increased interest rates making things far worse, investors are no longer investing, developers are losing money and a recently lucrative but entirely unsustainable market is tanking.
Speculative investment has, of course, always been a feature of capitalism, but the neoliberal period from the 1970s on saw a process of deregulation and ‘financialisation’ that has greatly increased such reckless and parasitic forms of investment. The turn towards neoliberal approaches was driven by an effort to restore declining rates of profit and the lure of financial speculation represented a means of enrichment that appeared to compensate for diminished returns on productive investment. By the time of the 2008 crisis, this speculative sector had spun out of control, with devastating results.
We might note that the return of Donald Trump to the White House offers a green light to the most reckless and dangerous tendencies within the capitalist class. Wall Street Pit notes that ‘following Donald Trump’s election, Wall Street’s speculative edges are witnessing an unprecedented surge in risk-taking behaviors.’ It adds that the ‘landscape is rife with high stakes where leverage can just as easily turn gains into losses overnight. Yet, for now, the appetite for risk on Wall Street’s fringes shows no signs of waning.’
The swollen global securitisation market, with its £4.7tn in high-risk assets, is part of an even bigger speculative pattern that leaves no doubt that the experiences of sixteen years ago changed remarkably little. The most parasitic, dangerous and destructive forms of speculation remain pervasive and global capitalism continues to generate the ever-present threat of shattering crises.
(You might think this piece is about the environment but it is really about capitalism. Most the the dire problems within are directly attributable to the capitalist mode of production.)
Actuaries and Scientists Warn Climate Shocks Risk ‘Planetary Insolvency’ as Power Struggles About How to Rebuild LA Begin
Posted on January 17, 2025 by Yves Smith
Yves here. A compelling report by British actuaries warns that the economic impact of climate change is far more severe than most economists forecast, with a 50% of GDP reduction forecast starting in 2070. We’ve embedded their analysis at the end of this post.
The problem with 2070 is that is too far out to motivate money mavens, since anything that happens beyond a 10 or 15 year horizon has close to zero impact in a net present value model. Stock prices reflect earnings expectations out at most to 18 months. Other experts have opined that potable water and food supplies will become critically scarce in many parts of the world by 2040. If that happens, expect an intensification of mass migration, conflicts, and government/social breakdown in the afflicted regions. In other words, events that will harm investible wealth look set to kick in not that far down the road.
The Los Angeles fires are putting an intermediate question front and center: how much will governments try to and succeed at socializing risks in the interest of trying to preserve the status quo? The problem, as some are starting to point out, that risks of this scale are not insurable. Consider that Los Angeles soil reached the driest level it has been at in 150 years. Combine that with the US affinity for wooden single family homes, typically with shrubs and trees.
Combine that with an issue yours truly had not thought about much heretofore: prevalent fire codes. Admittedly these are highly variable across the US. And my understanding is that they nearly always grandfather older buildings, as in potential fire traps. Needless to say, per a recent tweetstorm that Lambert posted, the usual priority is to make sure the building has features such as fire alarms, fire escapes, and emergency lights and for many structures sprinkler systems and fire doors, to give the people inside a good chance of escaping. Some also place restrictions on the materials so as to reduce flammability.
But as far as I can tell, devising structures that will survive fires, as opposed that enable people to survive them, is seldom required. That become a big problem when those structures have become a large part of the wealth of households in advanced economies, as well as providing collateral for one of the big lending categories, residential and commercial mortgages (admittedly steel and concrete are the main materials in commercial building, so the fire downside is vastly less acute). And as is now coming into focus in California, there will almost certainly be some sort of government funding of payouts to insured and burn-out homeowners, since the insurance losses are expected to exceed what private insurers are prepared to bear plus the mere $400 million reserves in the California state fire insurance scheme.
Governor Gavin Newsom is now trying to get out in front of the rebuilding issue. I’m doubtful his ideas will get very far, given that his and Los Angeles Mayor Karen Bass’ political capital is about zero.
Note that his mention of the Olympics and housing in close proximity is sure to engender pushback from the right wing, which holds the pursestrings in Washington and may gain more influence in California as moneyed homeowners in Los Angeles seem to be turning not just on Newsom and Bass, but the Dems generally. The Olympic Village was derided as a green experiment gone bad. A representative story from Deseret News, ‘Living in the Olympic Village makes it hard to perform’: Athletes are complaining about their accommodations in Paris:
The Olympic Village is not air-conditioned. It instead relies on a water cooling system that much of Europe already uses. Temperatures in Paris have already surpassed 90 degrees Fahrenheit during the Games, driving athletes from some countries, including Canada, Italy and Denmark, to use portable air conditioning units….
American tennis player Coco Gauff’s TikTok video showing how 10 athletes shared two bathrooms in her part of the Olympic Village went viral.
Other reports from athletes complained of poor water supplies and even issues with the hygiene in the bathrooms (not clear if due to the overcrowding per above or plumbing).
But he is believed to be advocating for multi-family housing in the middle-class Altadena, where many of the homes had been inherited rather than purchased:
They are going to turn Altadena into one gigantic apartment complex.
“As we start rebuilding, starting to relax some of the zoning laws, especially in a more working class neighborhood like Altadena. So that rather than putting up single-family residences, we could allow… pic.twitter.com/O5EnB2njra
— Kevin Dalton (@TheKevinDalton) January 15, 2025
Anyone who has lived in New York City will tell you this is easier said than done. All it takes is a few holdouts to interfere with an assemblage. On top of that, California has very generous eminent domain laws. Without going into the sordid details (which we did examine carefully during the foreclosure crisis), they require any government body seizing property to pay a full price, well above an “urgent sale” level. This is not just a matter of statute but a solid body of case law.
However, an offsetting pressure is that neither Los Angeles nor California has declared a property tax holiday for burnt-out homeowners. Rental prices have soared due to the need for emergency housing. And insurance payouts will be slow, despite handwaves otherwise. So many will be forced to take quick offers from vulture buyers.
Mind you, yours truly recognized that big changes in how advanced economies like the US organize housing and provision themselves is way way overdue. But even at a high level, the new vision for Los Angeles sounds like imposing housing austerity on the middle class and poors without going after the big greenhouse gas emission hogs, and demanding they make sacrifices too.
Now to the main event.
By Jessica Corbett, staff writer at Common Dreams. Originally published at Common Dreams
U.K. actuaries and University of Exeter climate scientists on Thursday warned that “the risk of planetary insolvency looms unless we act decisively” and urged policymakers to “implement realistic and effective approaches to global risk management.”
Actuaries have developed techniques that “underpin the functioning of the global pension market with $55 trillion of assets, and the global insurance market, collecting $8 trillion of premiums annually, to help us manage risk,” Tim Lenton, University of Exeter’s climate change and Earth system science chair, noted in the foreword of a report released Thursday.
Planetary Solvency—Finding Our Balance With Nature (https://actuaries.org.uk/document-libra ... th-nature/) is the fourth report for which the Institute and Faculty of Actuaries (IFoA) has collaborated with climate scientists. In financial terms, solvency is the ability of people or companies to pay their long-term debts. Co-authors of one of the previous publications coined the phrase planetary solvency, “setting out the idea that financial risk management techniques could be adapted to help society manage climate change and other risks.”
Three IFoA leaders—Kalpana Shah, Paul Sweeting, and Kartina Tahir Thomson—explained in their introduction to the latest report how “planetary solvency applies these techniques to the Earth system,” writing:
The essentials that support our society and economy all flow from the Earth system, commodities such as food, water, energy, and raw materials. The Earth system regulates the climate and provides a breathable atmosphere, it is the foundation that underpins our society and economy. Planetary solvency assesses the Earth system’s ability to continue supporting us, informed by planetary boundaries, tipping points in the Earth system, and other scientific discoveries to assess risks to this foundation—and thus to our society and the economy.
Our illustrative assessment of planetary solvency in this report shows a more fundamental, policy-led change of direction is required. Our current market-led approach to mitigating climate and nature risks is not delivering. There is an increasing risk of severe societal disruption (planetary insolvency), as our economic system drives further global warming and nature degradation.
“Impacts are already severe with unprecedented fires, floods, heatwaves, storms, and droughts,” the document points out, emphasizing that human activity—particularly burning fossil fuels—drives climate change and biodiversity loss. “If unchecked they could become catastrophic, including loss of capacity to grow major staple crops, multimeter sea-level rise, altered climate patterns, and a further acceleration of global warming.”
The report was released as wildfires ravage California and shortly after scientific bodies around the world concluded that 2024 was the hottest year on record and the first in which the average global temperature exceeded a key goal of the Paris agreement: 1.5°C above preindustrial levels. In the United States, experts identified 27 disasters with losses exceeding $1 billion.
“We risk triggering tipping points such as Greenland ice sheet melt, coral reef loss, Amazon forest dieback, and major ocean current disruption,” the new publication warns, adding that “tipping points can trigger each other,” and if multiple are triggered, “there may be a point of no return, after which it may be impossible to stabilize the climate.”
Food system shocks and more frequent and devastating disasters increase the risk of mass mortality for humanity—including due to hunger and infectious diseases—along with mass migration and conflict, the report highlights.
The conversation around the climate crisis isn’t to change or not to change – change is coming for us whether we’re ready or not. Time for leaders to take their heads out of the sand – we need to decarbonise, fast, and make our communities resilient. https://t.co/akb9IhErON
— Carla Denyer (@carla_denyer) January 16, 2025
“Climate change risk assessment methodologies understate economic impact, as they often exclude many of the most severe risks that are expected and do not recognize there is a risk of ruin,” the document stresses. “They are precisely wrong, rather than being roughly right.”
Specifically, lead author and IFoA council member Sandy Trust said in a statement, “widely used but deeply flawed assessments of the economic impact of climate change show a negligible impact” on gross domestic product (GDP).
However, Trust continued, “the risk-led methodology, set out in the report, shows a 50% GDP contraction between 2070 and 2090 unless an alternative course is chartered.”
To mitigate the risk of planetary insolvency, the co-authors called on policymakers around the world to implement independent, annual assessments; set limits and thresholds that respect the planet’s boundaries; enhance governance structures to support planetary solvency; and “enhance policymaker understanding of ecological interdependencies, tipping points, and systemic risks so they understand why these changes are needed.”
They also underscored the need to limit global warming and avoid triggering tipping points with actions such as accelerating decarbonization, removing greenhouse gases from the atmosphere, restoring damaged ecosystems, and building resilience.
“You can’t have an economy without a society, and a society needs somewhere to live,” said Trust. “Nature is our foundation… Threats to the stability of this foundation are risks to future human prosperity which we must take action to avoid.”
Should the Government Be Allowed to Hold Bitcoin?
Posted on January 31, 2025 by Yves Smith
Yves here. The idea of government holding private currencies like Bitcoin is such an obvious grift that I’ve found too distasteful to discuss. Fortunately Richard Murphy was willing to do the heavy lifting.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Funding the Future.
I had this article in The Times yesterday.
A Bitcoin dealer offered an opposing view, which felt a little lame to me, but I do not have the right to reproduce it.
Should the government be allowed to hold crypto?No
Richard Murphy, a professor at Sheffield University Management School
The answer to whether the government should be allowed to keep or invest in bitcoin is a very resounding no. Bitcoin is economically meaningless and there is no value to it. It has no known use except to facilitate illicit transactions, very largely in illicit substances.
Those who claim it can be used to make payments always ignore the fact that when doing so, its value is determined by translating it into another currency such as the pound.
So, why is bitcoin worth so much? That is the power of modern marketing. The myth has been sold that people need privacy in their finances from the government and that cryptocurrency will help deliver that.
They are also told that bitcoin is a hedge against inflation — but its massive price volatility proves it is anything but.
And they are also told that because bitcoin is in scarce supply, demand means that its price will go up, and it might just do, so long as the hype is maintained. But one day the bubble will burst, spectacularly, as such bubbles always do. Bitcoin is something I would not invest £1 in and nor should the UK government.
There are strong political reasons for the government steering clear. As all bitcoin enthusiasts make clear, their excitement about it is based on the claim that it undermines the money issued by governments.
Those enthusiasts want to destroy the government’s control over the UK economy and deliver the services needed by its population.
That is bitcoin’s destructive political goal and the UK government should have nothing to do with it.
Not least, that is because almost all bitcoins have now been mined. And so if the government were to buy more, it would have to do so second-hand from existing owners. It is estimated that 90 per cent of bitcoin is owned by just 2 per cent of the people who own cryptocurrencies.
Bitcoin wealth is, then, intensely concentrated amongst a few wealthy owners who are now desperate to find someone gullible enough to part with good money in exchange for their spurious tokens.
For the government to buy bitcoin, or hold on to the bitcoin it has recovered from criminals, would, therefore, reward the wealthy with real currency in exchange for their worthless assets. That is the last thing that a responsible government should be doing. Bitcoin is a con and the government should not fall for it.
The Execution of the CFPB: Capitalism Survives Another Attempt to Save It
Posted on February 11, 2025 by Yves Smith
Yves here. Tom Neuburger describes how Elizabeth Warren, who swore fealty to capitalism, found her tender faith to be misplaced. As most of you know, the Trump Administration is shuttering the Consumer Financial Protection Bureau, her brainchild that Obama allowed her to set up before refusing to back her as its first head. Neuburger describes how, despite regularly working together, Sanders and Warren are not on the same page about the merits of capitalism.
It’s even worse than Neuburger indicates. In 2010, I attended a panel sponsored by the Roosevelt Institute, Make Markets Be Markets. Warren made introductory remarks. It was striking to see her reveal that she was defensive about her belief in regulation. She started out in what struck me as “The lady doth protest too much” mode by saying how she loved markets, she taught contracts….as if regulating markets was somehow Communism. So despite her egalitarian veneer, at her core, Warren is a neoliberal, who hoped to implement a kinder, gentler version.
By Thomas Neuburger. Originally published at God’s Spies
Image source
The universal wolf, devoid of prey, at last eats up itself.
—Your truly, with apologies to you-know-who
I know plenty of people who think the Sanders campaigns and Warren’s single try are synonyms for each other — enough people that they’re not worth counting. One prefers Warren, one Sanders, a third picks them both. So what? It’s from the same menu, right? Birds of a flock.
But maybe they aren’t the same. Sanders thought billionaires simply shouldn’t exist. Warren thought they could be tamed. “I’m a capitalist. Come on,” she told CNBC. She just wanted “rules” to make sure capitalism worked for the rest of us, we with no capital, we who are burdened with debt (a capitalist’s “income stream”).
So Warren, in her wisdom, convinced another pro-capitalist, Barack Obama, to create the Consumer Financial Protection Bureau, a watchdog on capitalist activity, a way to make capitalists safe to be around.
How’d that work out? The capitalists and the Bureau fought a few rounds. Then the capitalists won easily, and the Bureau was summarily closed. Warren was wrong; billionaires couldn’t be tamed. The wolf made a meal of its guards and went back its work: the business of eating us all.
Why did the wolf consume this particular meal? It got in the way.
Musk Targets His Companies’ Regulators
…Late last month, Elon Musk’s company X announced a deal with Visa to create a digital wallet and peer-to-peer payment system through the social media platform. Days later, Musk is signaling that he and his DOGE team are working to kill the Consumer Financial Protection Bureau, which polices peer-to-peer payment apps and had been planning tougher oversight of such systems to make sure they don’t steal your money.
Capitalism. The universal wolf. It dies or it eats.
(It doesn’t help Warren’s case, or her final account, that she helped install Biden after Sanders took the lead in the 2020 campaign. But that wasn’t her first mistake; just her most telling.)
Saving the Beast
Carl Beijer, whom I’ve come to appreciate, remarked on this lately in a subscriber post:
The Consumer Financial Protection Bureau, which stood for a decade and a half as the culmination of liberal attempts to regulate capitalism, has been shut down by capitalists.
CFPB director Russel Vought effectively shuttered the agency last night in an email directing all employees to halt their work. The move is just the latest episode of billionaire Donald Trump’s ongoing campaign to dismantle the federal government.
The CFPB was launched in 2010 with the explicit purpose of saving capitalism from itself. “In the end, our financial system only works — the market is only free — when there are clear rules and basic safeguards in place,” [Barack] Obama said as he signed into law the bill that would launch the agency. “And that’s what these reforms are designed to achieve.”
Speaking at a 2018 Consumer Empowerment Conference, deputy director Brian Johnson affirmed the CBPB’s crucial role in maintaining capitalism.
“The role of these regulators is not to replace the market economy, but to reinforce it,” he said.
Making capitalism strong was the goal of the agency. In that it succeeded.
Beijer’s right: the beast can’t be killed, not by sane measures, not by being polite. A stake through the heart, perhaps. A bullet. An exorcism with prejudice. But not with sweetcakes and an invitation to talk.
‘A Conspiracy Against the Public’
I’ll leave with this thought. Even Adam Smith, a capitalist saint today, understood the inherent evil of what he saw. In The Wealth of Nations, he wrote:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. [p 54]
This won’t end well, but it will end predictably enough. The billionaires go or we all do, lit in a blaze of hubris-fueled climate glory, they with their winnings clutched in withering hands, we with politeness intact and hope in our hearts. Them or us all. What’s the over-under on “when it’s too late”?
Good enough, but if Bernie ever really did think that billionaires shouldn't exist(perhaps once upon a time...) he has never seriously acted up said belief. His 'speaking truth to power' only served as an outlet for frustration and burnishing his sheepdog cred. Had he been serious he'd have left the Dems after getting shit on in 2016 and run independent.
"There is great chaos under heaven; the situation is excellent."
Trump's Fiscal Hole: An Emperor In A Financial Straight-Jacket
Biden and his predecessors delivered a stinking fiscal and monetary mess to Trump
Roger Boyd
Feb 14, 2025
Getty AP/Salon
During the COVID-19 pandemic, the fiscal and monetary spigots were opened wide to both offset the effects of repeated economic shutdowns (due to the US not following the Chinese much more effective approach) AND to drive a hidden bailout for US corporations and the financial system. In the previous decade US corporations and financiers had splurged on debt provided at ridiculously low interest rates, and spent more than the profits they made on share buybacks and dividends to enrich shareholders and corporate executives. At the end of 2019, when a small rise in interest rates from the previously ridiculously low levels combined with a very small amount of quantitative tightening (QT) threatened a new Global Financial Crisis (GFC), the Fed had quickly taken measures to offset the worst symptoms. This involved colossal amounts of reverse repos (the Fed lending money to the big banks to provide liquidity), mostly to only six banks (Nomura, JP Morgan Chase, Goldman Sachs, Barclays, Citigroup and Deutsche Bank).
Those six banks were of course at the centre of the 2008 GFC and have repeatedly been at the core of financial crises and have had to be repeatedly bailed out by the US state and others; going all the way back to the 1980s Latin American lending crises. Instead of being shut down as the reckless and feckless institutions that they are, they have been repeatedly bailed out and allowed to grow to become financial behemoths; concentrating risk within the global financial system. But just providing liquidity did not provide a more medium term solution, that was through the massive corporate giveaways hidden beneath the COVID-19 measures of 2020. One that both Democrats and Republicans worked hard to make sure was never audited, and the details never made public. Over US$3 trillion was spent by the US federal government, with little real oversight. This was targeted mostly toward big businesses, and very much at the expense of small businesses; an approach seen in other nations. And of course there was a new massive level of money printing (QE) pushed through the banking system. Much of which flowed into the stock market and other assets such as houses, helped by many corporations using all the extra cash to drive even more share buybacks.
From late 2021, far, far too late, the Federal Reserve tried to at last take the punch bowl away after 15 years of largesse by raising short term interest rates relatively quickly. By the middle of 2022 it was obvious that the US economy was tipping into recession and that financial stress was rising as share prices fell significantly. With mid-terms in 2022 and a presidential election in 2024, the Democrats were looking at a quite probable deep recession. The Federal Reserve had also started a small quantitative tightening (QT) to start to reduce its colossal US$9 trillion balance sheet that had ballooned massively during the COVID-19 pandemic. With the levels of government, corporate and personal debt such that a new GFC could easily be triggered.
So, even with US debt to GDP still at 110% and the government deficit at 5.5% of GDP, they turned the fiscal spigots back on. And the economy and stock market responded; there would be no recession. US GDP growth recovered to be 1.9% for all of 2022 and then 2.5% in 2023. That growth delivered more tax revenues, but the fiscal spigot was running a lot faster than those revenues; with a deficit growing faster than nominal GDP. In 2023, the government deficit was 6.3%. Also in 2023 the Fed blinked and stopped raising interest rates, and then faced with a possible run on regional banks (who had stupidly invested massively in government debt when long term interest rates were unsustainably low) launched a full blown depositor bailout and new liquidity spigots were put in place. That bailout included many politically well connected companies and rich individuals who had deposits well over the federally-insured limit; rather than send a lesson to investors about taking into account risk, the Fed showed once again that they would be bailed out from their mistakes. The socialization of losses for the rich, while the rest are generally left to eat their losses.
Only in early 2024 were the regional bank bailout monetary support structures closed. QT continued, with the Federal Reserve balance sheet being reduced from US$9 trillion to US$6.8 trillion; still well above the pre-COVID period and seven times that of the pre-2018 GFC period. Showing how fragile the US financial sector is, dependent on so much Fed liquidity. The major US banks are sitting on very large unrealized losses on their massive bond portfolios that they were stupid enough to invest in at nearly zero percent interest rates. They would have been much better off holding cash and very short term bonds; the utter morons that did not see this are still running those major banks. These bonds are held in a “not for sale” portfolio that means that the banks do not have to declare these losses against profits; they are assumed to be able to slowly work off the losses helped by falling interest rates. But interest rates are not falling the way they were supposed to due to inflation.
As the US entered 2024 the fiscal spigots were opened even wider, and the federal government deficit increased to 6.5% of GDP even as that GDP grew 2.8% (and a nominal 4.96%!). While the Federal Reserve played the “see no massive new spending, hear of no massive new spending, talk of no massive new spending” game. The federal government debt level kept growing, with that growth accelerated by the much higher long term interest rates that new borrowing, and old debt refinancing, was subject to; at 123% of GDP in 2024. This is in a country that had a current account deficit of about 4% of GDP in 2024. Only the reserve status of the US$ saves the US from the enforced structural adjustment program that so many other nations would be subject to in such circumstances. Then the Fed went and reduced short term interest rates in the dying months of the Biden administration, completely against any actual evidence that such cuts were warranted. The bond market smelt the rat, and long term interest rates responded by increasing; seeing the lack of any real commitment from the Fed to fight inflation.
The CNBC piece below laughably calls current mortgage rates as “expensive” when in fact mortgage rates are more in the normal range that was in place before the monetary insanity of the past two decades. It’s just that the US now has so much debt that those levels of interest rates cause much more of a problem for over-stretched borrowers.
The Fed knows that it is sitting on top of a financial volcano, given the massive indebtedness of the US state, corporations and individuals; much of that debt taken on at much lower interest rates than the current ones. The US economy is a bit like the cartoon character Wily E. Coyote, with constant liquidity and new government debt financed spending needed to keep it from falling. And even then, gravity regularly raises its ugly head requiring yet another bailout.
This is the fiscal and monetary mess that Trump is faced with, the result of two and a half decades of funding foreign wars with debt (instead of higher taxes), tax cuts predominantly for the rich, the socialization of private losses, inappropriately low interest rates, massive money printing, and then the during and post COVID-19 pandemic fiscal and monetary splurge. The stock market is also in full bubble territory as inflation threatens to re-ignite and the government is running very large deficits. For more than the past two decades inflation has not been a big issue in the US as the “China price” and massive levels of illegal immigration stopped prices and wages from rising; with the result of transferring significant income from workers to to the rich and their courtier class. The “China price” is no longer there to keep prices down, especially with Trump’s tariff war against China and the world, and Trump’s own policies will significantly reduce the net influx of immigrants. The economic effects of widespread “long COVID” and COVID “vaccine” (it’s not a vaccine, its an mRNA therapy no matter how much they lie about it) injuries are also inflationary. In addition of course, the working population was decreased through the related deaths of working adults.
So any new move to very low interest rates will be inflationary, as shown by the uptick in inflation in early 2025; even after only a small drop in interest rates and with QT still in place. Loose monetary policy is no longer the easy option, and also threatens the stability of the US$.
The US combination of high government debt to GDP (and very high overall public and private debt to GDP), a high government deficit even with a growing economy, and a 4% of GDP current account deficit places it in the worst position relative to other Western nations; only excepting a Japan that went into full on debt monetization many years ago. It is also at a very major disadvantage to both Russia and China that are running strong current account surpluses as well as growing faster than the US (4% for Russia and 5% for China in 2025).
US: 123% government debt to GDP, 6.5% government deficit to GDP
Italy: 137% government debt to GDP, 4% government deficit to GDP
France: 112% government debt to GDP, 6% government deficit to GDP
Canada: 108% government debt to GDP, 1.5% government deficit to GDP
Spain: 108% government debt to GDP, 3% government deficit to GDP
UK: 99% government debt to GDP, 4.5% government deficit to GDP
Germany: 63% government debt to GDP, 2.2% government deficit to GDP
Poland: 50% government debt to GDP, 6% government deficit to GDP
Australia: 38% government debt to GDP, 2.6% government deficit to GDP
Japan: 255% government debt to GDP, 6% government deficit to GDP
Russia: 19% government debt to GDP, 2% government deficit to GDP
China: 84% government debt to GDP, 4% government deficit to GDP
Rating agencies estimate a 7.5% of GDP US deficit in both 2025 and 2026, given Trump’s stated plan to renew his expiring tax cuts and provide more for the rich oligarchs, and the small majority that the Republicans have in the Congress. Hence the emergence of DOGE under Elon Musk tasked with rapidly reducing expenditures. With the immediate focus on reducing the government expenditures which are generally spent abroad, such as the aid to Ukraine and the spending of USAID and the National Endowment for Democracy (NED); these can be cut with a muted impact on the domestic economy. Another area would be to get foreign nations to pay more for the upkeep of foreign bases, something that Trump is pushing for. But these are all still relatively small potatoes, the whole budget of USAID in 2024 was US$63.1 billion and the NED US$330 million. The 2024 fiscal deficit was US$1.8 trillion. Extra tariffs could raise an extra few US$100 billion, but would be inflationary and hit the poorest citizen’s hardest; taking from the poor to give to the rich.
But it is possible that all Trump is looking to do is dump more taxes on poorer people, somewhat hidden by using tariffs, so that he can keep the tax cuts that overwhelmingly benefit the rich. And even add a few more tax breaks for the oligarchy. He has no intention of fixing the fiscal mess, just keep things going. Since the 1980s the Republican extremists have wanted to create a fiscal crisis through underfunding the state during which they can slash and/or privatize the “entitlements” that benefit the many; social security (pensions), medicare (retiree health care), medicaid (poor people health care) and unemployment benefits etc. But after decades of this approach, the oligarchy has not just loaded up federal government deficits and debt, but also driven private debt levels to astonishing heights.
Only the socialization of losses in 2008 from the oligarchy to the state, and the pushing down of losses onto the poorer citizenry, saved the economyoligarchy during and after the GFC. Then extremely low interest rates for the next decade and a half, with inflation kept in check by China (and other offshore suppliers) and mass immigration, kept the US economy afloat. With the state fully debt and deficit loaded, and the inflation smothering mechanisms gone, the 2008 and 2020 options are no longer available. In addition, any new tariffs will be inflationary, and the loss of millions of immigrants that provide cheap labour will also be inflationary. The country was also aided in the 2010s by the fracking revolution that helped keep oil and gas prices down, while removing the US oil trade deficit and providing LNG export revenues.
As well as becoming massively indebted, the US has become increasingly de-industrialized and resultantly more and more dependent upon raw materials exports and manufactured imports. In 2023, the US exported US$1.86 trillion, of which the major areas were:
Raw materials and simple processing
US$388.05 billion was mineral fuels and oils, and LNG
US$174 billion was agricultural products
US$7.4 billion metals
US$6.2 billion precious metals
US$51 billion for organic chemicals
US$43.6 billion plastics and resins
More complex products
US$125 billion aerospace products
US$91.7 billion pharmaceuticals
US$81.6 billion navigational and medical instruments
US$69.3 billion gas turbines
US$65.8 billion vehicles
US$30.6 billion computers
US$21.6 machinery and mechanical appliances
US$8.1 billion machine tools
27.6% of those exports go to Canada and Mexico, with a significant amount representing intermediate goods shipped to US plants in those countries. 9.67% go to China (including Hong Kong), predominantly raw materials, agricultural products and intellectual property licensing; with higher complexity exports being hurt by US export controls on high technology products. 25.5% of exports go to Europe, which are predominantly professional services, oil & gas, intellectual property licensing, finance, pharmaceuticals and aerospace parts.
With the US quite possibly reaching a new long term peak in oil and gas production, there is not much room for expansion there. The same for the rest of the raw materials and simple processing sectors. With China leaping up the manufacturing value and complexity curves, the US may be challenged to maintain its levels of these exports, let alone increase them. The US issue can therefore be seen as one of a lack of a long-term development state, and the profiteering offshoring of so much of the complex products manufacturing, together with regular demand pump priming through corporate and rich people state giveaways. Tariffs can be used to restrict imports, but these will be both inflationary and stop the use of better products from abroad (e.g. Chinese-made EVs). Tariffs will hit the poorest the worst, and they have the highest propensity to spend extra dollars and also the greatest propensity to cut consumption when some of their basic items become more expensive. So tariffs could in fact be stagflationary in impact.
Given the US domestic cost structures (due to rentier profiteering) and loss of much of its manufacturing infrastructure and even generations of specialist knowledge, any US manufacturing turn around would take decades with the best of state management. In many ways, the US has gone down the same path as Argentina with a significant loss of local manufacturing (not as bad as Argentina) combined with a huge increase in debt (much worse than Argentina). The reason that the US is not suffering like Argentina is that its debts are denominated in its own currency, and foreign nations accept that currency for payment for US imports and as a general payments mechanism. Without that, the US would already be experiencing a colossal financial and economic crisis.
Trump senses this, as shown by his repeated threats to retaliate with very high tariffs against those moving away from the US$. Such threats though may have the opposite effect, pushing nations to diversify their trade (and foreign debt holdings) away from the US and to quietly explore alternative payment mechanisms. But Trump in no way wants to right the US government fiscal house, especially through tax rises on his fellow oligarchs and their rich courtiers; which would also lead to a reduction in US consumption (less than if the tax raises were much more aimed at poor people, as with tariffs) and therefore the current account deficit; the rich tend to consume a lot of expensive imports. What he also knows is that the US is in no financial position to fight another major foreign war, even on the scale of Iraq. Any such attempt will put the US$ reserve currency status at risk. Once the US is forced to finance itself using foreign-currency denominated loans, and pay for imports with foreign currency, its international power will shrink and it will experience a very major domestic financial and economic crisis. So without an oligarchy willing to take some limited pain to right the homeland that underlies the US ship of state and their own wealth and power, the unsustainable will be continued until it cannot.
Whether or not that day of reckoning happens under Trump or a later president will be up to circumstances and dumb luck. The last thing the US needs is an economic recession which will rapidly grow the already outsized deficits. The GFC-bloated 10% of GDP deficit of 2009 may be quickly surpassed given a starting level of 7.5%. And that would be with a starting federal debt to GDP ratio of about 130%, not the 55% of 2009. Failing and increasingly extractive elites and overwhelming debt are both symptoms of the end of an Imperial era. Post-WW2, the massively indebted UK had to bend to the will of its much larger creditor the US; a sad reality lubricated by the shared Anglo-Saxon ethnicity of the rulers of both nations. There will be no such lubrication for the next transfer of power, but that transfer is coming; with the US Empire increasingly running on fumes. And so utterly dependent upon Chinese manufacturing exports across all parts of its economy, and even in the military, that it can in no way go to war with China; economically or militarily. There may be a lot of shadow boxing, but no real fisticuffs.
The Pentagon is even dependent upon China for some of the strategic metals and minerals that the Military Industrial Complex utilizes to produce its weapons and munitions: