Kasama Position Paper: Current Collapse & Global Capitalism

This essay is based on a paper presented at a recent gathering of the Kasama Project. It has been revised in response to comments at and after that meeting.

The Current Collapse and Global Capitalism

by Eddy Laing

One of the all-encompassing features of capitalism is its inherent anarchy. Economic competition and anarchy both engenders and provokes political and ideological contention on a global scale. This anarchy is evident the organization of production, commerce and finance with the primary objective of profit-taking by capitalists (rather than for the immediate or strategic interests and needs of society as a whole) and in the competition among the capitalists, as each seeks to maximize their slice of that profit at the expense of all others. This is currently evident as various capitalists and their journalistic and academic apologists offer competing stories about who or what is to blame for the present mess. In other words, there’s a whole lot of finger pointing going on. A great deal of this is not only not trustworthy; it is specifically designed to misdirect us from understanding the reasons behind this economic collapse.

For example, even after all the tremendous devaluations that have taken place globally – the liquidation of large sums of debt, the bankruptcies of banks and factories, the huge declines in corporate stock prices – the story that continues to be spun out is that this collapse was caused by the growing number of sub-prime residential mortgage loan defaults. However, if we review the past six months of activity and disclosure within the financial sector, we instead see that huge amounts of debt have fuelled the operations of the financial sector for decades and at an exponentially increasing rate since the early 1970s. We further see that the massive credit defaults that have frozen the financial sectors are from debts that were organized within the financial and commercial sectors themselves – debt transactions among capitalists, not small homeowners.Over the last 30 years, the amount of financial services debt transacted by the US banking sectors has grown from about 258 billion (1978) to more that 16 trillion (2008), and corporate debt has risen from 500 billion to more than 6 trillion. While there is a lot of residential mortgage debt – two-thirds of all single-family homes and about US$12 trillion in debt – the rate of delinquencies and defaults among these mortgages was ‘just’ 2.13% at the end of 2008, well into the current collapse. However, as the recession continues to deepen, and millions more are thrown out of work, this rate is sure to spike upward as more mortgage holders lose their income and then lose their homes. During January 2009, the delinquency rate climbed to 2.42%. (1)

Within the diverse categories of financial and commercial debt, we can also situate borrowing for Real Estate Investment Trusts and other commercial and speculative real estate formations. A key reason that there was a housing bubble at all was the amount of speculative residential construction – not single family homeowners – and such speculation is always organized around great amounts of real estate investment debt, not home mortgages. Extensive new housing sites were developed in areas of Arizona, California, Florida, Nevada, and elsewhere, which remain largely unoccupied. These defaulted debts are not for owner-occupied housing.

The commercial real estate sector functions on leveraged borrowing against future rents or sales. In New York, a prime example of this type of debt is exemplified in the World Trade Center reconstruction project, which in the middle of the 2001-2003 recession was defined by lawsuits and counter suits regarding lease obligations and insurance coverage. About 40% of the old World Trade Center main office towers were vacant when they collapsed, and the current project is almost certain to recapitulate that problem, straining the site leaseholder (Silverstein Properties) and consequently the ability of the Port Authority of New York and New Jersey (which owns the site) to collect. About 27% of the Port Authority’s 2008-2009 budget is funded with money it has borrowed by issuing bonds, and it is spending about 12% of its collected revenues to make payments on those debts. At the close of 2008, the Port Authority had more than 40 such bond issues open – amounting to approximately $12 billion in debt – on which it is paying interest to various institutional (banks, investment funds, etc.) bondholders. (2) Even well before the current collapse, in February 2008, Port Authority bonds were considered so risky that they had to be offered at a 20% discount (offering a 20% yield). (3)

Corporate bonds and similar debt instruments – aka commercial paper – are used by capitalist enterprises to finance their operations, sometimes week-to-week. In addition, as we now know, US capital debt was being over-extended and re-leveraged in a manner similar to Russian nested Matryoshka dolls, debt payments covered by other debts. This practice is widespread, historic and considered acceptable business practice. It cannot be eliminated from capitalism – it is part of ‘managing’ the economic risk and anarchy of the system – and even regulating it is very difficult within the overall competition among capitalists for the greatest economic advantage. The Economic Crisis essay posted last October and the Risks of Empire essay posted in November both provide some details of this aspect of the capital process. For example:

* General Electric in FY 07-08 had outstanding debts of $11 billion, and its Capital Services division held debt notes valued at almost $500 billion. Over the past year, GE has seen its equity value decline 40%, and as one analyst observed this past week, they have been able to pay their annual dividend only by borrowing money.

* Samsung Electronics (a sub-unit of Samsung Corp.) in FY 07-08 owed about 2.8 trillion won in outstanding debt, of which about 234 billion won must be repaid in foreign currencies to lenders in other countries.

At least $50 billion of the bail-out money provided to insurance monopoly AIG by the US Federal Reserve has been passed directly through to the biggest banks holding AIG credit default swaps – for loans that had defaulted in the collapse – including Goldman Sachs, Merrill Lynch, Deutsche Bank AG, Societe Generale SA and several other US and European banks. (4)

Some investment analysts expect that as many as 1,000 US commercial banks (12% of the current total) are predicted to fail over the next five years (5) and that is probably a conservative number. (1,386 banks failed during the 1988-1990 US savings & loan bank crisis.) The US Treasury has already invested hundreds of billions of dollars in the largest insolvent banks and auto companies in an effort to ‘re-liquefy’ these debt pyramids. In the current arguments within the ruling class over nationalization, an overlooked fact is that the amount of money-capital already pumped into Citibank and Bank of America by the Treasury exceeds the total shareholder equity value of either. That these banks have not been officially taken over (‘nationalized’) emphasizes that the money-capital infusions being negotiated between the US Treasury and the individual capitalist groups must meet the criteria of being profitable to those capitalists. And of course, in re-capitalizing these companies, the US government is taking on new and record amounts of debt, which it presumes it will pay off through taxes, reduced social program spending, and by selling its debts (Treasury bonds) to investors overseas. For decades, the proud achievement of the US Treasury has been that it always makes its bond payments. It mainly does this through taxation – reclaiming wages from workers and to a much lesser extent taxing corporate profits – and by borrowing against this ongoing ability to tax.

The reality of inflation, the fear of deflation

To provide these vast new sums, bourgeois economists blithely point out that the Treasury ‘simply’ has to print more money. The catch here is that in doing so the exchange value of that money is steadily eroded; we experience that devaluation as inflation. Calculated over the past thirty years, the rate of inflation in the US is 323%. (One dollar today purchases about the same amount of goods as thirty-one cents did in 1978.) (6)  Nevertheless, the capitalists prefer inflation to deflation precisely because of the relative effects on their extensive debt obligations. A deflating currency means that the debt payments increase in real value terms. (Conversely, the exchange-value of money declines during inflation so that later payments represent less real value; using this 30-year example, 31c instead of $1.) This same principle applies to foreign currency exchanges that might be required by trade agreements or through international lending. As the value of the dollar declines, payment represent less comparable value; as the value of the dollar increases (by deflation), foreign payments become more expensive.

Deflation is taking place now in the real estate and petroleum sectors. In the first case, this is a result of the collapse of speculatively inflated housing prices. In the second case, it is chiefly due to the collapse of the petroleum futures market, in line with the broader collapse of the derivatives markets: because of loan defaults, because loans were called suddenly, to cover other debt obligations, etc. Thus, after hitting a speculative peak mid-year, gasoline prices fell back dramatically – approximately 65% – in the last quarter of 2008. Within the ruling class, there is great fear that this price deflation may become generalized. At the same time, price inflation continues in other sectors, especially in food prices, which have increased an average of 5.7% over the past year. (7)

A multi-faceted crisis of the capitalist system

Because of the collapse of the credit markets, capitalists in various sectors have been forced into bankruptcy or to drastically downsize their operations – as they fail to meet existing debt obligations and as markets for their products are further reduced – in a Mobius strip-like cycle of dysfunction.

Consequently, we are seeing growing unemployment as companies contract their operations. The official unemployment rate is now above 8% and the real rate is probably twice that. Moreover, this impoverishment is hitting some sections of the people more brutally than others: the unemployment rate among African-American men is twice or more the national average; it is now supposed that many immigrant workers who can are now emigrating back to their native countries rather than remain in this country out of work.

Since the collapse began to accelerate in September-October 2008, average weekly hours of production and average weekly earnings have declined in almost every manufacturing sector: non-metallic mineral products, primary metals (i.e. steel, aluminium), fabricated metal products, machinery, computer products, electrical equipment, motor vehicles and furniture manufacturing. Average weekly earnings have also declined in food, textile, apparel, paper and plastics manufacturing. Overtime hours in all of these sectors have also declined. (8) (Interestingly, average hourly wages have not declined, perhaps due to the lay-offs of junior, lower paid employees.)

In sectors that supply auto manufacturing or construction, we’re seeing these same effects, with factory closings, production contractions and bankruptcies. There will be a dramatic increase in efforts to further reduce wages of those remaining on the job as this process proceeds. In the auto sector, health and pension benefit wage forms are being reduced under the direction of the government (through its loan agreements with GM, Chrysler, as well as by Ford acting on its own opportunistic initiative). We are entering a period in which the living standard for the masses of people – perhaps reaching well into the petit bourgeoisie – will be ground down dramatically. As the current government actions indicate, the state has been called upon by the bourgeoisie as a class to play, and is responding in its role as, executive enforcer for the system as a whole. The creativity and initiative exhibited in this response appears to be a chief distinction between the current and last administrations. All of this further illustrates why so-called ‘economic democracy’ is not only a dead end but also a tar pit waiting for us to fall into it.

This is a multi-faceted crisis of the capitalist system. Nearly every exploitative and parasitic feature is making itself apparent and consequently available for very serious questioning. As the many economic failures of capitalism are further revealed, the political structures and parties that serve to support and defend this system will also become further exposed. The opportunity for building a broad anti-capitalist social movement is very real. For just that reason, the crisis will be accompanied by growing political and ideological assaults on the people, and on the activists among them who have not been beguiled by the demagoguery of the Obama government. We should expect that ‘turn’ from this government, and not be deluded by the newly benevolent facade that has been built to front it.

In other words, we need to comprehend not just the economic relationships of this crisis, but – and especially as far as our strategic interests are concerned – the political and ideological relationships involved as well.

The principle contradiction

The principal social contradiction in the world right now – the contradiction that exerts an overarching influence on all other social contradictions – is manifested in the recent economic collapse and ongoing crisis of capitalism. On one side, tremendously creative and global productive forces – the laboring people of the world – create significant social surplus. On the other side, that surplus is expropriated and speculated upon as the private property of capitalists. While the chief executives of the big banks – to pick just one section of capitalists – arrogate to each of themselves tens of millions each year, well over 2.5 billion people on this planet subsist on the equivalent of less than $2 per day. Tremendous inequalities are present in most of the ‘developing’ former colonies. For example, Nigeria, with 141 million people, is the most populous country in Africa. It has vast proven oil and gas reserves from which ExxonMobil extracted 416,000 barrels/day in 2007, for a net return of $17.37/barrel. Yet, the GDP of Nigeria is just $99 billion, the average life expectancy is 43.7 years, and oil tank truck drivers are paid the equivalent of US$3.85/day. While the current collapse, which emerged from those relationships, has assumed particular forms, economy-to-economy, the overall effect is widespread and inter-related. This contradiction – among the matrix of economic relationships – has now come to affect political structures and ideological frameworks within each of the major imperialist countries, and through them, it is affecting certainly most of the less developed economies as well. Several tens of millions have been thrown out of work in China – the emergent sweatshop to the world – and perhaps 50 million or more proletarians worldwide will be unemployed by the end of 2009.

This contradiction has also thrown the capitalist classes into disarray. The specificities of that disunity are very evident among the US ruling class, but they are also evident in inter-imperialist relationships: between the US and key members of EU, especially France and Germany; between Russia and its current and former dependencies; between China and the US; and so on.

The economic collapse has forced an initial wave of restructuring within the US and several of the major EU economies, as well as in China, the Ukraine, Iceland, South Korea, and elsewhere. These economic restructurings will in turn require restructuring in the political superstructures, and we are beginning to see that in the US, the UK and some other places, such as by nationalizing banks, directing money-capital to specific sectors, implementing new rules and regulations over commerce and finance, and so on.

In contrast to the focus being directed by the mainstream news media, this collapse is not only redefining various capital formations – and therefore capitalists – it is increasingly redefining the lives of millions of workers and middle-class people, in various and specific ways, and in every capitalist society.

The bourgeois economists – who are generally at a loss to explain the real causes of this collapse or the actions that might mitigate it, since to discuss either threatens to call into question capital itself – are also divided on the extent and length expected of the present ‘downturn’. Bourgeois optimists think the economy will hit bottom sometime in 2010. Less optimistic views hold that the downward spiral will continue for several years, perhaps five or more. None of these apologists can posit a framework that encompasses the global economy or the international economic relationships on which it is based, especially not as those involve the masses of people. But just as the collapse revealed the international character of capital, the continued crisis will necessarily play out internationally, and will require an international resolution.

In every event, how capital seeks to resolve this crisis can only be by increasing its exploitation of laboring people all around the globe, to unprecedented levels of economic and political oppression.

This necessity will also require new levels of acquiescence by the bourgeoisified citizens of the imperial homelands. This requirement comes at the same time, obviously, that those homeland citizens are experiencing a decline in their own living standards, with their own loss of savings, growing homelessness, rising rates of unemployment, etc. Some of these people will see their own impoverishment in contrast to the very rich, who seem untouched and continue to arrogate to themselves millions in bonuses, stock and other payouts. Some in the homeland will follow the ruling class’s lead and blame small homeowners, or immigrants, or the corruption of individual rich people as the bases of this collapse. There is a very sharp ideological and political battle shaping up out of this crisis, and it will get much, much more antagonistic as the crisis deepens.

A very important arena of that contention will be (and already is) among the capitalists themselves. This has emerged internationally, as some of the bigger EU economies place the blame on the US and its banking and credit system for the collapse. Similar sentiment has been enunciated within the ruling circles of Japan and South Korea, as well as of China and India.

Within the US ruling class, a great deal of disunity has emerged. In the superstructure, the two imperialist parties cannot agree on a forward plan. Within the financial sector, there is vocal opposition to some of the restructuring being implemented by the government on behalf of the national system as a whole. There is obvious confusion about what to do with the domestic automobile sector, and we can expect that similar contention will emerge regarding real estate – especially as foreclosures and bankruptcies continue to grow. We should consider the possibility that this contention will continue to widen divisions within the ruling class, even as a majority seem coalesced around the plans being devised by the Obama administration. This possibility should not be viewed as automatically favorable to the people, nor should we consider it automatically favorable to our political work. We will have to pull political advantage out of it.

Several possible outcomes

As part of all of this, the legitimacy of various manifestations of capitalism – if not capitalism per se – is being seriously questioned by millions of people who until very recently had not given it a second thought. Within this diverse range of people, comprising different strata and classes, a wide variety of opinions are forming about the causes of the collapse and about how to respond. Ideological ‘givens’ are being discarded left and right. Most of these may spontaneously trend toward individual responses to specific phenomena or events. This is a legacy of both the long viability of bourgeoisification and of the corresponding absence of influence since the early 70s of a broad revolutionary political movement.

This period of widespread questioning prompted by palpable examples of systemic failure provides us with unique opportunities for building a broad anti-capitalist movement, which reaches into many sectors of society and develops among many strata including most importantly among the proletariat and other oppressed people. We need to begin seizing on those opportunities, with a coherent plan for advancing both organization and expanding struggle. We need to understand our work as a strategic and synergistic set of processes, and we need through that work to win others to actively participating in the necessity and possibility of that strategic anti-capitalist process.

We should proceed with developing our understanding and analysis, aware of the possibility of great social upheaval but also aware that the outcome of that upheaval does not necessarily favor the proletariat. In this respect, an important aspect of the struggle we are confronting will be a battle of wills. The outcome will depend on what revolutionary forces plan and do, as well as what reactionary forces plan and do.

There are several possible outcomes to the current collapse. Many people still expect the capitalists to sort things out and re-establish the relative internal socio-economic equilibria – counterpoised by extensive, global parasitic disequilibria – that characterised imperial society since WW2. However, within the (non-US) capitalist classes themselves, there is growing consideration of a need for a new division or re-division of global capital. As the crisis deepens, a few bourgeois economists are even starting to compare the current USA with the former USSR and predicting structural collapse, with a new capitalist economic and superstructural formations emerging out of it. Very few are talking about violent re-division now, but we need to consider this to be a growing possibility, and in fact increasingly likely as the old alliances – post-WW2, post-Mao and post-USSR – fall apart or are torn apart by the crisis. Competition and contention are essential features of capitalism, and this manifests itself internationally as well as within each state. Inter-imperialist competition was the premise (understood within the Bush government) for the US invasions of Afghanistan and Iraq: as imperial exercise of power, to seize resources and to deny them to their rivals. It is also the background to ongoing machinations over NATO membership by Eastern European and Confederacy of Independent States (9) countries, joint military exercises by the Shanghai Cooperative Organization countries, meetings of the G8/G10/G20 over international finance and trade, and re-evaluation of trade agreements such as NAFTA and CAFTA. (10)

In any of these or other possible scenarios, we need to clarify and assert the strategic interests of the international proletariat and other oppressed peoples. We need to help give those interests political and ideological form, as well as practical organization, as alternatives to imperialism and class society.

Without a strategic plan, it is unlikely that we can or will contribute to pulling a revolutionary future out of the current mess, and is as likely that we will simply contribute to a resolution that leaves capitalism intact and sets the masses up for another period of capital expansion through world-wide exploitation and oppression.

Notes

1. Fannie Mae Monthly Summary. January 2009.
2. 2009 Budget of The Port Authority of New York and New Jersey. December 17, 2008. PANYNJ.
3. Auction-Bond Failures Roil Munis, Pushing Rates Up. Bloomberg.com. February 13, 2008.
4. Top U.S., European Banks Got $50 Billion in AIG Aid. Wall Street Journal. March 7, 2009.
5. One in eight lenders may fail, RBC says. Reuters February 9, 2009 4:42pm EST
6. US Bureau of Labor Statistics CPI Inflation Calculator.  Accessed at http://www.bls.gov/data/inflation_calculator.htm
7. Consumer Price Index: January 2009. Bureau of Labor Statistics. February 20, 2009.
8. The Employment Situation: February 2009. Bureau of Labor Statistics. March 2, 2009.
9. The Confederation of Independent States in comprised of states that were once part of the Union of Soviet Socialist Republics, such as Armenia, Byelorussia, Georgia, Kazakhstan, Russia and Ukraine, and are now independent but allied in this confederation.
10. NAFTA and CAFTA are acronyms for North American Free Trade Agreement and Central American Free Trade Agreement.