[OPE] Capitalism's dirty little secret?

Ben Funnell ("Debt is capitalism's dirty little secret", FT June 30 2009)
writes:

(...) The debt burden has to come down, which means more saving and lower
economic growth for many years to come. Along the way inflation is likely to
return, probably sooner and more violently than most expect, which will
prompt investors to demand a higher return and make it even harder for
governments to tackle the debt. At best the debt will fall slowly over many
cycles and simply trim otherwise resilient growth. At worst it could cause
growth to lurch upwards before tumbling again, with all the attendant
uncertainty that entails. At this point, no one can know which is more
likely. I incline to the more benign view because of the size of household
assets but, if the dollar's reserve currency status should come under
serious attack, rates would have to rise to defend it and that could itself
cause a consumption crisis. (...)
http://www.ft.com/cms/s/0/e23c6d04-659d-11de-8e34-00144feabdc0.html

It may be that, as Funnell states, the "average American" has a net worth
of $165,000 but this "average" means nothing, given the enormous growth of
economic inquality. As regards the latest net worth data published by the
Fed, one writer reports for example:

"For the top 10% of net worth the median amount was $773K. For the group
from 75%-89% the median value was $215K. To enter the top 10% of net worth
you need a value of about $400K. The median net worth for all families with
any assets is $28.8K."
http://shaferfinancial.wordpress.com/2009/06/11/what-the-federal-reserve-survey-of-household-finances-tells-us-about-personal-finance/

Well if the household MEDIAN net worth is $28.800 - I haven't checked this
figure yet - then half of all US households "with any assets" must have a
net worth of LESS than $28.000. But as a corrollary of this, their ability
to borrow funds is also much less, and consist mainly of the "hire-purchase"
of houses and cars; that is to say, the bulk of the total household debt
burden in the US is in fact held by the richest one-third of US society.

We can read such things as:

U.S. household leverage, as measured by the ratio of debt to personal
disposable income, increased modestly from 55% in 1960 to 65% by the
mid-1980s. Then, over the next two decades, leverage proceeded to more than
double, reaching an all-time high of 133% in 2007. That dramatic rise in
debt was accompanied by a steady decline in the personal saving rate. The
combination of higher debt and lower saving enabled personal consumption
expenditures to grow faster than disposable income, providing a significant
boost to U.S. economic growth over the period.
http://www.frbsf.org/publications/economics/letter/2009/el2009-16.html

But essentially all that says is, that many more ordinary folks were able to
borrow more, to buy houses and cars on credit. The real worry though is not
the size of the household debt burden per se, but rather the falling
household income which is required to pay off the debt, as enterprises are
relentlessly forced cut their costs. Put simply, from a capitalist's point
of view, you need to reduce debt because it ain't making money, but from a
worker's point of view, you need more income just to maintain your position.
The slogan of neoliberalism was "more security and less risk for
capitalists, less security and more risk for workers" but the result is more
insecurity and risk for everybody, impacting on the propensity to invest in
growth. The scourge of unemployment is a "triple banger" in this sense:
unemployed people cannot pay off their debts, and unemployment reduces real
wages, with a resulting downward spiral in aggregate final demand and credit
provision.

The argument for austerity is that people have been "living beyond their
means", incurring "excess debt", whereas in fact the incomes of ordinary
working folks in the US, as Funnel notes, dropped absolutely by about 10% in
real terms on average since 1970 and the only way out of that was upward job
mobility, which is now strongly declining (see e.g.
http://www.newsweek.com/id/180041
http://www.csmonitor.com/2003/0127/p21s01-coop.html ). The "human capital"
returns of a college degree are strongly reduced in an already oversupplied
market, although paradoxically you need one just as a prerequisite for any
decent job.

With the rhetorics about debts, the financial mismanagement and miseducation
delivered by the bourgeoisie - its ingenious propensity to blur the
difference between what is borrowed and what is owned, to maximise profit -
is projected onto ordinary workers. It is however not debt that is
capitalism's "dirty little secret", but rather the fact that the financial
rewards have gone mainly to those who could capitalize on property they
already owned, instead of to those who create new wealth by their labour. It
turns out that Karl Marx wasn't so wrong when he talked about the capitalist
tendency towards the "immiseration of the working classes". It is now
occurring in the citadels of capitalism, and not just faraway in the third
world.

Is Europe doing any better than the US? Yes and no. Socio-economic
inequality in Europe as a whole as measured e.g. by Gini coefficients is
somewhat less than the US, an aggregate difference of about 15 percentage
points. It is just that the consequences of income inequality are still
mitigated in Europe to an important extent by fiscal, welfare and other
provisions. That is, in Europe, even if you are relatively poor, you can
often still have access to life's essentials, whereas in the US you are
often practically shut out from much of society. For example, if you don't
have a car in the US, you may not get to go anywhere much. But in the
future, that difference is likely to reduce strongly, primarily as a result
of a higher level of unemployment, reduced utilization of labour capacity,
reduced state provisions and higher inflation. In many respect, financial
mismanagement has been worse in Europe.

Jurriaan

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Received on Sun Jul 5 16:26:06 2009