[OPE] dubai: capitalism takes the second hit and recession will deepen

Jerry,

(1) It is not true that the recovery of the stock values from the crash is
directly due to additional cheap credit money becoming available. But it is
certainly true in a general sense that "quantitative easing" in the US and
UK, the biggest financial centres, facilitated the recovery of the stock
market, and that very low interest rates enable a new round of global
profit-making from various forms of arbitrage utilizing cheap currencies. Mr
Trichet felt that the financial crisis was caused by an "under-pricing of
risk" as I mentioned, but in that case it is difficult to understand why the
same pattern is merrily happening again globally, in various forms. A
Marxian economist would say that there was an "over-insurance of risk". The
lucrative business of securitizing against risk boomed into a gigantic Ponzi
scheme, to the point where it crashed. If there is still a lot of idle money
sloshing around the world economy, that is mainly because because investors
divested from stocks and other tangible assets because of economic
uncertainty. A lot of money doing nothing actually contributes to keeping
interest rates low. But if stocks are converted to currency, currency can
just as quickly convert back into stocks. Even if the yield on stocks is
rather low, it is still often higher than the rate of interest, and if stock
values fell to an absurdly low level because of general panic, there had to
be a rebound. It is unlikely I think for another major stock crash to occur
in the immediate future, although no doubt there will be another one,
furtheron.

(2) It is not true that the "recession deepens". It is more that roughly the
same level of output gets produced by fewer workers, raising the OCC and
S/V. Having shed labour while producing the same level of output, employers
are not motivated to rehire more staff, unless final demand picks up. But
since real wages are constant or declining, and unemployment is increasing,
there is very little final demand growth. Consequently the effect of the
crisis is a durable increase in unemployment - fewer workers hired as
against more workers entering the labour force looking for jobs. The effect
of a durable increase in unemployment is that real wages simply cannot grow
very much, and consequently that final demand cannot grow very much. The
result of that is overall economic stagnation in the developed countries. It
is true that India's and China's economies are growing pretty strongly, but
that growth directly affects the incomes of only about about one in eight
people in their combined populations.

At least in the EU, aggregate M3 does not fluctuate all that much now and
indeed somewhat reduced in recent months according to the data available
(the US has stopped publishing M3 data, M3 sharply accelerated from 2005 and
it was growing at 13%+ per year in 2007). In Japan also, the increase in M3
is slight, it's about US$80 billion per year now. Lenin remarked once that
"The best way to destroy the capitalist system is to debase the currency",
but governments are in no mood to do anything like that. There are fears
that that governments such as the US (holder of hegemonic currency) will
print much more money in a bid to resolve their fiscal problems, but all
that really happens is that the private financial sector tightens its grip
over public finance and that the state and its financial system get
"restructured". In this sense Mr Obama believes himself to be "leftwing" in
a minimal sense by braking the pace of change. This restructuring means a
deepening of neoliberalism, if by neoliberalism you mean the application of
commercial principles to every facet of life. In reality, it isn't
"liberal", it's extending the dictatorship of market forces, wiping out
everything that doesn't yield an adequate financial return.

In many areas of the economy in the developed world, loan capital is now
difficult to get; in the UK - hitherto one of the largest financial
centres - the increase in net lending to business is near-zero, and the
increase in mortgage lending has tapered to about one-third of what it was
at the beginning of 2008.

As regards the US, Mr Bernanke remarked on 16 Nov that "in particular,
constrained bank lending and a weak job market likely will prevent the
expansion from being as robust as we would hope. (...) access to credit
remains strained for borrowers who are particularly dependent on banks, such
as households and small businesses. Bank lending has contracted sharply this
year, and (...) banks continue to tighten the terms on which they extend
credit for most kinds of loans (...)".
http://www.federalreserve.gov/newsevents/speech/bernanke20091116a.htm But
this does not bother global speculators so much because they just shift from
one kind of arbitrage to another.

As I mentioned on OPE-L in 2007, in addition to durably higher unemployment
the outfall of the crisis is a more conservative credit policy.

In simpleminded economics theories, credit is regulated by the interest
rate, but in reality, credit is regulated just as much by the terms on which
credit is extended. If interest rates are all kept very low as a standard
policy, they simply cannot do much regulating. They regulate only if you can
vary them significantly. But terms of credit become vastly more important.
In this sense, the credit supply has a direct political component. In the
modern "credit regime", economic control is exercised by imposing conditions
for the extension of credit - what the IMF or the World Bank do to poor
countries, is merely a special case of a more general phenomenon.

The aggregate volume of credit is rather meaningless, insofar what really
counts is who gets the credit and who doesn't. The problem of aggregate
credit growth is more that, beyond influencing it, it is very difficult to
control, and it is almost impossible to know beyond what point aggregate
credit growth becomes "excessive". Such labels are rhetoric, because you
know that it has been "excessive"... only after markets crash.

When Mr Trichet waxes about "excessive risk-taking" what he really means is
that "credit was extended where it should not have been extended". But,
firstly, that is easy to say after the crash, the problem is knowing what
the limit is beforehand. And they cannot really know that, that's the point.
If they did know it, they would have acted to prevent such big losses with
"counter-cyclical policies". All that lenders can really do, is become more
cautious in their lending criteria. But obviously that puts a damper on
"entrepreneurial risk-taking". Secondly, to prevent "credit being extended
where it should not have been extended" would require serious capital
controls, prohibiting certain types of deals, but that runs against liberal
market ideology - and, just as you have blocked transactions here, they
spring up somewhere else in a different form; serious capital controls can
lead to serious capital flight. So the real "capital controls" are in fact
those exercised by the creditors themselves. That is why the recent
conferences about "financial regulation" are mainly hot air.

In reality, traders do not "underprice risk" so much normally, they just
underestimate the deleterious macroeconomic effects of speculation based on
the ability to invest and divest everywhere very quickly. The real economy
simply cannot grow very much, if holders of surplus capital are mainly
interested in making money from arbitrage deals because doing so is more
profitable, and carries less risk, than investing long-term in production
growth - given that significant growth in final demand is rather uncertain.
And if you can invest and divest very quickly from assets, this obviously
increases economic uncertainty, since the economic outlook could change in a
matter of weeks. Marx anticipated all this when he noted that the historical
tendency of capitalist development is to promote the maximum mobility of
capital.

Exchange-rates for example can nowadays rise and fall rapidly without any
relation to real economic strength. Actually, a good current illustration of
the pitfalls of Keynesian theory is Japan - the value of the Yen surged
against other major currencies, so that Japanese assets gained value, even
although official unemployment in Japan is 35% higher now than it was a year
ago, and the total real capital stock of private enterprises in Japan is
basically unchanged from what it was in 2000. How can it be, that an economy
which is basically slumping, nevertheless grows in capital value? Such are
the wonders of "globalisation", in which whole countries are viewed as
corporations which can be "undervalued" or "overvalued".

Jurriaan

_______________________________________________
ope mailing list
ope@lists.csuchico.edu
https://lists.csuchico.edu/mailman/listinfo/ope
Received on Sun Nov 29 10:41:17 2009