Debt Makes the World Go Round!

The Citizen: Issue 4
September 2011

Author: GM1

In the way that even an accumulation of debts can appear as an accumulation of capital, we see the distortion involved in the credit system reach its culmination.

Karl Marx2

Introduction

When you loan a friend €20, whatever way you put it, you are down €20 until they pay you back. Even if they commit to pay you back €30, you are still down €20, and no shop will take their commitment to pay you back €30 as real money.

So, why is it, then, that when the bank loaned me €300,000 for a mortgage it did not deduct €300,000 from its accounts but instead actually added the full amount, close to €1.5 million, that I would pay back over the lifetime of the mortgage to its assets. It ‘created’ €1.2 million that did not previously exist through the loan. It is this type of unearned growth that gave credence to the monetarist belief that there could be unlimited growth and expansion. Debt, or credit, would make the world go around.

As Marx argued, credit and debt have always played a role in production and consumption within capitalism – what is different today is the dependence of the system on credit and the fundamental role it plays in profit creation as both a fund for and source of investment. Without debt, capitalism would cease to grow.

There have been many articles, books, and opinion pieces written from left or right wing perspectives on this latest crisis. Some have highlighted key points such as the lack of regulation or deregulation of key areas; privatisation of valuable state assets; the property bubble; the ludicrous salaries of senior managers; and the regressive tax regime. Others have sought to confuse and misdirect by blaming public sector pay and inefficiencies; trumpeting privatisation; repeating ‘there is no alternative;’ and generally trying to scare us into the arms of more money lenders.

But few have sought to place the current crisis within a historical overview of capitalism, which would recognise key changes and developments since the early analyses of Smith, Ricardo, Marx, and others. Of course, a few notable exceptions exist, such as the writers and editors at Monthly Review magazine, the writers at Research on Money and Finance (an online network of political economists), and Professor Michael Hudson (the US economist and academic).

It is only when one recognises a number of key developments within capitalism that this crisis makes real sense and that one can understand why the response from the establishment is to secure the finance sector at all costs and relieve it of any responsibility, as well as to try to create new private investment opportunities.

Monopoly Capitalism

The economic system has developed from competitive capitalism in the nineteenth century to monopoly capitalism in the twentieth century, with monopolisation greatly accelerating from the 1950s on, with a growing role for finance.

Monopoly capitalism is distinctively different to competitive capitalism, yet the debate today still uses references to features of competitive capitalism as if they were still relevant. For example, the current government is adamant that by reducing wages in, say, the hair dressing sector, it will increase jobs. This ignores the saturation of this industry by a number of monopoly firms or chains. In reality, a decrease in wages will only increase these monopolies’ profits, while doing little for job creation since domestic demand is being stifled and the market is flooded, leaving little room for growth. Or, we still hear commentators talk about the equilibrium markets create between supply and demand despite the obvious and overwhelming evidence to the contrary in the property bubble of the last decade.

Our understanding of how the basics of capitalism operate today must reflect the stage that capitalism is at. It is no longer a highly competitive system in which the production process is decentralised and local. It is now a system dominated and controlled by transnational monopolies, which are increasingly reliant upon financial ‘innovations’ for both investment opportunities for their accumulated capital and, consequently, for growth and the continued reproduction of capital.

The main characteristic of the system is the concentration of power in the hands of fewer companies as the big take over the smaller. Monopoly does not mean that there is only one company in an industry but that a number of companies are so big that they influence or control the production process and the price system. This gives the system a number of characteristics: (1) Price competition no longer exists, and competition is largely relegated to sales and advertising and to improving the production process (getting more for less). (2) Reduced labour costs do not necessarily lead to the creation of employment: if a market is flooded, it only leads to increased profits. (3) Cost reductions are not matched in price reduction but in increased profits. (4) Capital becomes concentrated and centralised. (5) Companies acquire and merge, first vertically (with companies performing different functions within their own production and distribution process) and then horizontally (with companies performing the same or similar functions within their own production sector) – later, the largest even expand into other sectors. (6) Operating nationally at first, they then become conglomerates and transnational corporations. (7) The production process and distribution are internationalised. (8) Markets become flooded, while more and more capital is accumulated, over-production and over-accumulation occur, and stagnation and crisis ensue. (9) Crisis leads to further monopolisation, mergers, and acquisitions, with reduced avenues for real growth and investment.

Crisis is a constant and unavoidable feature of monopoly capitalism. As a result of the concentration of capital and production in monopolies, production becomes increasingly disconnected from demand, and monopolies acquire the ability to produce more goods, more cheaply, and more quickly. When an area of growth is flooded with capital, leaving the market flooded and production outstripping demand, a crisis of over-production follows, resulting in stagnation in the economy, massive lay offs and unemployment, and a lack of investment opportunities for capital. Over-accumulation, or lack of investment opportunity, is a by-product of over-production.

Manufacturing and the ‘real economy’ have been in this state of crisis since the 1960s, and it is getting more acute as times goes by. Manufacturing no longer functions as an avenue for investment or growth on the scale required by the system as it operates at full capacity. Even the build-up of arms, war, the sales effort, privatisation, deregulation, the opening up of new markets – all part of the system’s constant struggle to avoid stagnation and crisis – could not prevent the repeated crises of over-production and stagnation the system has suffered.

Wages in the West fail to provide the level of consumptive demand required to match the supply of goods produced, and the conflict between the need to increase profit and the need to maintain wages in order to fund consumption adds further contradictions. It was in this context that monopoly capitalism developed the role of finance, credit, and debt to provide an avenue for investment, growth, profit, and consumption (without increasing wages).

Financialisation and Debt

Increasingly in the West, the classic economic formula of M—C—M (money—commodity—more money), which describes investment and profit creation through commodity production, has been replaced by M—M (money-more money), where investment and profit are in capital only.

First in industrial securities; then in stocks and shares and mergers and acquisitions; and now in more complex products and derivatives; finance has become the primary source of investment and profit in the system. It estimated today to be worth in the region of €150 trillion, three times that of real economy.3

This fluid, mobile, and herd form of capital is short term and highly anarchic, in that it can and does move at incredible speed to wherever there is a return and will flood that area, causing speculative bubbles, over-investment, and over-production. There have been a series of such bubbles that have all burst as a result of over-investment and over-production, including the dot-com bubble, telecom bubble, and most recently the property bubble.

But finance also took on the role of funding consumption of the real goods being produced more and more cheaply and in greater quantities than ever before. Debt became the source of consumption in the West of goods increasingly made elsewhere — wages in the West stagnated over recent decades, so debt became the major source of funding for consumption. Again, finance provided a short-term pressure valve for a system in deep crisis and contradiction.

House prices soared as a result of speculative investment, creating massive household debt. But, in addition to homes, cars, furniture, holidays, televisions, jewellery, and other goods could be bought on store credit. Credit cards frequently paid for that final grocery bill before pay day. Together, all of this created a massive household debt problem.

The German economy, the engine of the European Union, has a large manufacturing sector (by today’s standards) that operates at full capacity domestically. Monopoly firms in Germany accumulated huge profits as the German economy suppressed workers wages over the last few decades. However, the saturation of the German market by monopolies, combined with the suppression of German wages, meant that growth in Germany remained incredibly low throughout the 1990s and 2000s, even by pretty poor EU standards, never reaching more than 3.5 per cent or 4 per cent and more regularly being between 1 per cent and 2 per cent.4

On this basis, the monopolies accumulated stockpiles of capital, and the economy operated with significant budget surpluses. The low interest rate of the European Central Bank (ECB) was designed to facilitate the export of this accumulated capital abroad, again acting as a pressure valve to stave off over-accumulation and facilitate investment. Alongside this, the deregulation of the banking system and the opening up of borders eased the way for movements of capital.

German, French, Belgian, British, and Dutch capital required an outlet and so exported large amounts of cheap credit to peripheral economies, such as Ireland, Portugal, Greece, and Spain (where it became debt), blowing up speculative property bubbles in these peripheral countries. 76 per cent of aggregate German savings (private, governmental, and corporate) were invested abroad.5 The low interest rates of the ECB facilitated and exacerbated this problem.

Suffice to say, finance and debt have become increasingly critical to the economic system as it tries to ward off crisis. This may have tricked some into thinking crises were a thing of the past and perpetual growth was possible, but the reality of this crisis-ridden system is now clear to see, even if it is not widely understood.

The Irish Debt Crisis

The debt crisis in Ireland, personal and sovereign, is a consequence of the economic system. It is a consequence of the financialisation of monopoly capitalism globally and, more specifically, of Ireland’s membership of the EU and the euro currency, helped along the way, of course, by a self-serving ruling class.

Ireland, with the full knowledge and active support of the ECB, was flooded with cheap credit to serve the needs of the German economy and euro currency. Irish banks grew to be amongst the largest in the world. This cheap credit was poured into the Irish market, artificially inflating property prices and causing a property bubble that working people became entrapped in and indebted to. This property bubble has been well documented, but it is worth reminding ourselves of the absurdity of investment in this sector. Ennis, a town of 27,000, had an area plan with zoning for a population of 100,000!

While Irish banks became indebted to the larger European banks, Ireland also funnelled capital from those banks to other peripheral countries. Ireland became the fifth-largest lender in the world to Italy, Greece, and Portugal and seventh-largest lender in the world to Spain, exposing Irish banks (and now the state) to €5.1 billion of loans to Portugal, €25.3 billion to Spain, €40.9 billion to Italy, and €7.8 billion to Greece. The Irish Financial Services Centre served as an international tax haven for finance capital to half of the world’s top fifty banks and half of the world’s top twenty insurance companies.

The entire Irish economy became distorted, with large sections totally unproductive. Employment, economic growth, tax revenue, state expenditure, and personal consumption (credit cards, store credit, refinancing, loans using a mortgage as security, remortgaging) all became enmeshed with the financialisation of the Irish economy and its increasing debt crisis.

Household debt to disposable income ratio (%)6
Country 1995 2998 % increase
Ireland 48 176 267
UK 106 173 63
France 66 72 9
Spain 59 130 120
Canada 103 130 26

State debt was €47 billion in 2007, or 25 per cent of gross domestic product (GDP), but the September 2008 bank guarantee changed all that. National debt in March 2011 was over €102 billion; but general government debt – the standard measure used by the EU (this includes local government debt and promissory notes to Irish Nationwide and Anglo Irish Bank) – is €145 billion. In addition to this, the guarantee covers around €140 billion of bank debt owed to the ECB.

The EU and IMF recently revised figures to suggest that national debt will reach a peak of €210 billion in 2013 – 125 per cent of GDP. But even these catastrophic figures do not include the ultimate recapitalisation costs of the banks, as the current estimate of €70 billion will greatly increase when the domestic mortgage crisis is fully realised and banks begin to record losses on their household mortgage lending and potentially on foreign lending as well, particularly the loans to the property bubbles in Spain and Portugal and exposure in Greece and Italy. It will also increase as a percentage of GDP as growth estimates, dishonestly projected, are not realised and tax intake is negatively impacted.

The Maastricht Treaty requirement that budgetary deficits be no more than 3 per cent of GDP must be met by 2015 – revised to 2016 by the IMF, but likely to need pushing further out as the economy is nowhere near reaching growth projections and targets. It is estimated that the budget deficit for this year is likely to be 18 per cent of GDP.

It needs to be said, loud and clear: the bulk of this debt is not the state’s debt; it is not sovereign debt. It was initially private and corporate debt; it was then socialised without the consent of the people, causing a chain of events that has led to further debt being amassed and imposed on the state. This debt was incurred by finance houses and private individuals blowing up a speculative property bubble, which created huge short-term profits for themselves, while greatly distorting the economy and hugely over-inflating the price of houses and accentuating the problem of household debt.

Banks borrowed short and lent long, irresponsibly exposing themselves, yet facilitating growth in an otherwise dormant and stagnant economic system. They manipulated share prices through interbank lending arrangements and lied repeatedly about the scale of their debt. This was all supported by a number of monopoly accountancy firms and credit rating agencies. Even post-guarantee, the banks continued as before, using the guarantee to cover further undisclosed debts and new lending and continue to pay their executives grossly inflated salaries and bonuses in breach of government guidelines on pay.

The increasing sovereign debt that continues to be amassed comes with higher lending costs and the EU-IMF imposed debt. This EU-IMF debt was imposed upon the state by the ECB to protect the euro, again with no say given to the people. This debt, different in scale to other loans, came with crippling economic, political, and social conditionality that further reduced Ireland’s sovereignty to the point that little independent policy can now be pursued, even if the government desired to do so.

Given the initial 2007 figure of 347 billion, it is clear that the bulk of Ireland’s ‘sovereign debt’ is not in fact sovereign debt but rather a consequence of the 2008 guarantee policy, necessary to save the financial system and the euro, but at the expense of the solvency of this country and its people. All of this stems from the crisis of monopoly capitalism and its financialisation.

A Way Forward

It is clear we have a choice to make: a choice between (1) a self-perpetuating debt that will cripple the nation for ever; (2) default on lenders’ terms that will cripple the nation for ever with conditionality and hammer a nail in the coffin of Irish sovereignty; and (3) repudiation of the illegitimate part of the debt and building a people-centred economy.

We must make the choice and act upon it – no one else will deliver salvation for us.

GM is a trade union organiser and political activist

Notes

1 The author has requested anonymity because he fears the views expressed might be unwelcome to his employers.

2 Karl Marx, Capital, vol. 3 (London: Penguin, 1981), pp. 607-08.

3 Quoted in Phil Hearse, ‘The Third Slump and its Consequences,’ published by Socialist Resistance, available online at http://socialistresistance.org/253/the-third-slump-and-its-consequences-phi

4 C. Lapavitsas et al, Eurozone crisis: Beggar thyself and thy neighbour, available online at www.researchonmoneyandfinance.org/media/reports/eurocrisis/fullreport.pdf

5 Hans-Werner Sinn, Has Germany profited From The Euro?, available online at www.finfacts.ie/irishfinancenews/article_1020954.shtml

6 Oireachtas Library and Research Service, Spotlight, No. 3, 2010, p. 9, available online at http://www.oireachtas.ie/parliament/media/housesoftheoireachtas/libraryresearch/spotlights/Personal_Debt_and_Consequences.pdf

Copyright © The Citizen and the contributors, 2011