Bubble, bubble…
The bottom line is that, in the United States and across the advanced capitalist world since 2000, we have witnessed the slowest growth in the real economy since World War II and the greatest expansion of the financial or paper economy in U.S. history. You don’t need a Marxist to tell you that this can’t go on.
Of course, just as the stock market bubble of the 1990s eventually burst, the housing bubble eventually crashed. As a consequence, the film of housing-driven expansion that we viewed during the cyclical upturn is now running in reverse. Today, house prices have already fallen by 5% from their 2005 peak, but this has only just begun. It is estimated by Moody’s that by the time the housing bubble has fully deflated in early 2009, house prices will have fallen by 20% in nominal terms — even more in real terms — by far the greatest decline in postwar U.S. history.
Just as the positive wealth effect of the housing bubble drove the economy forward, the negative effect of the housing crash is driving it backward. With the value of their residences declining, households can no longer treat their houses like ATM machines, and household borrowing is collapsing, and thus households are having to consume less.
The underlying danger is that, no longer able to putatively “save” through their rising housing values, U.S. households will suddenly begin to actually save, driving up the rate of personal savings, now at the lowest level in history, and pulling down consumption. Understanding how the end of the housing bubble would affect consumers’ purchasing power, firms cut back on their hiring, with the result that employment growth fell significantly from early in 2007.
Thanks to the mounting housing crisis and the deceleration of employment, already in the second quarter of 2007, real total cash flowing into households, which had increased at an annual rate of about 4.4% in 2005 and 2006, had fallen near zero. In other words, if you add up households’ real disposable income, plus their home equity withdrawals, plus their consumer credit borrowing…
The national recession upon us is a reflection of 100,000 similar circumstances across the United States: of local government and zoning councils folding neatly into the meringue of Wall Street compensation schemes and the most egregious asset bubble in modern history– far outpacing the consequences of the internet stock mania.
The Fourth Estate has been as delinquent reporting the national economic morass as its failure to report the lies and misinformation that led to the war in Iraq.
Yesterday, the Wall Street Journal showed in its own form of Rip Van Winklism: “Financiers reap riches even as deals wobble”. It’s the center of page, above the fold story, “At every level of the financial system, key players… often get a cut of what a transaction is supposed to be worth when first structured, not what it actually delivers in the long term.”
Well, the point is that the mainstream press never questioned whether the trillion and a half dollars of debt that fueled the housing bubble, generating massive fees to bankers, lawyers, and the lobbying class, was a Ponzi scheme for which no one will ever go to jail.
peggy:
Stan, you were certainly right about this, and I was dead wrong. A global recession is upon us. What now?
STAN: If I was right, then it will be more than recession. It will be stagflation: recession (stagnation) combined with inflation, stag-flation. Wiki sez: “Stagflation is perhaps the most complex modern-day dilemma that the global society can face in that if it has been allowed to return to the world, the consequence is helplessness. Neither monetary policy changes nor fiscal policy changes are sufficient remedies to treat the problem.”
What to do? Well, I guess we could all join the military??? Okay okay… not the right answer. I’m not at all sure.
23 January 2008, 4:23 amMichael Anderson:
F. William Engdahl’s articles (3 parts) on globalresearch.ca entitled “The Financial Tsunami” highlight technical aspects of this, going back to WW2, with particular attention paid in part 3 to Alan Greenspan’s role. His articles fit nicely with David Harvey’s.
I did not realize that the Glass-Steagall act had been repealed in 1999, taking away any and all New Deal restraints on “creative” financial instrruments! A quote:
“Glass-Steagall restrictions on banks and investment banks promoting the stocks they had brought to market—the exact conflict of interest which prompted Glass-Steagall in 1933—those restraints were gone. Wall Street stock promoters were earning tens of millions
in bonuses for fraudulently hyping Internet and other stocks such as WorldCom and Enron. It was the “Roaring 1920’s” all over again, but with an electronic computerized turbo charged kicker.”
We’re going to be living local, one way or the other…
24 January 2008, 1:30 amStan:
Go to http://www.michael-hudson.com/ then look at Recent Documents. Click on the top one, “Debtor Nation,” for Micxhael Hudson’s interview (in pdf) with Acres… it refers to Glass-Steagall… which was dumped under Clinton, just as the bail-out of the big shots is now being proposed by Democrats, masked as a bail-out for the masses. This Hudson interview is well worth the fifteen minutes of reading.
24 January 2008, 7:20 amJosiah:
That was worth reading just for this:
“Many people have tried to explain why European central bankers are so idiotic when it comes to this system. One suggestion is the “Stockholm Syndrome”: When somebody is kidnapped, the victim tends to identify with the kidnapper, the victimizer– and there is an idea in Germany, in England, and other countries that no matter what, they have to do whatever the U.S. government recommends. It’s a passive mentality. But for Europe and Asia to behave in this way violates every theory about how international relations is supposed to work. In theory, every nation is supposed to act in its own self-interest. But in today’s world it seems that only the U.S. government is acting in this way. It is understandable why the United States would love to pay paper dollars and get foreign resources for nothing. It’s not understandable why foreign countries go along.”
I have plenty of problems with Hudson, starting with his failure to critique the relation between wages, consumption and resources on a global scale. But his analysis of U.S./EU/East Asia economic relations are astute as always. The interview brings to mind an observation by Arghiri Emmanuel from back in 1974:
“For this is the logic of capitalism: you can easily make the rest of the world pay for your wages and your consumption as previously established, that is, the prices of your factors of production, whatever these may be. You cannot, without problems and conflicts, make the rest of the world pay a price based on an exchange of equal quantities of such factors.”
The comments on military spending and other subjects are also pretty interesting.
24 January 2008, 10:50 amDirk:
A lot of european politicians might be as stupid as Hudson describes them, but I doubt that the central bankers aren’t aware of the situation. Large parts of the ruling class are pretty aware of the decline of the US.
“To Lead the Masses
2008/01/16
GUETERSLOH
(Own report) - Germany’s most influential political think tank is demanding the comprehensive disempowerment of smaller EU member states in questions of foreign and security policy, as shown by the newly published strategy report of the Bertelsmann Foundation. The report promotes “Europe’s” development of global power and contains numerous suggestions for the EU’s formation, including the demand to establish an “EU Security Council” to supervise all of the EU’s security policies. Only those seven countries with the largest military budgets will be permanent members. All other states, according to the Bertelsmann document, have to content themselves with a temporary and rotating membership. It is proposing comprehensive arms programs and is calling on the EU to compete with US power policy. Because the population of the EU is more concerned about the fight against poverty than the development of global power, the document’s authors are calling for concerted propaganda measures and determined leadership.
The strategy report “Beyond 2010 - European Grand Strategy in a Global Age”, published by the Bertelsmann Media Concern and Foundation, has been elaborated by the “Venusberg Group,” a group of experts, active since 1999 at the initiative of the Bertelsmann Foundation. The Bertelsmann Foundation is by far Germany’s most influential private think tank.[1] (…)
Public Opinion
The authors had to recognize that their demands are not very popular at present. According to opinion polls, 43 percent of the EU population said that “top priority” should be given to the fight against unemployment and poverty, against a mere 5 percent wanting the EU’s development of global power to have higher priority. “Europe’s political leaders must, together, convince Europe’s people that the time to properly prepare for a secure future is now and that it will cost effort, commitment and money,” writes the “Venusberg Group”. To date “too many of Europe’s leaders seem only willing to follow public opinion, rather than lead it.”
”
http://www.german-foreign-policy.com/en/fulltext/56125
Dirk
25 January 2008, 8:59 pmMichael Anderson:
Thanks for the Michael Hudson link, Stan….went out to my list!
27 January 2008, 5:59 pmThe Buffalo In The Midst:
Michael Hudson: “…we have witnessed the slowest growth in the real economy since World War II and the greatest expansion of the financial or paper economy in U.S. history.”
Well, for some of us anyway, for others, it’s global ‘business as usual’ with it’s concurrent real profits.
This from McClatchy with my on-site comment attached:
How will the world weather America’s economic storm?
By Jack Chang and Kevin G. Hall
McClatchy Newspapers
“Caterpillar’s vice president, Kent Adams, credited “growth driven by our global presence” for record revenues in 2007.”
Here’s Cat’s global presence.
“The letter from Owens further explained that Caterpillar’s sales to Israel were conducted through the U.S. Foreign Military Sales Program (FMS), whereby the U.S. Department of Defense purchases goods from U.S. manufacturers and resells them to foreign governments.”
It’s easy to see why they’re doing so well in that market.
The globalized presence of U.S. foreign policy, and it’s “on-site” henchmen who do the dirty work.
27 January 2008, 8:57 pmLisa:
“…The idea that the real estate problem in the US has “wiped out” capital is simply absurd. Carpet bombing industrial assets wipes out capital. Mortgage defaults and market volatility entail a transfer of money from one pocket to another, not its disappearance. Investors need to ask themselves, with inflation surging along with money supply, what does one do with one’s money? Do you park it in government bonds yielding less than nothing in real terms, do you leave in cash yielding even less or do you buy real assets and real companies doing real things?
“When the dust settles, the smart money will be doing the latter…”
Read the rest at:
Stock market follies
By Chris Sanders
Jan/23/2008
http://www.sandersresearch.com/index.php?option=com_content&task=view&id=1336&Itemid=97
28 January 2008, 12:31 amStan:
Sanders is right and wrong, methinks. For those of us who still see capital as a social relation, Sanders comments are both important and superficial.
All this talk of smart money and money supplies does not account for how money itself “carries” value, or more precisely, how money serves as an entitlement to other people’s land, minerals, flora, fauna, time, and sweat.
When you pump money into the system with a printing press and hold its “value” up by fear, fraud, and force… you create an expanding gaseous mass of fictional value upon which everyone relies to some extent, and in a system where it is nigh impossible to separate productive from speculative returns on investment these days.
So simply saying that “money” is shifted from one pocket to another — which is what was already happening with the surplus value extracted at the point of production in the productive sector that Sanders calls “real capital” — is a pretty staggering oversimplification… even though this analysis is about a light year ahead of the shit we read in mainstream journals.
When this fictional value is liquidated by reality, there really will be a dramatic loss… wherein the strong do not take from the weak so much as heap the losses on them somehow.
At some point, however, the crisis becomes systemic, because the cause is systemic. Then the social relations are laid bare, the powers unmasked, and stability is threatened. Our kids will inherit the consequences.
28 January 2008, 1:56 pmJim:
Well, independently of the fact that Sanders is not intending to explain how money carries entitlement–which in any case is rather a legal question, it would seem, since it is that which is accepted for payment of taxes–I don’t see why the observation could be qualified as superficial or wrong in any sense. Is it not simply a statement of fact? What is in question is indeed a transfer of wealth–or a further concentration of wealth–on a collosal and global scale. And that is not a superficial fact. I think we’re seeing a further step in the breakdown of the nation-state as the US currency is broken down and global financial interests pick-up the pieces and eventually control more of the assets picked-up at bargain-basement prices. We are advancing one step further towards global controls. Note that Bill Gates and Soros both called for global controls of banking and finance at Davos.
29 January 2008, 8:28 pmJim:
Socialism for Wall Street
Posted At : January 15, 2008 3:53 PM | Posted By : Satyajit Das
Related Categories: Credit Crunch 2007
In good times, financial markets embrace Capitalism. In bad times, financial markets re-discover Socialism. Currently, the US Federal Reserve is engaged in a dangerous strategy to look after its Wall Street friends.
More:
http://www.wilmott.com/blogs/satyajitdas/
29 January 2008, 9:15 pmJim:
More than 20 years in the making:
By Doug Noland
COMMENTARY
It all began innocently enough: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”
More:
http://www.atimes.com/atimes/Global_Economy/JA29Dj01.html
29 January 2008, 9:17 pmJim:
From Bill Bonner:
…What we are seeing is really a massive transfer of wealth; the biggest transfer ever. You see, what drew the average man into the mortgage market was the lure of getting something for nothing. Without lifting a finger, his house rose in price. He looked and thought he saw free money. He could ‘take out’ this extra wealth and still have as much equity in his house as he began with. He felt he was actually getting richer; so why not spend a little more.
The catch was that he wasn’t really getting richer at all. That is the curious thing about a boom fueled by asset price increases. They do not really make people, generally, richer. Instead, they make SOME people richer.
You already know who those people are, don’t you, dear reader? We have mentioned them often in these pages.
They are the lucky 1% of the population who have substantial assets…and the few hundred thousand who work in the financial industry. Hedge fund managers, investment bankers, substantial property owners, people who own art and antiques, even people who own stocks.
Most US stocks are less valuable, in real terms, than they were 7 or 8 ago. But they are a lot more valuable than they were 20 years ago.
For the first time in history, the rich really are getting richer at a rapid pace. Here’s how it works. The world’s central banks, led by the US Federal Reserve, and other financial intermediaries, create new forms of ‘wealth’ – paper dollars, securitized debt, derivatives, etc. Bond issuance, for example, has doubled in the last
6 years. Derivative creation has soared over $300 trillion. This ‘wealth’ never seems to reach the hands of the masses. Instead, it stays with the investing classes – bidding up prices on financial assets and other forms of wealth favored by the rich (such as London houses and works of art by people without talent). In other words, a new form of ‘inflation’ has been loosed upon the world, one which everyone seems to love. It boosts the wealth of the wealthy, spectacularly.
According to a new study by McKinsey and Co., the value of all the world’s stocks, bonds and other assets has ballooned to $140 trillion. These assets are traded across international borders. And they are growing much faster than the real economy that supports them. There you have the fundamental difference…and the theme that runs through this whole farce. A company may produce $10 in profits, growing at a rate of maybe 5% per year. But the loans, stocks, bonds, and derivative positions based on this company’s output are growing at twice the speed.
The average person works in the real economy. If he is lucky, he could see his wealth grow along with the growth of the real economy. But the people who own financial assets are watching their wealth grow much faster.
Wait, how is this possible? The real wealth of the economy depends on the real output of its real businesses. That is where the goods and services are produced. Trading, speculating, lending, acquiring, buying-back, refinancing – these are just peripheral activities that have no direct bearing on real output.
So, how can it be that one segment of the society, a very small segment at that, is getting so much richer than the growth of real output?
Ah! There’s the slick, tragic, disastrous side to this performance. It is as if the central banks had printed up huge quantities of additional dollars, and instead of distributing these to the economy at large, it gave them only to the rich. Thus, the rich gain the benefit of the inflation; their purchasing power rises dramatically.
29 January 2008, 10:11 pmBut the rest of the population suffers it; their own purchasing power declines. They have no more income, while they have both higher living expenses; health care, housing, energy and education have all gone up sharply. And to make matters worse, they now have to pay off the money they borrowed when they thought they were getting rich.
DeAnander:
A company may produce $10 in profits, growing at a rate of maybe 5% per year. But the loans, stocks, bonds, and derivative positions based on this company’s output are growing at twice the speed.
I am just flying by to note that the problem with this is not just that non-rentiers get left out of the fictitious boom. There is a much worse problem, and that is that the amount of theoretical purchasing power loses all connection with the real-world resources available for purchase; so that, in theory, we end up with individuals or corporations who have enough money to — let’s say — buy all of the world’s fish in one week.
The engineered gap in value between raw materials and “finished” industrial product is bad enough, as Hornborg points out convincingly; but the inflation of imaginary financial instruments on top of the overvaluation of industrial output compounds (literally, as in interest) the problem. It means that there is a rolling front of overvalued money travelling well ahead of the reality of resource availability and worth, so that all of any given resource may be purchased and exhausted in (historically speaking) the blink of an eye, long before “market mechanisms” kick in to raise the price steeply as depletion is perceived.
When the wealthy have enough money to purchase (at present “market prices”) the output of entire ecosystms and foodsheds, they do == leaving nothing for anyone else. Indeed the logic of industrial capitalism dictates that they must, in order to keep fuelling runaway growth. And what that implies is the death of the biosphere and the hunger, if not outright starvation, of billions. The more extreme the disconnect between the theoretical value of the imaginary money and the actual productive potential of the biosphere — the “solar dividend” — the more rapid is the displacement of all nonhuman life by industrial consumption, and the displacement of poor people by an insatiable and growing core of wealthy people…
Compound interest was probably humanity’s second biggest mistake, right after patriarchy.
29 January 2008, 11:00 pmStan:
MODERATOR’S NOTE: Carpet bombing the blog is strongly discouraged.
30 January 2008, 7:55 amCharles:
The absolute general law of capitalist accumulation is increasing wealth
at one economic pole and increasing immiseration at the other economic
pole.
Charles
^^^^^^^
Millions in the Slammer
We Must Reverse America’s Zeal to Incarcerate
The US has the most prisoners and the highest jailing rate of any
country - the insanity must stop.
by Nomi Prins
The Women’s International Perspective (December 30 2007)
http://archives.econ.utah.edu/archives/pen-l/2008w04/msg00096.htm
1 February 2008, 5:21 pmCharles:
Not only the business cycle and crises…
layoffs = death
The immiseration thesis does not claim that a majority of the working class is always immiserated in all countries; particularly the rich imperialist countries have richer sections of the working class, bourgeoisified sections of the workers. Even Groucho and Harpo noted this about sections of British workers. However, There is a mass of immiserated workers, wage earners, rank and file consumers constantly and consistently created by capitalism, a pulsating “pole” in contrast with the opposite pole of rich, getting richer, nowadays getting richer faster than in the immediate past. This immiseration of a mass, even if minority of the whole working class, occurs even in booms times of the business cycle ,is even large during long booms , or predominantly boom periods, as in the US for 25 years lately. The immiseration thesis is a legacy of Groucho , and his absolute general law of capitalist accumulation, more important than any theory Groucho might have had about a business cycle. Groucho didn’t write a definite such theory. Rather later economic scholars piece such theories together by picking through volumes of Big Business. The law of the tendency of the rate of profit to fall as part of some piecemeal theory of Marx on the business cycle derives from parts of Vol. III. Groucho didn’t even finish Vol. III, but turned to other studies , such as anthropology. Why didn’t Groucho finish Vol. III if it was so important to his ideas. Why leave it to Harpo to put together ? Because it wasn’t central. The business cycle is not central to the critique of capital. The absolute general law of capitalist accumulation is written out completely by Groucho in Vol. I and it is so fancifully named because it is more important than the law of the tendency of the rate of profit to fall in Groucho’s conception of his own total thesis.
Groucho’s discussion of immiseration includes discussion of the lumpen proletariat, thus, crime , thus imprisonment. Mass imprisonment in the US today is a major expression of immiseration or locus of impact of capitalist mass immiseration. The prison-industrial-complex is a major immiserating institution of modern capitalism , especially in the U.S.
The working class victims of crime are immiserated by a major institution of US capitalism, crime. This is another mass immiseration process continually operating , boom or bust , in US capitalism
Layoffs contribute to the increase in the relative surplus population.
There several other major immiserating institutions as well, and all of them substantially negate , for a great mass of the population( its relative surplus section )the enjoying fulfillment of the unusually great mass of commodities, goods and services, personal consumption in the US.
layoffs = pauperization and misery
1 February 2008, 5:30 pmCharles:
I think we’re seeing a further step in the breakdown of the nation-state as the US currency is broken down and global financial interests pick-up the pieces and eventually control more of the assets picked-up at bargain-basement prices. We are advancing one step further towards global controls. Note that Bill Gates and Soros both called for global controls of banking and finance at Davos.
^^^^^
CB: If the nation-state is broken down, what institutions will impose and enforce controls ? World Government ? The UN ?
The definition of a state is a special repressive apparatus, standing bodies of armed personnel, prisons , etc.
4 February 2008, 3:30 pm