Overaccumulation and the Current Crisis
DO the theoretical expositions in Capital tally with the actual working of capitalism today?
Behind the familiar crisis symptoms – we learned in our brief dialogue with Marx – lurks a complex interplay of myriad forces, the most important being the tendency of the average rate of profit to fall with rising organic composition of capital and increasingly skewed distribution of income and wealth. There is no dearth of data supporting this: data showing, for example, falling profit rates and stagnant/declining wage levels vis-à-vis corporate profit explosion in recent decades.
Marx also shows that capital’s frantic endeavour to overcome inherent constraints like mass poverty and inadequate demand leads to artificial credit-induced expansion. But this false prosperity built on debt always bounces back in the shape of sudden contraction or crisis, much like a rubber band getting stretched and snapping back. This phenomenon, witnessed much more vividly today than in Marx’s time, is called a bubble – something that is empty and without substance; a hollow growth that is transient by definition. Bubbles in other words result from efforts to “grow the economy” by means of debt, faster than is warranted by the underlying flow of new values generated in production and get deflated sooner rather than later.
Such was basically what happened in the “roaring twenties” that ended with the Wall Street crash of October 1929. But the more sophisticated and widespread the credit market, the greater is the degree to which “forced expansion” (as Marx called it) can be induced and the more devastating must be the inevitable crash whenever it comes. This is precisely what we see today.
Why Bubbles Burst: US Experience
As a strategy to counter the economic slump that started in 1970s, the working people of America were encouraged – or goaded, if you will – to keep up their consumption levels with easy credit made available through aggressive credit card promotions, new and reckless mortgage practices, and other means. This policy had a great political benefit too: the enslavement and immobilisation of the proletariat in credit chains. In fact a good many workers in the US find themselves practically incapable of going on strike because they are “just one check away from homelessness”, which means that if they do not get wages even for a month, they stand the risk of mortgage foreclosure, i.e., losing their mortgaged homes.
As Lenin showed in “Imperialism and the Split in Socialism” long ago the imperialist bourgeoisie had devised the tactic of creating a stratum of workers’ aristocracy in their countries by bribing the latter with small fragments of super profits earned in colonies, i.e., by paying them relatively better wages. Today they have improved the tactic further. They now give out huge loans while restricting wages, imposing on the workers a modern version of debt bondage and, with that, the ideological enslavement of consumerism. The “American way of life” ensures high demand for all sorts of consumables and the US economy keeps running with astronomical current account and fiscal deficits – with borrowed money, that is.
The collapse into recession was thus delayed no doubt, but at the same time and in the same measure the latter was made more inevitable and more intense. As of November 19, 2008, the total U.S. federal debt was $10.6 trillion, about $37,316 per capita. The catastrophe had to strike, and did strike. A premonition was felt when the “dot-com” or “New Economy” stock market bubble burst in 2000. The US economy went into recession and it was weakened further by the 9/11 attacks. In order to allay the fears of financial collapse, the Federal Reserve lowered short-term interest rates. But employment kept falling through the middle of 2003, so the Fed kept lowering short-term lending rates. For three full years, starting in October of 2002, the real (i.e., inflation-adjusted) federal funds rate was actually negative. This allowed banks to borrow funds from other banks, lend them out, and then pay back less than they had borrowed once inflation was taken into account.
This “cheap money, easy credit” strategy created a new bubble – this time based in home mortgages. This “great bubble transfer” involved a further expansion of consumer debt and an enormous profit explosion in the finance sector achieved through extension of mortgage financing to riskier and riskier customers. There were lots of what insiders call “ninja” loans — no income, no job, no assets.
Monthly Review editor J. B. Foster gives us a penetrating analysis of the whole process:
“…the theory [was that] new “risk management” techniques had devised the means (hailed – bizarrely – by some as the equivalent of the great technological advances in the real economy) with which to separate the weaker from the stronger debts within the new securities. These new debt securities were then “insured” against default by such means as credit-debt swaps, supposedly reducing risk still further.”
But this proved illusory. The payments on sub-prime debt faltered, slowly at first, then in a massive way. The other side of the problem was that, “as a result of the completely opaque securitization process, no one knew which debts were bad and which were good. Credit markets froze because the banks and other financial institutions were ceasing to lend since the borrowers could not be counted on to pay them back….
“Under these circumstances, no matter how many hundreds of billions of dollars in liquidity were poured into the financial sector, nothing happened. All those with money, including the banks, were hoarding. The U.S. was printing dollars like mad and flooding the financial sector with liquidity, but rather than loaning out money capital the banks were stuffing it in their vaults, or more precisely using it to purchase Treasury bills, creating a kind of revolving door that negated the attempts of the government.” For the time being “a complete meltdown” was prevented “by injecting capital directly into banks in return for preferred stock (a partial nationalization of banks), guaranteeing new debt of banks, and increasing deposit insurance.
A Dialectical Approach to Crisis
Thirdly, Marx and Engels taught us to understand crises from the standpoint of historical materialism and revolutionary dialectics. On the one hand, crises are not only not avoidable, they are essential to the law of motion of capital. They constitute capitalism’s inbuilt mechanism for spontaneously and ruthlessly eliminating excess or over-accumulated capital, so that “the cycle would run its course anew”. On the other hand, they achieve this in a manner that paves the way for more extensive and more destructive crises, and diminishes the means whereby crises are prevented (Communist Manifesto) and leads finally to the “violent overthrow” of the rule of capital (Grundrisse).
However, the exact trajectory of this progression depends on the peculiar features and severity of a particular crisis as well as other attending factors, both economic and political. The fierce fight among capitals (big corporations) and national blocks of capital (nation states) that a crisis engenders may, for example, lead to local or global wars. Thus the GD was overcome in the normal course by the mid-1930s only in part; for the rest, it produced fascism and led to – or should we say merged into – the Second World War. What will happen this time round nobody can tell at this point in time, but certainly we can indicate some special features, broad trends and possible scenarios.