Surplus countries of the Euro-zone do not seem willing to either limit their excessive surpluses (by increasing the wages of their employees, so that domestic demand will increase), or to transfer «resources» to the members running a deficit, nor are they willing to «mutualize» public debt, or allow the transformation of the ECB into an actual central bank of the Euro-zone (Euro-bonds, direct purchasing of bonds from member states etc.).
As a result, the vicious cycle of banks «rescuing» states and, later on, states rescuing banks will perpetuate – thereby....
ultimately increasing the debts of both. It is therefore reasonable to assume, that the particular «un-natural» process has an expiration date.
In this context, it is justifiable to believe
that, unless radical changes come into effect, sooner or later an unprecedented
twin explosion will occur – an explosion of states and banks simultaneously,
the size of which will be increasingly devastating the more it is being
artificially postponed. The ones blamed are not going to be the economic elite
– which essentially governs from the backstage.
While hoping to be proven wrong, concerning the
above «predictions», it seems appropriate to go through some details again:
ANALYSIS
’’In the Nordic countries, Germany, the
Netherlands and France, a different economic «mixture» was preferred after the
mid 20th century. Its vision could perhaps be summed up in the idea that capitalism
is the only system available that can work – but only with the strong presence
of the government’’ (R.Heilbroner, 1919-2005, American economist and
historian of economic thought).
Is capitalism in reality, one wonders, despite
its promises to generate wealth for all, eventually making the rich richer and
the poor even poorer? Can growth be achieved without the creation of
inequalities – that is the widening of income differences between the upper and
the lower «social layers», whether they are individuals or entire nations?
Stated even simpler, can rich people get richer, without the poor becoming
poorer – without the one side «growing» at the expense of the other?
Furthermore, does the vast majority really need
a «smaller state» (reduced government interference), as many liberal economists
believe it would be to the benefit of society, putting all their faith in the
skills/uprightness of the private sector or would it rather benefit from a more
qualitative, less costly or corrupt, and more transparent state, regardless of
its size (especially when political power, is the only protection against
financial power)?
And are economic crises, the frequency of which
have increased dangerously, the necessary «companion» of the capitalistic
process, as well as the «creative destruction» (Schumpeter, 1883-1950,
Austrian American economist and political scientist), or is there a way to
avoid this, by appropriately regulating the free market system? How much longer
will humanity be able to withstand the markets «depressive» behavior, meaning
the continuous rises and falls, the «oscillations» which expand more and more,
from the lowest end (recessional debt downsizing) to the maximum end
(development indebtedness)?
Finally, is it objective to believe, that the
«invisible hand of the market» (as Adam Smith named it), if released, creates
wealth in the real economy (Main Street), and brings destruction to the
financial markets (Wall Street)?
It is obvious, that an honest answer to all
these questions is not an easy task, as long of course one remains a supporter
of the free market theory – both of the non-centrally directed, as well as that
of the non-monopolistic. Especially when realizing that the circulation system
of the economy, or otherwise money, is generated through credit – thus from the
creation of debts, with all the problems this entails.
However, it is vital for these questions to be
answered, even if the answers cannot be properly documented or the questions
completely covered. Especially since it is by now clear that we are
experiencing an unprecedented massive global economic war – with the ones
«feeding» it being the financial markets, which seek their authoritarian
establishment in global governance, with the complete privatization of power.
THE BIGGER STATE
Before the financial crash and the Great
Depression of 1930, the levels of national income in the U.S. were, without any
doubt, impressive in overall volume. But by taking a careful look, one would
determine that the country benefited very unevenly from the distribution of
this generated wealth. The approximately 24,000 families at the top of the
social pyramid reaped three times more income compared with 6,000,000 families
characterized as being part of the Pyramids base – while the average income of wealthy
families at the top was 630 times larger than the income of families at the
base (source: R. Heilbroner).
Unfortunately, this was not the only problem at
the time. Forgotten on the sidelines of the excitement created by the belief
that Capitalism was to generate unlimited prosperity («Everyone should become
rich», were the words the President of the democratic party back then
articulated), were two million unemployed citizens, while hiding behind their
classical, marble facade, banks went bankrupt at a rate of two per day – for
six whole years before the financial crash.
The average American back then, used his
prosperity in a self-destructive manner. He had taken on too many loans, was
also dangerously exposed to the market «sirens», buying products with
installments and had sealed his fate by entering the stock market – engaging in
stock purchases made not with his own money, but with bank loans. The tragic
developments may have been inevitable, but even so not predictable, since
rarely a day went by, without some personality of the days, assuring the nation
for its prosperous condition – among them prominent economists, academics,
businessmen and politicians.
Between 1930 and 1970, i.e. after the Great
Depression (which unfortunately led to the second world war), income
inequalities in «western» economies narrowed considerably – in complete
contrast to the latest decades (after 1970). In 1928, the U.S. richest enjoyed
5% of the country’s total income – forty years later, in 1970, their wages did
not exceed 1% of it (today, they have increased again, as a result of the
«reverse» policy adopted in recent decades).
During the same period, the power of labor
unions was increasing steadily, granting them the ability to continuously
negotiate higher wages for workers – who in this way participated in the
additional revenue generated both by the growth rate and an increase in
productivity. This «conditions» where of course largely the result of
government «provisions», which actively participated in both the redistribution
of income and unemployment reductions – mostly through public investments
(Keynes) and tax law reforms.
Governments generously increased spending on
social services, funded to a great extent from income generated by the rich. In
Great Britain, the highest tax rate was close to 83% – a rate more than double
of that today, and much too excessive to hold. The state was making large
investments in social care and education, while also funding college education.
In the contrary, as far as the financial
markets are concerned, the situation was completely dampened – with minimal to
nonexistent profit opportunities. The international flow of capital was
strictly controlled, the financial «products» limited, while bank executives
(the equivalent of today’s Golden Boys), were rarely earning more than their
peers in other business sectors. At the same time, neither citizens, nor
governments were seeking to engage in borrowing – since spending was not in
excess of income.
Unfortunately, at some point logic was lost
completely, driving the system to its limits. Tax rates increased excessively,
while unions were demanding ever higher wages, which ultimately triggered an
inflationary spiral circle – at the same time, continuously ongoing strikes
undermined business operations, leading the economy to a dead-end.
On the other hand, with social benefits
exceeding reasonable limits, unemployment benefits sometimes even surpassed
salaries, reducing work incentives. In the end, the international currency
system collapsed, leading to the «hatch» of the Chicago school – with the Nobel
laureate economist Robert Lucas (born 1937, American, University of Chicago)
demanding for the complete change of the system.
’’The redistribution of income, strict rules on
markets and high tax rates, mean death to the free economy’’, as Robert Lucas documented his thesis,
continuing: ’’Whoever is forced to be taxed on a large portion of his
income, as well as whoever can rely on assistance from the state, has little
incentive to work, invest or finance his college studies… Inequality is the
basic prerequisite for growth and wealth generation while, by a dynamically
growing economy, even the poor benefit… The tide lifts all boats’’ (note:
the translation was based on Greek text, therefore minor variations to the
exact words of Robert Lucas might be found).
Both R. Reagan and M. Thatcher based their policies on these theories, in an effort to «reduce the state» and to neutralize the unions. When they finally succeeded, privatizing enterprises and selling public property (British public property nowadays consists only of a bridge on the Thames, since governments have sold everything, but even so the country’s total debt exceeds 500% of its GDP), inequality soared – because the market never seeks for equality on its own.
So as it turns out, the
markets dis-proportionally reward the rich, helping them, among
others, to charge high interest on their capital. They also reward those with
special skills, inherited or acquired, as well as those who have been fortunate
enough to work in growing sectors. Essentially therefore, they are «punishing»
all the others, which are characterized by limited skills, poor ancestors or
who have been unfortunate enough to train in a profession for which there is no
demand at the time.
Specifically, the period after the abolition of
the gold standard (starting in 1971), was undoubtedly extremely profitable for
the capital owners – for all of those who were considered to be rich or
capable. Both their income and «portfolios» were constantly growing – as proven
by the fact that, if in the 70’s an American had a total net worth equal to 75
Million Dollars, he belonged to the 400 richest people in the country, while
today more that 1 Billion Dollars of net worth are required to fit that position.
In contrast, the same period was of rather
neutral importance to employees, since the annual income of an average American
worker was $ 45,879, remaining almost stagnant until today ($ 45,113, with data
being «deflated»). In Germany, even during the period of high growth between
2004 and 2008, when corporate profits jumped dramatically, the average wages of
workers significantly narrowed, instead of increasing (a situation that
contributed to the improvement of the country’s competitiveness, to the detriment
of its citizens and its European partners).
In Greece, wages were little changed after
2000, despite the country’s relatively high growth rate – which explains the
sharp downturn that followed the arrival of the IMF. In Great Britain, special
fees (Bonus) for executives in the financial industry surpassed all previous
records, while the wages of all the other workers remained at previous year
levels.
Of course in developing economies poverty
reduced in absolute terms, but social differences increased dramatically – and
once again the big loser’s here are workers, while the «winners» are those who
had bet their income on capital «commissions». In China, 10 years ago, 50% of
GDP was spent on wages and salaries – recently it was reduced to 40%. In India,
mainly high income groups benefited from the economic reforms of the 90’s –
while in Brazil, after the invasion of the IMF, the rich live in fortified
areas and sheltered apartments, to protect themselves from the many poor.
According to a recent study conducted by the IMF, ’’Inequalities have increased
in all countries, except perhaps in the poorest nations of the planet’’.
The common «political» feature of this period
was undoubtedly, as was mentioned in the beginning, the predominance of
the neoliberal doctrine of the Chicago school, in the reforms that were carried
out by R. Reagan in the U.S. and M. Thatcher in Britain.
Concluding, the «limiting» of the state and the
privatization of all public enterprises, as well as the sale of state assets,
predominated – with documented (historical) results being, the state and
household indebtedness, keeping wages steady, the neutralization of unions,
increases in corporate profitability, the emergence of monopolies
(multinationals), continuous «attacks» by the IMF, as well as the omnipotence
of the idle, speculative capital – meaning all kinds of financial «markets» by
that.
THE DOMINANCE OF CARTELS AND BANKS IN EUROPE
The budget deficits of European countries have
increased 8-fold in 2010, compared with 2007, reaching
-581 Billion Euros, from -60 Billion Euros previously.
Of these, -360 Billion Euros are attributed to the five most dangerous «countries
of the South», which quadrupled their deficits in just three years. According
now to the prevailing view of Euro-zone governments, accountable for these
outcomes are solely the countries themselves, that were proven incapable of
managing their own financial problems – despite the fact that in many of these
countries, like for example Greece, the annual interest charges are now
approaching nearly 30% of government revenues.
Continuing, the Euro-zone private sector in
2000, the multinational companies in particular, had reached a combined funding
deficit of -202 Billion Euros. Ten years later, in 2010, the deficit had
converted into a surplus of 82 Billion Euros – of which, 55 Billion Euros of
surplus was attributable to German companies, which in 2000 had a deficit of
-129 Billion Euros. Across the European Union as a whole now, the total deficit
of businesses, around -346 Billion Euros in 2000, converted into a 300 Billion
Euros surplus (source: Ringier AG, CH. Ringier is a major media company in
Switzerland, Zurich It publishes over 120 newspapers/magazines. It
was founded in 1833).
In 2000 now, European (multinational) companies
were financing their investments in a natural way – partly from their equity
capital, as well as from credit obtained by banks. Today, these companies are
practically receiving 300 Billion Euros in excess of what they spend on their
products, wages, taxes and investments – since their balance sheets show a
surplus of this amount («over-charging» their products obviously). At the same
time, they sell goods valued at 300 Billion Euros on credit.
Since these companies now have increased their
receivables (company demands), and at the same time reduced their payable’s
(debt), states or households then have either increased their debt levels
or decreased their savings levels. In reality, household savings halved between
2000 and 2007 – from 170 Billion Euros to 84 Billion Euros.
Furthermore, since the beginning of the crisis,
the private financial sector surpluses increased by 500 Billion Euros in the 27
member EU – with the corresponding deficits burdening the state coffers. This
of course is not surprising, since governments, for the first time in history,
took on the bad debts of banks (indirectly reinforcing the profitable ones), while
at the same time funding efforts to reinvigorate the economy.
To conclude, this development did not work
equally in all countries, since in those that experienced an increase in wage
levels, along with an increase in productivity (Greece, Spain, etc.), effects
on corporate profits were very little. On the contrary, in countries like
Germany, where real wages dropped considerably, company profits increased, and
so did the external account balance surpluses. At the same time, Germany
increased its credit levels towards the importing countries of the South
running a deficit – a situation that will be proven rather painful for the
country’s economy in the future (bad debts).
The global economy, despite the «treatment» it was put through by Reagan-Thatcher, did not grow faster compared with the previous period – meaning, it has not benefited from the privatizations, the liberalization of markets and the «opening» of closed professions.
And in stark contrast with the «new world
order» of the Anglo-Saxon School, some of the richest countries of the world,
Scandinavian, still maintain high tax rates and a large state – with public
employees constituting up to 30% of the total work-force (about 12% in Greece).
How do we justify this?
According to many, most people are not working
for the sole purpose of generating money – but out of interest for their job,
as well as for public «recognition», both of their personality and the
work-service they provide, by the social environment. These same people believe
that the «key» towards acquiring true wealth is access to a better education,
social stability and the quality of infrastructure – elements far more
important than incentives, that stem from the «hunt» for profit and from large
income differences.
Also, quiet often one hears that the major
technological progress, as well as globalization, are continuously generating
inequalities. However, these conclusions are not as obvious as we had assumed
in the past – especially since in countries with high technology and open
borders, as for example in the «open societies» of Sweden and Finland,
inequalities are very limited.
The use of machines, as well as the free
exchange of goods and services without tariffs or other «state-imposed»
obstacles, certainly contribute to the elimination of job positions – creating
others though, in «new» areas. Of course the government can rightfully engage
in actions, that would help avoid income inequalities – so that not only some
citizens benefit from growth, but all together (Table I):
TABLE I: The «distribution» of income in selected
European countries
Source: Eurostat
Table: V. Viliardos
Note 1: The development of income disparities between
the richest 20% and the poorest 20% of citizens where, for example, the index
3.7 means that the income of the richest 20% of the population of a country is
3.7 times higher than the income of the poorest 20% (on average).
Note 2: The index for China was 8.34 in 2005 – 8.96 for
Russia in 2007 and 8.42 for the U.S. in 2000 – in the EU-27, the average ratio
was 10.13 in 2008, facts that highlight the huge imbalances between European
countries (Source: F.E. Stiftung, the Friedrich Ebert Foundation, a German
political foundation established in 1925).
Continuing, there are of course economists who
also argue that the high concentration of wealth in few, is disastrous for the
growth of an economy. The higher the income levels, the more one saves and the
less the demand for consumer goods. According to Schopenhauer:
’’People who have not inherited a fortune, but
manage to earn money using their personal abilities and skills, almost always
succumb to the illusion that their talent is the capital stock and therefore
the money they acquire through it the interest – and so they don’t save part of
the acquired wealth, in order to generate a capital, but rather spend
everything they earn. On the contrary, anyone who has grown up in inherited
wealth, has learned to separate what is capital and what is the interest,
safeguarding his property with his own life – and therefore remains neat,
careful and thrifty’’.
Furthermore, the U.S. tried to fight the
concentration of wealth in few (a phenomenon they themselves created, thus
reducing consumption levels because of the low salaries the majority of workers
earned), with the help of the «consumer» loans given mainly to lower income
classes (instead of taxing heritage and the rich). But as we all know, these
efforts led to the enormous global crisis we are experiencing today, which
began with the purchase of property on credit, aiming at reselling it at a
profit, so that consumption would increase – until real estate prices
collapsed, making it impossible to pay-off the loans to banks.
So one can only wonder today, whether the
massive «attack» against the welfare state was necessary from an economic
standpoint – or whether a simple correction of the 1970′s excesses would have
been enough, excesses largely caused by labor unions.
Either way, it has been historically proven,
that capitalism can survive both under a larger and a smaller state. The
question or better stated the issue of the ideal income distribution, is
therefore essentially not relevant to the economy, but to Politics – although
today’s politicians do not seem to be able to assume their responsibilities.
After the prevalence of the «smaller state»,
that we described earlier, the «invisible hand of the market» was released from
its «bonds» and began moving undisturbed/unobstructed, the same way it did
before the 1930s, in the financial market.
Shortly after, two devaluations of the dollar
followed, with the famous «oil shocks» of 1973 and 1979 – accompanied by
intense, devastating recessions. The interest rate levels exceeded the growth
mediums, while modern financial products, namely derivatives of all kinds, but
all the other «products» as well (credit cards, consumer loans at loan shark
rates above 20% etc.), led to the «trend towards higher profit hunting», i.e.
from the production of products to speculation. Table II below is typical:
Table II: The development of the U.S. public debt in
Trillions of Dollars, Public debt as a percentage of GDP, deficit/surplus in
Trillions of Dollars
*U.S. government predictions.
Source: Spiegel, Germany
Table: V. Viliardos
Note: The household debt of the country approaches 14
Trillion Dollars (100% of GDP), and has increased 20 times, compared with the
1970′s.
The industrial groups, which marked the growth
after the 1930′s, focusing on the production of real products, «mutated» into
financial «beasts». The banks, that up till then were at the service of the
real economy, transformed into «money alchemists». Simply stated, the «miracle»
of economic growth after 1980, took place in the financial world – with
increased lending, as well as with the constant shrinking of «real world
business», i.e. the businesses that produced goods and services (a gap that
China eventually filled – the country that is currently being characterized as
the production engine of the West).
The theoretical explanation of this undoubted
fact, according to which the «invisible hand of the market» generates wealth in
the real economy, but causes destruction in the financial (economy), is rather
obvious. For example, when demand for a product increases, its price rises – as
well as the profit motive for the «manufacturer». What happens next, is that
the entrepreneur increases the quantity produced (or new businesses enter the
market, because of the positive profit outlook), the supply that is, and
therefore the price decreases – while the balance between demand and supply is
restored.
But when demand increases in financial markets
(equities etc.), followed by higher prices, supply cannot be increased – since
the quantity of shares is usually limited (of course markets use certain
«tricks», such as «splitting», i.e. the production of two or more shares from
one initial – the company though remains the same). Also, when demand for
shares increases, brokers and financial advisers usually recommend a
«buy» – so, instead of an increase in supply (as would happen in real
products), demand increases even further, and with it, the prices once again.
These conditions result in twisted price
developments of stocks, raw materials, interest rates and currencies,
developments that eventually lead (mid to long-term) to upward or downward
financial markets – in other words to depressive price fluctuations, instead of
normal and balanced ones.
The second reason Adams Smiths’ «invisible
hand» operates destructively in financial markets is, that in these markets no
products are created nor any real value – but there is simply a redistribution
of business generated value, among participants. In
this «game», those who have the most information available (Goldman Sachs, BIS,
Hedge Funds, etc.), let alone «internal/insider» information, always win, while
the rest usually loose – from amateur «investors» to large pension funds.
The financial markets make it possible to
effectively disperse risks, those they themselves generate. And with the
ever-faster speculation tools (online trading – casino) available, they
eventually manage to destabilize stock prices, commodity prices etc. –selling
at the same time new «investor insurance» products (CDS etc.), that are
supposed to protect «investors» from dangers they themselves cause, thus
obtaining double profits. The developments in Greece and Ireland (many others
are to follow, like for example Spain, Belgium, Britain, the U.S. etc.), are
«exemplary»:
The markets, by «betting» on Greece’s
bankruptcy, caused an increase in the country’s borrowing rates (above 10%). In
this way, the chances of a bankruptcy magnified – so the «markets» now, not
only gain from higher interest rates, but also from products they sell (CDS,
etc.), to «protect» their clients from the risk they themselves create. At the
same time, they borrow money from the ECB at a rate of 1% – and use that money
to buy government bonds, with yields close to 10%. Now if they happen to lose
their money, then they simply ask for state assistance – i.e. financial aid
«billed» on taxpayers, the same people they just tried to rob.
Finally, the funds gathered from citizens of
indebted countries, i.e. from workers and businesses, with wage reductions,
taxes and other sacrifices, eventually go, through interest rates, to these
financial beasts – and as a result, public debts continue to grow.
In reality therefore, the problem are the «loan
shark» interest rates – as well as the willingness of «people in charge», to
compensate the «markets» for dangers they themselves create, in order to
speculate. The political elite do not seem to understand, that the «invisible
hand of the market» generates «falsified» prices in the financial system –
since, in stark contrast to the real economy, it is unable to work in balance, i.e.
to obey the laws of supply and demand.
This twisted functioning of the financial
markets further increases insecurity, to the detriment of business initiatives
– while all the turmoil and the economic crises since 1970, are directly linked
to the instability these unregulated markets as well as the monopolistic,
multinational hyper-businesses, generate.
The only solution to the systemic crisis we are experiencing today, as far as the «markets» are concerned, is the regulation and limiting of the financial sector – in order to drive back the healthy tendency towards profit generation in the real economy and businesses, that produce real products, vital for both our survival and the betterment of our quality of life.
An even better solution would most certainly be
the nationalization of the markets – namely, the nationalization of both large
banks (first and foremost the Bank of International Settlement/BIS, which is
an international organization that serves as a bank for central banks and is
currently not accountable to any single national government), as well as
national stock exchanges. This would ensure the proper functioning of the
financial system (flow of funds to the real economy, rational consumption,
realistic borrowing etc.) and would radically confront the dependence of states
on greedy, dangerous and depressive markets.
As far as the multinational monopolistic
businesses are concerned (cartels), which are also responsible for the current
systemic crisis, since they drain off national economies, it is necessary to
set limits on their sizes – in principle, with the proper operation of the
commissions responsible for issues relating to fair competition, which have
rather weakened, if not distracted completely from the original purpose of
their establishment.
Moreover, governments should not privatize in
any way public utilities (electricity, water, telecommunications, etc.), which
ought to remain in their property – operating of course with absolute
transparency (Financial Statements posted online etc.), so that they can be
controlled by responsible citizens.
Closing, we must point out to workers, that a
smaller state (privatizations etc.), means limited social benefits, as well as
lower wages for them. On the contrary, a bigger state, translates into higher
wages and more social benefits – up to the point, of course, when their demands
would «threaten» to overpass the capacity of businesses, opening the «Pandora
Box» (as happened 40 years ago and we still continue paying our dues for it).
Therefore instead of wasting their energy on
criticizing the state deficiencies, essentially playing the game the «markets»
set for them (setting various social groups into opposing camps and dominating,
by means of «divide and conquer»), it is rather wiser to contribute actively to
the good functioning of the state – without excessive demands from companies
and states, but also without allowing the extremely dangerous privatizations to
take place/continue, which would ultimately make them slaves of the financial
markets and of monopolies (or, perhaps, colonies of the planets strongest
economies).
Either way, the exit from the current, national
and global crisis, cannot come from the economic elite, but from Politics –
which must be restored to power, assuming the responsibilities for its proper
functioning: by requiring a more direct and effective democracy, with the help
of new institutions.
Vasilis Viliardos
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