Saturday, March 16, 2013

TWIN EXPLOSION: The Current Debt System has Reached it’s Expiration Date

At the end of the millennium, a perfect convergence took place between the forces responsible for today’s looming storm: Indebtedness, the rise of neoliberalism, the collapse of communism, the information revolution, globalization and the «liberation» of the banking beast.

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:


’’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.


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 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


No comments:

Post a Comment

Commentators have the exclusive responsibility of their writings, the material that they mention, as well as and the opinions that they express.