The Third International after Lenin

Thursday, September 8, 2011

Our age of ''sovereign insolvency''

The crisis of overproduction deepens

The near-meltdown of the imperialist banking system makes way for sovereign insolvency

Buried behind sensationalist coverage of the youth uprising in Britain and triumphalist rantings in regard to the Nato assault on Libya, has been further documentation of the economic crisis which is deepening by the hour. The big stories have been, on the one hand, the brinkmanship in the US between Republican and Democratic political hacks which almost led to the US government running out of cash to meet its day-to-day financial obligations, and on the other, the attempts in Europe to calm the turmoil in the eurozone, where not only has it been arranged for Greece to actually default, but interest rates are being hiked beyond affordability for Spain, Italy, Cyprus – and even France has been under fire. Each of these dramas in turn tells a story of further reductions in public spending, further job losses, all of which slash consumption, aggravate the crisis of overproduction, and must unfailingly lead to even more assaults on civilisation in the coming months and years.

Retrenchment in the US

The background to the recent squabbling over lifting the debt ceiling (the maximum amount that the US government is permitted to borrow) is of course the country’s staggering indebtedness: the federal debt has increased from $9.2 trillion in 2007 to $14.2 trillion in 2011, an increase of nearly 55%. According to Wikipedia, “the public debt has increased by over $500 billion each year since fiscal year (FY) 2003, with increases of $1 trillion in FY2008, $1.9 trillion in FY2009, and $1.7 trillion in FY2010. As of August 3, 2011, the gross debt was $14.34 trillion dollars, of which $9.78 trillion was held by the public and $4.56 trillion was intragovernmental holdings. The annual gross domestic product (GDP) to the end of June 2011 was $15.003 trillion (July 29, 2011 estimate), with gross debt at a ratio of 96% of GDP, and debt held by the public at 65% of GDP”. This humungous debt is expanding by the minute, with government spending exceeding revenue by the trillions listed above by which the public debt has been increasing.

These huge increases have mainly been brought about by two major factors – the constant wars that US imperialism has been waging all over the world, and the bank bailouts.

According to Prof. Ismael Hossein-Zadeh (see Global Research, ‘Escalating Military Spending and the Debt Ceiling: Lots of Posturing, No Solution’, 30 July 2011):

It is now common knowledge that a major contributor to the rising debt and deficit is the escalating spending on war and militarism, nearly doubled over the past decade (from $295 billion in 2000 to the current $560 billion). While the official Pentagon budget for the 2011 fiscal year is $560 billion, the real figure is nearly twice as much as the official figure. The reason for this understatement is that the official Department of Defense budget excludes not only the costs of the wars in Iraq and Afghanistan, but also a number of other major cost items. These disguised cost items include: budgets for the Coast Guard, the Department of Homeland Security, nuclear weapons, veterans’ programs, most military retiree payments, interest payments on money borrowed to fund military programs in past years, and more. Once these misplaced or disguised expenditures are added to the official Pentagon budget, total ‘security’/military-related budget items would amount to slightly more than $1.1 trillion, which absorbs about one-third of the entire 2011 federal budget of $3.4 trillion.”

Professor Zadeh also cites Senator Bernie Sanders (of Vermont) who publicised the extent to which this public debt has been inflated by bank bailouts beyond even what the government had admitted: “The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression.”

It should be noted that in this crisis, while public spending has been accelerating at an unprecedented pace, what is being spent on services to the public has been declining for years. State budgets have been heavily clipped, with the result there are states in the US that have cut days of schooling, that have stopped local bus services, and that have turned off a proportion off street lighting in order to save money. And this is at a time of so-called “stimulus spending” when the Obama administration threw some $800 billion into the economy in the hope of rescuing it from the negative impact of the subprime crisis – but with very little effect.

In the row that developed between Democrats and Republicans over lifting the debt ceiling, it was agreed by both sides that the lifting of the ceiling needed to be accompanied by deep cuts in public spending. Curiously enough, the Obama administration was calling for some $4 trillion of cuts over 10 years, while the Republicans were prepared to be satisfied with the $2.4 trillion that was eventually, at the 11th hour, agreed upon. Even at the lower figure, this massive cut, says Patrick Martin (‘The US debt ceiling deal’, Global Research, 1 August 2011), “would [throughout the 10 years of its implementation] cover the annual deficits of all 50 states, twice over. It is more than the combined annual budgets of the departments of Education, Housing and Urban Development, Labor, Transportation, Agriculture and Veterans Affairs.”

Republicans were motivated both by a desire to maintain high military spending and to protect the rich from having to pay more taxes. And in fact the Republicans were able to use the spectre of the disastrous consequences that would follow, if no agreement was reached on raising the debt ceiling, of the government being forced to default on US obligations to terrorise Obama into abandoning any suggestion of levying more taxes on the rich.

The end result was:

“* The deal would allow President Barack Obama to raise the debt ceiling in three steps. Congress would get a chance to register its disapproval on two of these, but would not be able to block them unless it musters a two-thirds vote in both the House and the Senate - an unlikely prospect.

“* It envisions spending cuts of roughly $2.4 trillion over 10 years, which Congress would approve in two steps - an initial $917 billion when the deal passes Congress and another $1.5 trillion by the end of the year.

“* The first group of spending cuts would apply to the discretionary programs that Congress approves annually, covering everything from the military to food inspection.

“* Those programs would be capped each year for 10 years. The caps would be relatively modest at first to avoid stifling the shaky economy - spending for the fiscal year that begins Oct. 1 would be only $6 billion below the current level of $1.049 trillion. The caps would have a greater impact in later years, when it is hoped that the economy will have recovered.

“* Some $350 billion of the $917 billion total would come from defense and other security programs which now account for more than half of all discretionary spending. Republicans are resisting this idea and it is one of the few areas of dispute left.

“* Automatic across-the-board spending cuts would kick in if Congress does not observe the caps in coming years.

“* A 12-member congressional committee, made up equally of Republicans and Democrats from each chamber, would be tasked with finding a further $1.5 trillion in budget savings.

“* That committee could find savings from an overhaul of the tax code and restructuring benefit programs like Medicare - the politically risky decisions that politicians have not been able to agree on so far.

“* The committee would have to complete its work by Nov. 23. Congress would have an up-or-down vote, with no modifications, on the committee's recommendations by Dec. 23.

“* If the committee cannot agree on at least $1.2 trillion in savings, or Congress rejects its findings, automatic spending cuts totalling that amount would kick in starting in 2013.

“* Those cuts would fall equally on domestic and military programs. Medicare would face automatic cuts as well, but Social Security, Medicaid, federal employee pay, and benefits for veterans and the poor would be exempt.

“* The plan also calls for both the House and the Senate to vote on a balanced budget amendment to the Constitution by the end of the year. It is not likely to receive the two-thirds vote in each chamber needed for passage, but its inclusion will make it easier for conservatives to back the overall deal.” (See ‘US debt-deal, key points’, Daily Telegraph 1 August 2011).

It is thus now official that the entire cost of the cuts will fall on the relatively poor. This is in spite of the fact that the rich in the US have the most generous tax breaks:

According to Citizens for Tax Justice (CTJ), the combined amount of taxes paid by the following 12 corporations for the 2008-2010 period was less than zero, despite reporting between them some $171 billion in profits from 2008-2010. Indeed, not only did they pay no tax, they actually received between them $2.5 billion in refunds. The 12 corporations in question were: Exxon Mobile, Wells Fargo, DuPont, American Electric Power, Boeing, FedEx, IBM, General Electric, Honeywell International, United Technologies, Verizon Communications, and Yahoo.

The cost for the poor is horrendous:

Already, before implementation of the cuts, Motoko Rich tells us that “An extraordinary amount of personal income is coming directly from the government. Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability ... By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year “ (see, ‘Economy Faces a Jolt as Benefit Checks Run Out’, New York Times, 10 July 2011). This of course means not only that the poor in the US will be facing hunger and destitution, but also that $37 billion of effective demand for the world’s overproduced commodities will have been wiped out – thus exacerbating the crisis.

The debacle has provided a stark lesson on the nature of bourgeois democracy, as has been shown by Noam Chomsky:

For financial institutions [i.e., a euphemism for the big US bourgeoisie] the primary concern is the deficit. Therefore, only the deficit is under discussion. A large majority of the population favor addressing the deficit by taxing the very rich (72 percent, 27 percent opposed), reports a Washington Post-ABC News poll. Cutting health programs is opposed by overwhelming majorities (69 percent Medicaid, 78 percent Medicare). The likely outcome is therefore the opposite. ...”

In spite of the manifest wishes of the electorate, “Not even discussed is that the deficit would be eliminated if, as economist Dean Baker has shown, the dysfunctional privatized health care system in the U.S. were replaced by one similar to other industrial societies', which have half the per capita costs and health outcomes that are comparable or better. The financial institutions and Big Pharma are far too powerful for such options even to be considered, though the thought seems hardly Utopian”. (‘America in Decline’, Truthout, August 5, 2011).

And how does it come about that elected representatives ignore the wishes of the electorate? That is simple: in order to meet the astronomical costs of participating in US elections, political parties are dependent on handouts from the giant monopolist corporations – and those handouts are simply not forthcoming except for candidates who are unequivocally committed to carrying out the instructions of the bourgeoisie.

Very shortly after the deal was announced, the S&P rating agency reduced the US’s credit status from AAA to AA+, (a move that has not yet been followed by other rating agencies).

It was no doubt influenced by statistics released showing (in the words of Paul Krugman of the New York Times) “It’s not just that the threat of a double-dip recession has become very real. It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery” (‘The wrong worries’, 5 August 2011).

In effect the new figures show that while “Until recently, most observers believed the American economy was in a slow recovery, albeit one with very disappointing job growth”, because “official figures on gross domestic product showed the United States economy grew to a record size in the final three months of 2010, having erased the loss of 4.1 percent in G.D.P. from top to bottom”, the revised figures released at the beginning of August told a different story:

“... last week the government announced its annual revision to the numbers for the last several years. New government surveys indicated Americans had spent less than previously estimated in 2009 and 2010 on a wide range of things, including food, clothing and computers. Tax returns showed Americans even cut back on gambling. The recession now appears to have been deeper — a top-to-bottom fall of 5.1 percent — and the recovery even less impressive. The economy is still smaller than it was in 2007” (Floyd Norris, ‘Time to Say It: Double Dip Recession May Be Happening’, New York Times, 5 August 2011).

The fact is that increasing unemployment of necessity means that less is being produced in the way of values, whatever official GDP figures might say. Furthermore, there can be no meaningful expansion unless the commodities produced can actually be sold, which is becoming ever more difficult as a result of most of the countries in the capitalist world cutting public spending and of generally declining wages, as well as reduced ability to borrow. And, incidentally, US unemployment figures have continued to rise throughout the crisis:

Consider one crucial measure, the ratio of employment to population. In June 2007, around 63 percent of adults were employed. In June 2009, the official end of the recession, that number was down to 59.4. As of June 2011, two years into the alleged recovery, the number was: 58.2” (Paul Krugman, ibid.).

This grim reality is masked in the kind of statistics that are usually published:

The downtick in the unemployment rate, to 9.1 percent from 9.2 percent, is also dismaying on closer inspection. It does not reflect an increase in the share of workers finding jobs. Rather, it reflects a shrinking labor force, as the long-term unemployed and other jobless workers give up looking for jobs. If nearly three million sidelined workers were included in the official unemployment rate, it would be 10.7 percent. (The rate is higher still, 16.1 percent, when people who can only find part-time jobs are included.)” (Editorial, ‘Political roots in US economic crisis,’ New York Times, 6 August 2011).

The credit-rating downgrade generated at the beginning of August by these clear indications of economic stagnation would normally mean that the US would have to pay higher interest rates on its debt, which would have heaped yet more disaster on the US economy. Currently the US pays some $250 billion in interest every year on its federal debt. Even small rate increases would make serious dents in the federal budget. As it is, however, those who control the world’s investment funds – capital – are having a hard job finding anywhere safe (let alone profitable!) to park these funds so there is still a huge demand for US Treasuries (and indeed for British government debt), notwithstanding the grim economic outlook that both countries are facing.

The European saga

Whenever the US financial pundits feel the need to cheer themselves up, they take a look at what is happening in Europe and console themselves that things in the US could, after all, be worse.

At the heart of the crisis are the various countries in the eurozone whose economies are clearly unable to generate sufficient income to keep up their debt interest and repayment obligations. This pushes down their credit ratings while the rates of interest they have to pay move vertiginously in the opposite direction. Sovereign debt on which interest rates reach 7% are generally deemed to be unserviceable. This of course is what gave rise to the need for rescues for Greece, Ireland and Portugal.

The cure was seen in gigantic amounts of money being made available from a pool created by the various European governments for lending at relatively reasonable rates of interest to the afflicted countries. However, these rescues are always accompanied by the familiar demands for really severe cuts in public spending which in every case have of necessity caused GDP to shrink and the country’s debt, therefore, to increase as a percentage of GDP even while the absolute amount of the debt was being reduced. The shrunken economies became even less able to pay their debts than they had been previously, calling for yet more rescues, as is currently the case with Greece. In other words, to borrow a metaphor coined by one Yanis Varoufakis, an Athens economist, “if you keep cutting like this you start to cut into muscle, which affects your growth and your tax revenues” (quoted by Landon Thomas Jr in ‘Austerity Plan Might Not Work for Spain and Italy’, New York Times of 9 August 2011).

As Greece’s desperate situation, notwithstanding (or rather because of) the stringent cuts that were forced on it, became apparent, what happened was that first one of the credit-rating agencies, Moody’s, downgraded Greece’s creditworthiness yet again to the second lowest rating available – in effect its sovereign debt was classified as junk. This pushed up Greek borrowing costs beyond the affordable and Greece to the edge of default, owing various European banks so much money that the default threatened various banks’ solvency, or certainly the sufficiency of their capital base to maintain confidence in their various banking activities. As a result there was a panic summit held on 21 July of various heads of eurozone states to rustle up some kind of response that would, hopefully, minimise the damage that was threatening the entire eurozone banking system.

What did the European states decide?

The deal contained three main elements:

1. reduced interest rates on the bail-out loans to Greece, Ireland, and Portugal;

2. some losses for private investors to reduce Greece’s debt; and

3. a transformation of the euro zone’s temporary bailout fund, the EFSF, into a cash-point that banks and possibly Spain and Italy could tap, but so far without the necessary funds.

“In addition, euro-zone leaders finally came back to reality by accepting that Greece will enter some form of default - a ‘restricted default’ - given its huge debt mountain; and one has to ask whether Ireland can be far behind.

“These outcomes appeased the financial markets for something less than a week.” (See the Irish People’s Movement, ‘Back where we started? Deal agreed at EU summit rests on some heroic assumptions’).

Louise Armistead and Bruno Waterfield in the Telegraph of 22 July 2011 (‘Greece to default as eurozone agrees €159bn bailout’) put some flesh on the bones of these bare statistics:

Greece is set to lead the eurozone's first-ever default as European leaders agreed that the private holders of Greek debt will take a hit of €50bn over three years.


“As part of the deal Greece will also receive another bailout package - from Europe, the International Monetary Fund and the private sector - worth €159bn.

“The second bail-out, which follows the €110bn rescue funds agreed last May, will cut Greece’s debt by a quarter.”

These decisions indicate a belated realisation by the various European banks that there is no way they are after all going to be able to force the Greek masses to pay back all that is owed. When the money was originally borrowed, it was assumed that Greece would be able to continue selling commodities all over the world in order to generate the necessary income to repay the loans with interest at the rates then applicable. It is not Greece’s fault that, as a result of a crisis of overproduction within the capitalist system as a whole, it is not after all able to sell its commodities to the extent that had originally been envisaged. Greece is in the situation of a worker who is unable to pay his mortgage once he has, through no fault of his own, lost his job.

The hope is that by accepting today small reductions in what is owed to them, the banks will avert much greater losses in the future. The financial number-crunchers have, however, expressed the view that this mouse of a rescue plan that the mountain of European heads of state managed to give birth to after a fraught labour will have no such effect. Ambrose Evans-Pritchard points out in the Telegraph of 2 August (‘America is merely wounded, Europe risks death’):

“As the details dribble out from the summit deal, we can now see that Greece will enjoy no debt relief despite having been pushed into default. Citigroup said the net effect will increase Greece’s debt by a further 4pc of GDP to more than 160pc next year. Since this is obviously untenable, Greece will need a third rescue.

“The EU has brought about the first sovereign default in Western Europe since the Second World War and set a fateful precedent without actually resolving the Greek problem. This is the worst of all worlds.”

In the Irish People’s Movement article cited above it is estimated that to return Greece to solvency at least a 40% “haircut” to the country’s debt is needed. But the plot hatched up by the European heads of state achieves a mere 7½% debt reduction, according to most estimates. In other words, Greece’s problems are by no means over.

However, Greece’s problems do not stop in Greece. Because so many European banks are holding Greek bonds, they themselves risk being driven to insolvency by Greek default, and it is all too likely that the various European states will feel constrained to rescue their banks at huge cost to the public purse because of the need to maintain the essential services that the banks provide in a capitalist system. Investors do not require a crystal ball to be able to foretell that this will of necessity cause these countries’ sovereign debt to escalate – to the point that they will be unable to meet their obligations.

Spain, Italy, Cyprus and to some extent France are already feeling the fallout, and the EU has been struggling for months to avert Spain being sucked into the morass. In the past few weeks, Italy too has been sliding closer and closer to the abyss, with the interest rates both countries have to pay in order to borrow the money they need gradually edging up towards the fateful 7% mark. Spain and Italy are countries that are regarded to some extent as “too big to bail”. Nevertheless, some thought is currently going in to how that might be done:

The bond vigilantes broadly agree that the EFSF needs €2 trillion in pre-emptive firepower to forestall a twin crisis in Italy and Spain [as compared to the $440 bn of which it disposes at present], though quite how France might pay for this without being drawn into the maelstrom itself is an open question.” (Ambrose Evans-Pritchard, op. cit.). Italy, it is estimated, would cost $1.4tr to bail out and Spain $700bn.

But who would provide this money which is, after all, to be invested in risky holdings at rates of interest below the market rate?

For starters, the deal is a huge political gamble on the willingness of taxpayers throughout the euro zone to continue to underwrite other countries’ debts. By expanding the scope of the EFSF the agreement is providing greater avenues through which risk can be transferred from private-sector bond-holders to taxpayer-backed institutions. In fact the deal hints at nothing short of unlimited bail-outs, which means that the EFSF has to be radically increased in size to serve as a credible backstop.

This may sit well with investors who will continue to see their losses socialised, but convincing Dutch, Finnish, German, Slovak or even French taxpayers (under the agreement the French government could face higher borrowing costs than those it is bailing out) to provide not billions but trillions ... in loan guarantees to struggling banks and governments around Europe—a mighty task indeed.” (People’s Movement, op.cit.).

In spite of the fact that German banks stand to lose as much as anyone else in case of major sovereign defaults in the eurozone, the German government is under very heavy public pressure not to advance any German money at all to the rescue of what are regarded as feckless southern Europeans, perceived in German popular mythology as crickets who play all summer long while German ants sweat their guts out in order to be able to put aside the necessary provisions to be able to ride out the winter. Now that the winter has come, Germans are all for letting the improvident crickets starve, which is what many Germans tend to think they deserve. Away from this world of make believe, however, the reality is that if the southern Europeans sink, they will pull the Germans and all the rest of Europe with them. Caught in the maelstrom of the most severe capitalist crisis of overproduction that the world has even known, there are no safe havens. The weaker go to the wall first, but the stronger inevitably follow. Only the richest of the rich survive and prosper on the misery of the vast majority of humanity.

It should be noted that if the Germans tend to be contemptuous of Greeks and believe that it is through improvidence that they have found themselves in difficulties, the Greeks are more than happy to repay the Germans in kind.

Greeks, meanwhile, are as fed up with Germany as Germans are with Greece. As plumes of tear gas bathed the streets of Athens in June, for example, many protesters said they wanted the drachma back. ....

“... a study published in June by the French bank Natixis ... found that Greeks and other south Europeans worked more hours than Germans, though the German economy was more productive.

“Nor have Greeks let go of the idea that Germany owes them billions in reparations that were never paid after the brutal Nazi occupation during World War II.” (Jack Ewing and Liz Alderman, ‘Some in Germany want Greece to temporarily exit the Euro Zone’, New York Times, 11 August 2011).

As the various national states within the European Union try to work out how they can individually save themselves from being swallowed up in the crisis, it becomes hard for them to reach agreement on any kind of collaborative effort. Even the pathetic plan cobbled up on 21 July requires ratification by every single state of the EU, and there has to be doubt that this can be achieved. There is talk of encouraging the weaker economies to leave the EU, reminiscent of “a scene in [an old disaster movie] in which the passengers in a lifeboat realize that they don’t have enough food and water for everyone and that someone needs to go over the side. We’re looking at you, Greece”. (ibid.).

Hence there is still a real possibility that the EU would break up, even though the individual countries of the EU would be even weaker without it.

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