Costs Of Empire: 'Time-bombs', Guns, Risk And Anarchy - part I
By Eddy Laing
13 November,
2008
Countercurrents.org
"And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented." (Karl Marx and Frederick Engels, Manifesto of the Communist Party, "Bourgeois and Proletarians.")
The neo-liberal quagmire
Among its other qualities, capitalist production is governed by an incessant chase to realize exchange-value. The circuit of capital is only concluded by selling the commodity, whatever it is, and converting the surplus-labor concretized in it into money (which can then be re-activated in the next circuit).
While every commodity must meet a social use-value in order for it to find a buyer, there is no over-all conceptualization of the extent of the social need that any set of commodities might fulfill. There are quite typically many more commodities produced than can be circulated (at a profit) by capitalist markets. This applied to bushels of corn as well as clothing as well as sport utility vehicles.
This anarchic character of capitalism comprises a risk to the capitalist, who can never know whether or how many units of the commodities that he is trying to sell will actually be sold.
An important feature of contemporary global capitalism (imperialism) is the export of capital; that is, the transfer of capital processes by highly concentrated (e.g. monopoly) formations into local and regional economies elsewhere around the planet. This process has reached such an extent that not only do local neo-colonial economies (such as Nigeria) come to be dominated by externally-centered formations (such as ExxonMobil and Royal Dutch Shell), but also entire circulatory processes are set-up 'off shore', away from the 'original' center of the formation.
For example, most US electronics and computer equipment firms conduct their production processes not in the US but in Thailand, Singapore, China, or some other country. Many of the commodities so produced are not returned to the US for sale, they are sent on to be sold elsewhere in the world. The sale of those commodities realizes further money-capital which is re-energized off-shore (by the labor of workers) in further production and circulation circuits. Profits from this process might also be banked off-shore as well (although ultimately they accrue to the owners of the capital process in whatever form those capitalists demand and wherever they reside).
Increasingly, capitalism - and especially US capital - has relied on this export of capital to reproduce itself. A key quality of late 20th C. 'neo-liberalism' has been an ever increasing domestic 'down-sizing' along with 'out sourcing' of capital reproduction processes to other countries, especially to Asia and Latin America.
As this out-sourcing comes to typify capital, it introduces new risks into the circulation process. For example, when capital circuits are freed from the economic relationships of the home country they are also freed from its legal and political superstructure, which was constituted to serve those capitalists who own the out-sourced capital process. Likewise, risks emerge from fluctuating currency valuations or other 'dis-equalibria' that might arise between the home economy and the satellite economies, among multiple off-shore economies, and so on.
Hazards of empire
The effort to control economic risk is not a new concept, but it is specific to capitalism. Risk control is the basis of the insurance sectors, and the reason there are commodity exchanges that buy and sell 'futures' - contracts to deliver X amount of something -- such as corn or pork or eurodollars -- in amounts and prices decided well in advance of delivery. This future-trading mechanism is applied to precious metals, stock (equity) prices, bond (debt) obligations, and so on. The earliest risk-management instruments were 18th C. shipping insurance companies (e.g. Lloyd's of London) that offered guarantees of trans-oceanic deliveries of slave labor to and raw materials from the colonies to capital formations in England, the Netherlands, the USA, etc. By the second half of the 20th C., capital was confronted with many types of risks it had not faced 200 years earlier, including the consequences of anti-colonial social movements and the global imperial contention formalized in NATO and the Warsaw Pact.*
In the post-World War 2 period, several mechanisms were implemented to try to control risks. In the geo-political arena, various treaties and alliances -- backed by imperial militaries -- were entered into around the world. In the economic arena, the Bretton-Woods agreement was devised to control economic variability by imposing the US gold reserves and currency as the 'Western' (as distinct from the USSR, China and the Warsaw Pact states) standard against which all others would be measured.
With the collapse of the Bretton-Woods arrangement in 1971 -- a collapse that was prompted by then-current economic instabilities and political realignments within international capitalism -- new mechanisms for mitigating risk were sought out.
It is from this time forward - accelerating quickly during the so-called Thatcher-Reagan era of the 1980s - that contemporary arbitrage and financial 'derivatives' enter the capitalist world. Derivatives are contracts that promise a specific financial outcome (e.g. delivery date, sale, purchase) or change in market factors. For example, grain 'futures' are derivative contracts and can be traded without either party ever taking possession of the grain that is supposedly the basis of the contract. Financial derivatives are used to trade in interest rates, currency exchange rates, commodity, credit, and equity prices. Arbitrage is a type of trading which operates on the price differentials between markets.
In 1973, financial derivatives were almost non-existent. (1) In fact, in the US and the UK, financial derivatives were considered to be covered by gaming statutes. Financial futures were disallowed as wagering at the Chicago exchanges until 1982, and the status of financial derivative trading in London wasn't resolved until 1986. (2) By the second quarter of 2008, US commercial banks (alone) held derivatives valued at $182 trillion. (3) The October 9, 2008 New York Times placed the global trading value of derivatives and similar instruments at over $531 trillion. (4)
As we've seen in recent months, financial derivatives are the objects of extensive trading and speculation, since they cover money-capital itself and have come to comprise large percentages of the assets held by the biggest commercial banks and insurance companies. The circulation of derivatives is now the single largest market in the capitalist world economy. As objects of speculation, these debt obligations are even further separated from the underlying economic relationships they presumably represent. The capitalists themselves complain that 'no one understands' the specific sources of these derivatives, their composition in money-capital or collateral.
The reality of the matter -- while encompassing defaulted mortgages and illicit lending practices -- is much more profound and general. The speculative trade in these obligations has diverted money-capital from value-creating (productive, 'real economy') sectors and exacerbated global currency disparities. This has in turn affected international trade and lending, resulting in corporate debt defaults, runs on bank deposits and money market funds, the collapse of hedge funds and still greater trade imbalances between states.
"[People] think of derivatives as being everything toxic about the market they don't like. That's not true. Markets have been toxic for many, many years before derivatives arrived. And we've always thought of having a hedge as desirable." (New York University finance professor to Reuters, 31 October 2008)
It is an enduring feature of capitalism that even the mechanisms devised
to mitigate risks are subject to the most rapacious types of speculation,
thus increasing the risks that the mechanism was intended to prevent.
"everything but the squeal"
Tremendous debt has emerged as a central, enduring feature of US imperialism.
Among the most favored objects of derivative trading have been collections
of debts: corporate bonds, municipal bonds, mortgage-backed securities,
and so on. This speculation on debt has been revealed as an important
trigger of the current crisis. The trade in debt-based derivatives
is euphemistically called 'exposure to risk based capital' -- a truly
revealing description.
At the end of the second quarter of 2008 (July 1), US commercial banks
'owned' $182 trillion in derivatives. The vast majority of these derivatives
($176.6 trillion) were held by just five banks: HSBC, JP Morgan Chase,
Citibank, Bank of America and Wachovia. The single largest category
of derivative ($114 trillion) in all that is the 'credit default swap'
-- a 'future' contract to guarantee full or partial payment on one
or more debts. (3)
Several factors have influenced this accumulation of debt, including
the lending rates set by the Federal Reserve Bank and by the speculation
in financial derivatives itself. But at bottom, it reflects the international
parasitism of the US economy in relation to the rest of the world,
and specifically the massive amounts of money-capital created through
the super-exploitation of human labor in Asia, Africa and Latin America.**
For the past several decades, US society has been held together with
great amounts of debt, both short-term and long-term.
For the week ending October 22, US commercial banks held loan obligations
worth $7.2 trillion. Of that amount, $1.7 trillion were commercial
real estate debts; $1.6 trillion were loans to commercial and industrial
formations; $1.4 trillion were residential mortgage debts; and $870
billion was credit card and other short-term consumer debt. (5) Including
borrowing through finance companies, credit unions, savings &
loans, etc., the aggregate short-term consumer debt in August 2008
was $2.58 trillion. (6)
Total US domestic non-financial sector debt at mid-2008 stood at $31.72
trillion -- approximately 229% of GDP. Within that figure, $13.8 trillion
represented household debt, a figure essentially equal to the current
annual GDP, and the US financial sector owed $16 trillion, or 116%
of GDP. (7) By comparison, the reserve assets held by US Federal Reserve
Banks, in cash, gold and foreign currencies came to just $70.5 billion
in 2007. (8)
But that is just the current snapshot. Since 1974, debt in the US
economy has grown exponentially, from $2.4 trillion to $49.7 trillion
(2070%). Within that figure: foreign debt grew from $81 billion to
$2 trillion (2488%); state and local government debt grew from $208
billion to $2.2 trillion (1050%); federal government debt grew from
$358 billion to $5.1 trillion (1430%); household debt rose from $680
billion to $13.8 trillion (2036%); and financial sector debt expanded
from $258 billion to $16 trillion (6200%)! (7)
According to their own definitions, the US economy -- the largest
and 'most-favored' capitalist economy on the planet -- is a highly
leveraged fiction.
Next: The ideological quality of the home mortgage, global economic
disparity, military spending, and the real costs of empire maintenance.
notes:
* It is also a feature of capitalism that social relationships are
hidden behind abstracted economic transactions. Just as the human
source of value is hidden behind the exchange-value of commodities,
other highly differentiated and unequal social relationships are abstracted
as generic 'risks' that should be priced into the circulation of commodities
rather than negotiated 'face to face' in the real social world.
1. LiPuma, E. and B. Lee, "Financial derivatives and the rise
of circulation." Economy and Society, 34(3), August 2005.
2. MacKenzie, D. "The material production of virtuality: innovation,
cultural geography and facticity in derivatives markets." Economy
and Society, 36(3), August 2007.
3. OCC’s Quarterly Report on Bank Trading and Derivatives Activities
Second Quarter 2008. Comptroller of the Currency. Washington, DC.
4. "Taking a hard look at a Greenspan legacy," New York
Times, 9 October 2008.
5. Federal Reserve statistical release. H.8 (510). October 31, 2008.
Board of Govenors of the Federal Reserve System.
6. Federal Reserve statistical release. G.19 Consumer Credit August
2008. October 7, 2008. Board of Govenors of the Federal Reserve System.
7. Flow of Funds Accounts of the United States. Z.1. September 18,
2008. Board of Govenors of the Federal Reserve System.
8. Statistical Supplement to the Federal Reserve Bulletin, September
2008. U.S. Reserve Assets/Foreign Official Assets Held at Federal
Reserve Banks.
