Waiting For The Other Shoe To Drop
By Eddy Laing
"In times of a squeeze, when credit contracts or ceases entirely, money suddenly stands as the only means of payment and true existence of value in absolute opposition to all other commodities."
(Capital, Vol. 3. "Money-capital and real capital, III")
While bourgeois economists argue over the precise meaning of the word 'recession', the debt crisis is transforming itself into a much broader production crisis which will undermine not only individual banks but entire economic sectors. Within the global hierarchy – and global anarchy - of the imperialist economy, sectorial crises can easily become multinational economic crises. As the current crisis grinds on, destroying huge amounts of social surplus, the various national systems are being pushed into sharper contention with each other, competing over supplies, markets, and opportunities to expropriate surplus value.
But capital is not a collection of things, it is a process; a matrix of social relations. (1)
Taking this view, we can better understand and explain the real nature of the current debt crisis, recognize its transformation into a more general economic crisis, and see how its international scope may compel the crisis toward specific forms of resolution.
As described in Part 1, residential mortgage debt in the US alone is tremendous, approximately $12 trillion, and defaulted debts within that amount are growing rapidly (1.45% as of summer 2008). But all of that debt is greatly overshadowed by the international debt derivatives market, which measured $531 trillion in 2008. This latter figure includes the 'troubled assets' and 'toxic debts' which triggered the current credit freeze, and of which defaulted home mortgages are but a relatively small part.
In a real-time demonstration of the relationship between the economic base and the political superstructure of capitalist society, the heads of the major finance capital formations have demanded that their national government executives use the central banks to 're- liquify' the banking system with loans, the acquisition of debt obligations, and even by buying out ('nationalizing') the assets and shareholder equity of specific organizations. And so far, the governments of the UK, Iceland, Belgium, the Netherlands, France, Germany and the United States have begun to buy out the devalued assets (debt obligations) of various banks, insurance companies, and other finance capital formations.
NOTE: The nationalization of banks by capitalist governments does NOT mean expropriating the expropriators, or anything remotely related to holding or operating these capital formations 'for the people'. Buying up devalued debt obligations and loaning 'public' money (e.g. taxes or more debt obligations) is ONLY intended to provide fresh money-capital to the process of global exploitation.
In doing so, these governments have greatly added to their centralized 'public debt,' and as these treasuries go deeper into debt, they face growing pressures to make ever increasing payments on their own bond issues. For example, US treasury debt obligations grew 56% between September 2001 and October 2008, (2) in part to fund the imperialist wars against Afghanistan and Iraq. Currently, the monthly interest payment on this debt is $43 billion.
For the US, treasury debt obligations take the form of bond issues which are traded daily on the global bond markets. The return rates on these bonds have steadily declined throughout this credit crisis and have sharply declined during the past month. For one example, the discount offered on 6 month 'T-Bills' has declined by 75% since January 2008, and since September these bonds have sold only slightly (a fraction of 1%) below face value. In other words, at this extremely low rate of return, investors in the bond markets are not very keen on buying US treasury debt.
However, most people have little alternative to one specific type of treasury 'debt instrument' - those that are in pocket. As a result of the expanding government debt, the value of the dollar continues to decline. According to the US Bureau of Labor Statistics, a US dollar in 2008 has 84% of the exchange-value of a US dollar in 2003. (A real 'rate of inflation' of 19%.)
And partly in response to that decline, other currencies have increased their exchange value viz. the dollar; the euro has risen 15.8%, the British pound has risen 2.7%, and the yen has risen 8.8%. (3) More significantly, these differentials reflect and influence global exchange.
On October 13, the US Treasury announced that it would commit $250BN to buy blocs of preferred shares in certain financial organizations. (The stock markets began buying bank stocks and the S&P 500 index had the largest one-day gain since 1932. NB!) The first round of investment consisted of $125BN worth of stock purchases in nine of the biggest US banks: Citigroup, Goldman Sachs Group, Wells Fargo, JPMorgan Chase, Bank of America, Merrill Lynch, Morgan Stanley, State Street and Bank of New York. (Note that the combined assets of these banks equal 76 times the amount of this money-capital 'infusion'.)
Also noteworthy, this first injection of money-capital was not offered to other equally large banks, such as Wachovia, US Bancorp, Capital One, or Sun Trust. While the Treasury is investing in Merrill Lynch - which was already acquired in September by Bank of America - it offered no help to the equally large Wachovia Bank, enabling the smaller Wells Fargo Bank to complete its acquisition of Wachovia at a fraction of the latter's 'book value'. The political basis for these choices, of course, has only been alluded to in the broadest terms, Treasury secretary Paulson stating, "these are healthy institutions, and they have taken this step for the good of the U.S. economy." Other reports indicate that the banks were confronted with non- negotiable letters of agreement. (4,5)
These facets of the debt crisis have also revealed arguments among the ruling classes of capitalist countries in favor of abandoning the US dollar as the global standard for banking and trade. This view has been expressed openly by the German fiance minister advocating 'multi- polarity' in the global monopoly-capitalist economy; by the Russian prime minister suggesting that international trade should be 'pegged' to the ruble instead; and by the central banks of Brazil and Argentina (to name only two) which have stopped using the US dollar for international transactions. Further, the EU is organizing a November conference of its 26 member states to discuss a 'new Bretton Woods' type of agreement concerning international finance capital. (6,7,8)
However, the acquisition by the US treasury (and by other governments) of the huge debts that were previously held by banks and insurance companies, while providing an immediate fix of money- capital, cannot control the debt crisis and more likely will help push it along. For example, these 'infusions' add to the existing debts carried by the banks as well as the treasury. This money- capital fix will likely be used to pay current obligations and to create new debt amidst an overall contraction of production (which is where real value is created by human labor).
"Hence the universal depreciation of commodities, the difficulty or even impossibility of transforming them into money, i.e. into their purely fantastic form." (Capital, Vol. 3. "Money-capital and real capital, III")
The growing crisis in production
Soon enough, against the scenario where commercial credit is scarce, where the dollar continues to devalue, and where consumer credit becomes more untenable daily, the crisis rolls from the banking sectors into what commentators have lately referred to as 'the real economy.'
Clearly, the US domestic housing market is in the midst of depression - as are those in the UK and other 'developed' countries with large single-family housing stocks. All of the sectors that supply residential and commercial construction are being pulled down as well. For example, PVC pipe manufacturing in China is down 30% for the current quarter, and four of the largest steel companies in China have announced that they are cutting production by 20% in response to falling product prices. Similarly, European building materials manufacturers, such as CHR and Michelmersh, have been closing factories and scaling back production in response to the rising costs of credit to the building industry. (9,10,11,12)
The 'downturn' in the auto industry is another clear example, especially within the G7 markets. GM, Ford, Toyota, BMW, Daimler, Volkswagen, Audi and Porsche and the European GM and Ford subsidiaries have all cut back operations. And this 'downturn' in the consumer markets not only affects automobile manufacturers; it affects steel, glass, rubber, electronic parts manufacturers, and so on. The immediate ramifications are seen in lay-offs and plant closings. In the past three months, despite reporting a better (less bad) third quarter than other US automakers, General Motors has closed or announced the imminent closing of six factories in North America: five in the US (Georgia, Michigan, New York, Ohio, Wisconsin) plus plants in Toluca, Mexico, and Ontario, Canada. Globally, GM is eliminating shifts and staging temporary (so far) shut-downs of factories in Germany, Spain, Britain, Poland, Sweden and Belgium. Some of this 'restructuring' is driven by the need to pay down existing debt obligations; GM hopes to raise $15BN through factory closures, asset sales and further borrowing. (13,14,15,16)
Each large plant closure produces an echo through regional economies. After the assembly plant comes the closure of scores of parts manufacturers and suppliers; the GM Moraine factory was supplied by 103 other firms. GM, in turn, supplied others, and the US National Automobile Dealers Association predicts 40% of new vehicle dealerships will close over the next year. With each plant closing, of course, hundreds and thousands of workers are made unemployed, or forced to take drastic wage cuts. New Process Gear in East Syracuse, NY, presented the ultimatum: take a 45% wage cut or find the plant shuttered. As local unemployment grows, the tax bases for local and regional government services are reduced or eliminated, small towns are ruined. (17,18,19)
restoration of capitalism in 1977, China has become sweatshop to the
world. Along with many other 'developing' countries, it is now an
important center of industrial production. Some of the most hazardous,
toxic and environmentally harmful sectors of industry have set up
shop there, including plastics, resins and other petrochemical processing
which provide the finished products and semi- finished materials that
are used in other stages of production processes. Finished PVC goods,
such as plumbing pipe, are one example; polyethylene and polypropylene
are others. Against the speculation in crude oil prices - a key raw
material for making plastics - the deepening economic crisis has collapsed
markets for both resin and processed plastics in China and other manufacturing
centers, with predictable cascading effects in the local economies,
especially on unemployment. Assessing conditions more broadly, the
Federation of Hong Kong Industries predicts that more than 20% (14,000)
of the Pearl River Delta area manufacturers will close down within
the next 24 months due to the spreading crisis. State economists estimate
that nationally, the 'surplus labor' population (i.e. unemployed workers)
is currently somewhere between 52 and 150 million persons. And the
credit crisis has also affected the Chinese equity markets; the Shanghai
stock exchange has fallen 60% during the
past year. (20,21,22)
Still other sectors are being sucked down by the credit crisis. Within the US, Duke Energy, which owns power utilities in five states, has $650M in bonds coming due this year, $442M due next year and $500M due in 2010. It recently had to borrow against a $1BN credit line (short-term credit at much higher rates than bond issues) to pay its debt obligations because it could not find an underwriter willing to re-securitize its existing debts. The McClatchy Company, which publishes the Sacramento Bee (California) and 31 other newspapers likewise had to re-negotiate its $1.1BN credit line and agree to higher interest rates and borrowing limits in exchange for more lenient terms on cash flow (which impacts its ability to meet future payment schedules). National retailers in 'consumer goods' such as food services, electronics and clothing are starting to close stores and lay-off workers. (23)
"Therefore, the value of commodities is sacrificed for the purpose of safeguarding the fantastic and independent existence of this value in money. As money-value, it is secure only as long as money is secure. For a few millions in money, many millions in commodities must therefore be sacrificed. This is inevitable under capitalist production and constitutes one of its beauties." (Capital, Vol. 3. "Money-capital and real capital, III")
Where is this headed?
The steps by which the ruling class is now trying to shunt off the current credit crisis are also laying the basis for a more extensive crisis ripping through all of the 'productive' sectors.
We can now see specifically how their triumphal expansion after the last recession was achieved through new and more complex methods for engineering debt. Finance capital expanded by devising new methods for speculating on the exchange value of money, rather than by employing money-capital in production. A tremendous bubble was inflated around residential and commercial construction. A growing tumor of consumer debt was heralded as the engine to drive the US economy into the future.
Now, the economic chaos and parasitism is becoming evident. Now, the government is seen to be incapable of reacting to or positively effecting the crisis. Now, the hegemony of US capital is questioned and contested by big and small capitalist powers around the world. Now, the commentators are compelled to ask 'is capitalism over?' in order to to bury Karl Marx, yet again. Now, the government and the banks are quick to point the finger at small homeowners who 'irresponsibly' borrowed beyond their means, or to avaricious mortgage lenders who neglected 'due diligence' in lending money.
"People always have been the foolish victims of deception and self- deception in politics, and they always will be until they have learnt to seek out the interests of some class or other behind all moral, religious, political and social phrases, declarations and promises." (Lenin, The Three Sources and Three Component Parts of Marxism.)
Amidst the cacophony of the present crisis and confusion, the revolutionary Marxists need to step up and clarify the essential nature of the current economic crisis, as well as the further economic and political crises that are on the way. The ruling classes are struggling to retain their political as well as their economic hegemony, both of which are being threatened in every field. We should not let this opportunity pass.
Marx. Grundrisse. "Notebook II, The chapter on capital"
2. "Summary Schedules of Federal Debt – Daily, Unaudited." U.S. Department of the Treasury, Bureau of the Public Debt. Accessed at
3. Some other indicators of the devaluation of the US dollar: key agricultural commodity prices have also increased dramatically over the last two years; corn is higher by 75%, wheat by 60%, soybeans by 22% and sugar by 280%. Taking into account the recent drop, crude oil sells at 165% above its 2002 dollar price, and the dollar prices of gold and silver have risen 105% and 55%, respectively.
Urges Banks to Deploy Capital to Spur Economy." Bloomberg News.
14 October 2008. Accessed at
5. "Drama behind a $250 billion banking deal." International Herald Tribune. 15 October 2008.
6. "A power that may not stay so super." International Herald Tribune. 12 October 2008.
7. "Latin America well prepared for financial crisis, says Brazilian adviser." Pagina 12 (Argentina), 5 October 2008.
8. "EU to press for reform, Asia joins bailout bandwagon." Reuters. 15 October 2008.
9. "Fixtures for Australian ore slow to a trickle." Lloyd's List (England). 12 September 2008.
10. "Factory closures hit construction." Birmingham Post (England). 10 September 2008.
11. "CRH to close Scottish brick subsidiary." Irish Times. 25 July 2008.
12. "Black October to deliver more pain." Canberra Times (Australia). 12 October 2008.
13. "European car companies curb production." Associated Press Financial Wire. 7 October 2008.
14. "GM doesn't rule out more restructuring." Associated Press Financial Wire. 2 October 2008.
15. "Leaders: time to focus on GM plant reuse." Dayton Daily News (Ohio). 7 October 2008.
16. "McHugh: GM powertrain workers eligible for compensation benefits." States News Service. 18 September 2008.
17. "GM plant's closing hits suppliers." Dayton Daily News (Ohio). 8 October 2008.
18. "Union members will be asked to choose between jobs at lower pay or closing the plant." Post-Standard (Syracuse, NY). 17 September 2008.
19. "Ohio jobless rate up again in August." Associated Press. 19 September 2008.
20. "Asian PE, PP prices slide on crude plunge, US banking woes." Platts Petrochemical Report. 19 September 2008.
21. "The 2008 crash: how the financial crisis swept the world." The Observer (England). 5 October 2008.
22. "Delta factory closures to accelerate as orders, credit dry up." South China Morning Post. 1 October 2008.
23. "Cash-starved companies scrap dividends, tap credit." Pittsburgh Post-Gazette. 2 October 2008.
Read Part I
The Mountain Of Debt
By Eddy Laing
The current credit crisis is not primarily due to failing single family home mortgages, although mortgage debt is part of it. It is the coming due of capital debts that resemble Russian nested dolls, each one opening up to reveal yet more debt. These are the now-famous 'toxic assets', the 'collateralized debt obligations' and 'jumbo covered bonds' which promised to pay the holder based on the interest that would be collected on yet other debt instruments