One of the whacking big problems of the modern world is what the rich are going to do with all the money they are extracting from the rest of us. They can’t spend it on building more manufacturing plant, because that would increase the existing oversupply of consumer goods. They can’t solve the problem of the oversupply by reducing their prices and thus pushing demand up, or by increasing the salaries of their existing workforce, because in the short term that provide them with less of the money that they don’t know what to do with but can’t do without. They can’t spend it all on luxury goods, though they try very hard (no doubt the extinction of the rhino is being hastened by this predicament; it would be interesting to see how many staterooms in how many billionaire’s yachts are paved with slices of rhino-horn).
So it mostly gets tipped into the stock and bond market, which naturally goes up because rich people are buying stocks and bonds, but this doesn’t create inflation (yet) because those stocks and bonds are not being sold for a while. It’s a bit like photocopying Monopoly money and then putting it under your mattress, and every year Forbes and the Wall Street Journal get to look under the mattress and declare you a fine fellow for all that photostatted paper. Grown-ups would not behave like this. The Masters of the Universe are astonishingly like eight-year-olds in their behaviour-patterns — though it’s not exactly their fault, since they have been rewarded ever since they were eight for never changing those behaviour-patterns.
This all helps to explain part of the weirdness about what we may as well call the West, although they are north of us and of Brazil, and rather east of Japan. This weirdness is an obsessive focus on the supposed value of the stocks and bonds sold by companies, banks and countries, which value relates, not to the equity or the companies or their productive prospects, but to the way in which those stocks and bonds themselves are traded. In the last couple of years, the value of these stocks and bonds in large parts of the West have gone up, despite the fact that there has been no change in the equity or prospects of the companies, banks and nations symbolised by those stocks and bonds. This means that freedom is on the march.
Every now and then, however, the value of these stocks and bonds dips a few percentage points. This means that freedom is in peril and various commentators are wheeled out to proclaim either that this is a minor speed-bump on the road of permanent prosperity for all who deserve it, or that this is a catastrophic threat to permanent prosperity for all who deserve it, and those who deserve it must therefore receive massive subsidies from the less deserving. The two kinds of comment appear to be opposite, but are actually identical, since both enfold within them the declaration that the world ought to be run in the interests of those who stole it; the difference lies in the method by which those interests are to be defended.
Of course it doesn’t have to be this way, even with the rich fools in charge. In the past the same rich fools were in charge, yet somehow things were worked differently, and the value of stocks and bonds was something which facilitated the financial services which were provided for the development of productive industry. Now it is simply all-important. What was once an assisting force, and an indicator of economic health, has become economic health itself. It’s rather like what happens in an intensive-care ward, where, all too often, the people tending the machines surrounding the body of the patient come to see the machines as much more important than the patient.
This has become extraordinarily important now that the Western banking system has collapsed. It becomes necessary to pretend that the banking system has not collapsed. The only way to do that is to provide the banking system with a constant stream of cash. This is necessary, because the banking system has to be carried on in spite of the fact that the system does not know, and has no desire to find out, whether it is solvent or not. For an insolvent bank to survive, it must sit on its assets and maintain a facade of having infinite amounts of money while discouraging anyone from asking questions about its capacity to meet its liabilities. In order to do this it must have at least some money, and preferably there must be someone else towards which the bank can point fingers and shriek about the financial problems of those people over there.
The money, in the West, comes from two places. In the United States and Britain it comes from nowhere at all, which is to say it comes from what is called quantitative easing, meaning that the federal reserve system and the Bank of England produce imaginary money which is inserted into the bond market — that is, a quantity of money (theoretically this is just printed money, since it is not borrowed and therefore is not a liability to the banks) is used to ease the financial burdens on the commercial banks. It is used as collateral for issuing bonds — and if anyone doubted the value of the bonds, the money would have to be distributed and this would cause inflation, since we are talking about trillions of dollars. However, the financial system has no interest in wishing to see this happen.
In the Eurozone the European Central Bank is forbidden to print money in this way; it is only allowed to manufacture money to meet a particular demand for trading in cash. Therefore, where is the revenue stream to come from? Obviously, from the loans made by the ECB and by the European investment banks. But there’s a problem; some of these loans are undoubtedly bad loans. Try to call them in and the recipients will default, and this would probably set off a cascade of defaults (because the next people in line to have their loans called in would expect this to happen and would default too). Therefore, to force any private borrower to pay back the loans would almost certainly set off a banking crisis which would probably expose the insolvency of all major European banks, which is precisely what the ECB wants not to happen. (And what nobody in any major government wants to happen, because the Americans and British want Europe to remain in the banking business, and the Asian manufacturing giants, and Germany, want Europe to continue buying their manufactured goods.)
So the solution is to demand that “sovereign debt”, which is the debt owed by nation-states, be repaid. Theoretically, sovereign debt is more reliable than private debt, simply because if the debt on a corporation becomes too great, it will go under — but even if a nation-state defaults, the nation-state will still be there and can perhaps be squeezed for cash in some way. Therefore, squeezing a state is less likely to have calamitous consequences than squeezing a bank or a large corporation. Most particularly, because states are not profit-making entities, and also, because various small states are politically in thrall to larger states and therefore their governments can be compelled to cough up the money owed.
But what is required is an enormous amount of money, and small nation-states don’t really possess this. So, what the ECB decided to do was to grant bailout packages to the small nation-states (Portugal, Ireland, Greece and Spain, the PIGS). These packages would supposedly be given to assist those nation-states meet their commitments. In reality, what was happening was that the ECB would borrow cash which would be given to nation-states, and this was legal in a way that it wasn’t legal to give that cash to private corporations. This cash would then be immediately returned to the banks which had loaned money to those nation-states. Thus the PIGS were functioning as a kind of money-laundering outfit for the ECB. Another way of looking at it is that the ECB was pouring money into a vast bucket called the nation-state, but this bucket had a hole in the bottom, and the Western European banking system had its own bucket under that hole. Hence the concept of “bailout”.
Up to a point. Of course, the consequences are extraordinarily unpleasant for the people over whom the governments rule. This is because more money has to come back to the banks than they pay out, for banks are not in business for their health. Hence the poorer countries of Europe are subsidising the banks of the richer countries directly, as well as serving as conduits for flooding those banks with credit which they are not using and don’t need except as bargaining-tools to justify their profits and their other activities.
Unfortunately, the impact of this is necessarily destructive. Since so much money is flooding out of the poorer countries in Europe anyway, it’s easy to secure capital flight — and since those countries are being forced to cut back on social spending, the countries are in recession, meaning that there’s nothing to spend the money on, so there’s good reason for capital flight. Therefore cutting back on social spending doesn’t lead to any shrinkage of the budget deficit, because the money which used to come in from taxes is pouring out of the country. But it does lead to unemployment, and therefore the poor get poorer. Therefore, all the poorer countries in Europe are in slow or speedy downward economic spirals, and they are all being blamed for this, as well as being blamed for all the other economic woes which Europe faces. Sensible politicians always blame foreigners for their country’s problems, and it’s hardly surprising that Chancellor Merkel and Prime Minister Cameron are doing precisely that.
But blame doesn’t help those countries get out of their problems. Instead, it makes it easier to punish those countries for having problems, and therefore puts those countries deeper in their problems. As a result, the poorer countries of Europe are tending to decline more and more rapidly as time passes, because they are getting no help, only hindrances. Therefore, matters are getting close to the point at which it will be impossible to squeeze more money out of those countries. In which case, where will the cash-flow come from? The same process will have to be applied to other countries — to Spain and Italy, probably, which are richer and therefore offer more reward for plundering. However, those countries are extremely vulnerable, and are being made more vulnerable by the collapse in financial confidence which they are experiencing because they are known to be next for the chop. In other words, it seems likely that they will go down even faster than Greece did. It’s altogether possible that they will deliberately go down, in the same way that (ironically) Germany pushed its economy over a cliff in 1923 rather than pay reparations for the war for which they were blamed. Today it’s economic reparations for a banking crisis for which the PIGS were blamed, and the money’s being paid to Germany — the technical details may be different, but the squeeze is the same.
The end product of this would ultimately be that the flow of money to European banks would dry up, and meanwhile, in order to provide that flow for a few years, the whole of southern Europe would be placed in depression (which would surely spill over to the rest of Europe in the end). So that depression would then be followed by a banking crisis in Germany and Britain, which would probably kibosh the whole system and lead to a general collapse of the Eurozone economic and political entity.
The United States, meanwhile, is engaged in grand-scale finger-pointing, declaring that the world’s economic problems are being caused by the Eurozone. Meanwhile, the United States is quietly pursuing much the same policies as the European Central Bank, except that it is doing this to its own states rather than to small allied countries, starving the states of cash so that the cash can be transferred to the financial system. When Europe goes down, America will, too — there is little doubt of that, in part because the US austerity programme is just as unsustainable as the European and relies on a sense of credibility which will be blown away by a collapse of the Eurozone. In order to pretend that this isn’t happening, the Americans are also pretending that they have a major infrastructure programme, like the Chinese — but of course they don’t, because that would mean spending money in a way that the American ruling class doesn’t want. Once again, it is easier to find someone far away to blame for the crisis, than to resolve the crisis.
What’s to be done? Nothing. It is the system which has led us to this. In order for the crisis to be resolved, the system must first be blown away. But in order for the system to be blown away, the crisis must first run its course, until the last banker is strangled with the guts of the last journalist.