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Saturday, May 28, 2022

Report Card on a Failing Economic System

On Friday, May 6, the Federal Reserve released data showing that consumer credit (debt) has been accelerating since the fourth quarter of last year, with revolving credit (largely credit card debt) speeding up at an even greater pace since the third quarter of 2021. Total consumer credit grew by an annualized rate of 7% in the fourth quarter of last year, increased to 9.7% in this year’s first quarter, and expanded to 14% in March.

At the same time, revolving credit-- the debt largely incurred through credit cards-- grew 8.3% in the third quarter and 12.7% in the fourth quarter of 2021, and then 21.4% in the first quarter of this year, and an astonishing 35.3% in March!

Clearly, the US economy’s reliance on consumer spending is more and more dependent upon consumer debt, especially the credit card. For months, the business press has been hailing the continued expansion of consumer spending-- a huge contributor to overall economic growth-- as the one bright spot in the news. Now we see that consumer spending is built on the sands of consumer debt.

Likewise, personal savings (as a percentage of disposable personal income) in April, 2022 reached a low unseen since September of 2008, a sure sign that people are dipping into savings to make ends meet.

And subprime-- low credit score-- loans are failing. Subprime car loan and lease delinquencies hit a record high in February.

To make matters worse, the Federal Reserve has, after more than a decade of unprecedented near-zero Federal funds target interest rates, raised the rate by half a percentage point, the greatest one-time increase in 22 years. Without a doubt, this will translate into higher credit card interest rates going forward, applied to a broad, rapidly growing mass of consumer debt.

Thus, the consumer is turning to the credit card-- incurring debt-- precisely when the cost of using the card is rising.

Higher interest rates are exploding mortgage rates-- and dampening the over-heated housing market-- in some cases, doubling this year. Because of rising mortgage rates, new home sales fell 16.6% in April from March, yet prices of homes continue to rise: the median existing home price rose 14.8% from April, 2021 to April 2022. While it’s dramatically costlier for the homebuyer to finance a new home, the price of a house continues to rise alarmingly-- a perfect, classic housing-market bubble on the verge of bursting!

But the plight of the consumer gets worse: inflation continues to drive the cost of living for the average consumer higher and higher. For eight months, the annualized rate of inflation has been rising, culminating in an 8.5% rate in March and 8.3% rate in April-- rates rarely seen in the last 40 years. Food prices alone-- the most critical consumer goods for the least advantaged-- are up 10.8% for the year ending in April, 2022, the greatest 12-month increase since November, 1980.

When inflation raised its ugly head last year, pundits and the Federal Reserve dismissed it as temporary, an anomaly caused by dislocations following the Covid pandemic. In response, I wrote:

Despite the admonitions of the central bankers and financial gurus, inflation seldom self-corrects. It rarely runs its course. Instead, inflation tends to gather momentum because all the economic actors attempt to catch up and get ahead of it.

Today, the central bankers and financial gurus agree that inflation will be around for some time, eroding the buying power of the average worker.

Despite the dire accusations in the business press that increases in worker compensation is driving inflation, the truth is the opposite. The average worker’s hourly income-- adjusted for inflation-- has dropped by 2.6% from last April! Whatever gains are made, they are soon devoured by inflation.

Nor does the future portend well. US economic growth (GDP) sunk by 1.5% in the first quarter of 2022. As they did with the inflation crisis, pundits are shrugging this off as a self-correcting aberration. Yet, it is hard to imagine that the shrinking incomes, expanding debt, and fierce inflation will not take its toll on consumer confidence and spending, the factors that contribute far-and-away the most to US growth.

A powerful indicator of roadblocks ahead for growth was the first-quarter collapse of labor productivity. Thus, labor productivity dropped by an astonishing 7.5% in the nonfarm business sector, the largest decrease since the third quarter of 1947-- nearly 75 years ago! This collapse was brought on by a 5.5% increase in hours worked and a 2.4% drop in economic output (this is a broad measure of hours worked, including employees, proprietors, and unpaid family workers).

Companies continue to compete for employees and hire new employees, while the economic product shrinks, a formula-- under capitalism-- for future slowing accumulation, a coming decline in the rate of profit. Some of the US’s largest retailers are reporting a decline in earnings.

This employment boom arose especially in the technology sector, where tech start-ups round up capital, borrow heavily, and hire furiously on the faith that profits will come later. Risk taking, future high return-seeking venture capitalists and the extremely low cost of borrowing, combine with a young, educated, competitive workforce to create the perfect conditions for inflated expectations and recklessness. With interest rates rising and uncertainty growing, the tech bubble is now leaking-- hiring freezes, layoffs, and austerity are occurring or in the offing.

The technology sector is the most vulnerable sector of the capitalist economy because of a long period of easy access to capital and a long incubation period before returns on investment appear. Banks have become impatient for profits from the latest glitzy app, just as they gave up waiting for returns on their investment in promiscuous fracking a few years ago (that is being corrected with the greatly increased demand for energy in Europe as a result of the Ukraine war).

The tech sector's troubles are reflected in equity markets, with the tech-based NASDAQ sinking faster, yet dragging down the S&P index as well. So far this year, as of May 20, the NASDAQ composite has dropped well over a quarter, with the S&P falling 19%, the S&P’s worst start to a year since 1970. With 8 straight weeks of losses, the Dow Jones Industrial Averages has incurred its worst stretch since 1932. For those whose only exposure to the stock market is their 401(k) retirement plans, stock performance is a disaster-- investment advisors and managers have put a greater proportion of their funds into stocks (as opposed to other investment instruments like bonds) than in the past. This will be catastrophic for those planning to retire in the next few years.

Bonds, a usual safe haven when the markets are down, are also down for the year. And bitcoin, the darling of the financial hipsters and the crooks, has lost a third of its value this year.

Nonetheless, investors are buying in the face of a deepening bear market, seduced by the old saw of “buying on the dip” -- buying stocks when they are at the bottom and, therefore, a bargain. Despite the market's abysmal performance in March, individual investors bought a net $28 billion in stocks and ETFs-- a record. This would appear the greatest exercise in wishful thinking since the 2007-2009 crash. Maybe it's an omen!

Certainly, if equity markets continue to lose trillions of dollars of hypothetical wealth (the top six Standard and Poor’s companies lost $3.76 trillion of nominal value through May 20), the negative wealth effect will restrain spending, especially among those in the middle strata and in the bourgeoisie. Bloomberg estimates that global stocks have lost over $11 trillion in value: “Investors continue to reduce their positions, particularly in technology and growth stocks,” said Andreas Lipkow, a strategist at Comdirect Bank. “But sentiment needs to deteriorate significantly more to form a potential floor.”

What does all of this bad economic news mean?

The end of the Cold War brought not a peace dividend, but a gift to the victorious capitalist ruling classes. It was, after all, a struggle between capitalism and socialism, despite what the bogus left thought about Soviet socialism. Without question, the capitalist class understood the Western confrontation with the Soviet Union as an existential battle.

With capitalist triumphalism came decades of super-exploitation of millions of workers thrust into the global labor market. Billionaires abounded, income and wealth inequality exploded, and the resultant accumulated capital sought new and creative destinations. To a large extent, the financial sector enthusiastically accommodated this need by devising innovative, complex instruments, new investment structures, and opaque financial operations.

Capital’s imperative to reproduce itself took it into riskier and riskier places; the growing volume of accumulated capital became more difficult to productively reinvest; investors booked “profits” that were more and more contingent or hypothetical; the euphoria of hyper-accumulation invited greater and greater leverage; and the accumulation mechanism finally crashed under the weight of tenuous, hypothetical, and “fictitious” capital in 2007.

The history of the twenty-first century since the 2000 tech collapse has been one continuous struggle on the part of the Central Banks, international economic organizations, government administrations, and financial institutions to rescue capitalism from the giddy orgy of speculation and overinvestment triggered by capitalist triumphalism.

These actors have attempted to seal off the trash-- bad investments, overvalued, unredeemable bonds, unrecoverable debt-- from the healthier economy, while injecting massive volumes of no- or low-cost (near-zero interest rates) liquidity into a shell-shocked economy.

The raging inflation that emerged late in 2021 places the masters of the capitalist economic universe in a policy vice. To stem inflation, they must raise interest rates, which invariably dampens economic growth. But economic growth has already slowed-- indeed, turned negative in the US for the first quarter of this year. With so many economic indicators declining or going negative, rising interest rates will only accelerate the slowdown of consumer spending, productivity, wage growth, investment, and social spending, while increasing debt and its costs.

This is truly a bleak picture and it's not clear what useful tools remain in the hands of the policy makers to brighten it. The NATO/Russia/Ukraine blunder of a disruptive, grinding war can only worsen global economic conditions for everyone except the arms makers.

We can only hope that people will make the connection: capitalism breeds misery and war.

Greg Godels

Monday, May 9, 2022

No to the Imperialist War!

Amidst echoes of 1914 and World War I, the political left-- far less potent than a century ago-- is split between the contestants in a European war.

As in 1914, the rush to pick sides in the conflict in Ukraine clouds all judgment, conjuring the adolescent emotions engaged while witnessing a schoolyard fight. Some on the left portray Ukraine as an innocent victim of a notorious bully and the bully’s long history of belligerence.

Others, long cognizant of the nefarious role of the US and NATO in bringing perceived rivals, renegades, or defiers to their knees, see Russia as the hapless victim of betrayed promises and existential threats.

Those who rush to Ukraine’s defense without qualification display an ignorance of history and the transparent roles of all the players in the global imperialist chess game. They also succumb to the crudest propaganda campaign since the 2003 exaggerations and fabrications employed to sell the Iraq invasion. Their jump onto the Western imperialist bandwagon is, at best, naive beyond hope, at worst, complicit in the aggressive foreign policy of the US and NATO.

Invoking Ukraine’s right to self-determination would seem to have more credibility. But it is necessary to remember how Western imperialism has often twisted the doctrine to fit its own predatory goals. When Vietnam was moving towards independence, the US and its allies artificially created a Republic of Vietnam in the south, basing US support and long war on defending its right of self-determination against “Communist aggression.” The West used the same ruse with mineral-rich Katanga, Kosovo, and oil-rich Cabinda to name a few. Ukraine lost any pretense of self-determination after it underwent a Western-sponsored coup in 2014. Western imperialism is always anxious to defend the spurious right of self-determination of its clients and puppets.

On the other hand, those opposing the unqualified support of “heroic” Ukraine certainly have a case. The aggressive posture of the US and NATO towards Russia since the fall of the Soviet Union is real, though seldom explored by anyone in the monopoly-media commentariat. Surrounding Russia with NATO member states, bases, war-game simulations, and troop deployments is inexplicable, except by attributing hostile intent. Meddling in the civil and political life through unrequested NGOs and bombarding Russia’s citizens with critical, oppositional messages cannot be seen as friendly acts.

Nonetheless, these acts of aggression fall short of military action and do not justify military action by another party. Saber-rattling is qualitatively different from going to war. An invasion is not a justified response.

Also, the proffered notion that the Russian invasion was actually a defensive action to rescue the Russian-speaking citizens of Eastern Ukraine reeks of the same doublespeak that the US and NATO employ with their putrid doctrine of humanitarian interventionism. The shame of this excuse for imperialist aggression does not validate it for Russian use.

A strong case can be made that the Russian leadership was once again drawn into the ‘Brzezinsky trap.’ US signals before the invasion were remarkably ambiguous. While the US military and State Department were warning of a Russian build-up and imminent invasion, the usual, expected bellicose warnings were not heard from Washington. Typically, when a great power senses that a rival is threatening, it responds with exaggerated threats of its own, military maneuvers, troop build-ups, heightened alerts, etc. Instead, President Biden gave assurances that the US would not be drawn into a war.

Brzezinski, President Carter’s National Security Advisor, devised a scheme to draw the Soviet Union into a long, bloody, fruitless war in Afghanistan by encouraging and supporting Islamic zealots to destabilize a country on the USSR border.

Similarly, George Bush, the elder, allowed his ambassador to give mixed signals about a US response to Saddam Hussein when Hussein contemplated an invasion of Kuwait. Hussein took the bait, precipitating a US invasion of Iraq.

If it was a trap and the Russian leadership fell for it, then not only was the invasion not justifiable, but it was tragically misguided. The result, to date, has generated greater military, economic, and public pressure on the Russian Federation, a situation that Russian leaders said they wanted to forestall with their action.

Thus, defending Russia’s invasion, despite the context, is defending the indefensible.

Many want to portray Russia as “anti-imperialist,” given its commendable acts of opposition to US aggression in countries like Syria, Cuba, or Venezuela. But as I explained in an earlier article, that is not a helpful way of understanding Russia’s role in the imperialist system and certainly not consistent with V.I. Lenin’s theory of imperialism. Those who harbor this illusion-- whether from Cold War nostalgia or a misreading of Lenin’s writings-- are attempting to detach today’s Russia from its capitalist economic base and deny that its rulers act on behalf of its capitalist class.

It is possible to grant that Russia objectively acted against US imperialism in militarily aiding Syria while also asserting that the conflict in Ukraine is an imperialist war. That is, the battle raging in Ukraine is, in the final analysis, fought over the material interests of capitalist ruling classes, not the interests of the people of Ukraine or Russia.

The great tragedy is that the broad left-- the historical foil to war and imperialism-- remains divided, confused, and inactive while a bloody, destructive war rages, threatening to expand and escalate. As the war continues with no resolution, the only winner is US imperialism.

In sharp contrast, over 40 Communist Parties have signed a joint statement --No to the Imperialist War in Ukraine!-- affirming that the war in Ukraine is an imperialist war and that the people “have no interest in siding with one or another imperialist or alliance that serves the interests of the monopolies.” The statement recognizes that ending the conflict-- “the meat grinder of imperialist war” -- is the foremost task and goes further to “demand the closure of military bases, the return home of troops from missions abroad, to strengthen the struggle for the disengagement of the countries from imperialist plans and alliances such as NATO and the EU.”

One signatory-- the Greek Communist Party-- has led the way by protesting at the US and Russian embassies, organizing mass demonstrations against the war, and leading the effort to stop NATO weapons shipments. Italian labor organizations have also resisted NATO arms shipments.

To the magazine’s credit, the editor of Monthly Review, the influential US left publication demonstrates a similar understanding:

At present, we are once again seeing “an old-style struggle for power” in the form of a war in Ukraine, which has taken on a “ghostly character” because of the presence of thermonuclear weapons on both sides of what… is essentially a “proxy war” between two capitalist states: the United States (along with the whole of NATO) and Russia.

By bringing the threat of nuclear war into sharp focus, editor John Bellamy Foster shows the folly of those caught in the blame-game, those immobilized by the allure of war pornography spread by monopoly capital’s powerful propaganda machine, and underscores the urgency of stopping the war now.

To perhaps the surprise of some, Pope Francis has brought clarity to the war in Ukraine, in earthy, but direct language. Supposedly, he told the Russian Orthodox Patriarch that the Russian church leader should not be “Putin’s altar boy.” While this brought glee from those supporting “Glory to Ukraine” at all costs, he followed up with the charge that the cause of the war might be the “barking of NATO at the door of Russia,” an apt metaphor. The Pope's blunt analysis supports his commitment to ending the war above all other concerns. He has offered to visit all belligerents and negotiate, the sane way to end hostilities.

While Pope Francis’s position as peacemaker may seem unremarkable, it must be placed against the backdrop of the “just war” concept that has allowed Catholics and church leaders in the past to tailor the Church’s message to please right-wing regimes, war makers, and xenophobia, while appearing doctrinaire.

A recent commentary in The Wall Street Journal explores the Church’s historic relationship to the concept. Francis seems to prefer a just peace to a just war, forestalling its expansion and flirtation with nuclear war.

We can but hope that these sane voices can unite a divided left into vacating the debate hall and returning to the streets to protest an imperialist war and the elites that profit at the expense of the masses. We cannot repeat the mistakes of 1914.

Greg Godels