Friday, June 20, 2008

Virtual Paper, 3

A vision appeared to Fastow, the enslaved prince of the off-balance-sheet investment vehicle. A ghost, the ghost of Ken of Enron, although unrecognizable as his former self, wrapped as he was in a cloak of witness protection:

Spoke Fastow, " Are you not dead, Sir Ken?"

The ghost answered, in a voice electronically distorted as required by the terms of agreement, "No. I live on. Everywhere. And forever. I live on in asset backed securities, in credit default swaps, in PIK bonds. I am Everyman and Everyman's banker."

Fastow sobbed, " While I waste away in minimum security."

Softly, Ken placed a comforting hand on Fastow's trembling shoulder. "My son, you are the Galileo of the new age, serving your time because you were ahead of it."

1. The hard landing of the US economy after the capital investment expansion of 1992-1999 reproduced itself spectacularly, and as a spectacle, with the destruction of the World Trade Center. Not so much as event as a package, September 11 was the perfect combination of distraction and destruction where the action became secondary to the commentary on the action; where image was not as important as the replay of the image, the packaging and repackaging of the image; where life and death crawled along the bottom of a video feed; where everything you need to know was learned off a flat screen.

Multi-million dollar aircraft, financed by loans syndicated, subscribed, and secondarily marketed, flying on fuel twice as expensive, crashing into the most expensive commercial cubic footage in North America...thus was the conflict between the means and relations of production broadcast and rebroadcast, both a terrorist act and the creation of a new market, the market called homeland security.

Accidents never happen in a perfect world, and if September 11 hadn't existed, the bourgeoisie would have invented it. Overproduced to the point of catastrophe and then some, the miserable, excruciating, vicious dialectic at the core of capitalism, the reduced rate of return, bought itself compensation in the destruction of assets, organic and inorganic.

2. So if capital fashioned for itself an inferno in the stairwells of the north and south towers, the class of capitalists determined to rise from those ashes not as a phoenix, but as a chickadee, hoarding, storing, restraining growth.

Private fixed investment was throttled. Having grown 60% in the period 1994-2000, investment declined the next three years. By 2006, annual investment was only 12% greater than the 2000 mark.

The restraint on growth was measured in ways other than gross investment amounts. Everything in capital is measured by more than just gross amounts. Anything that has significance to the bourgeoisie obtains its significance, its worth, as a relation, a ratio. So the ratio of domestic private investment to fixed capital consumption indicates both a rate of replacement and a rate of reproduction.

In 2000, the ratio of gross domestic private fixed investment to fixed capital consumption measured 1.69. In 2003, the ratio had dropped to 1.43, and in 2006 the mark was 1.44.

And the bottom line was....? Of course, it was the bottom line itself. Net operating profits which in 2000 measured 7.65% of sales, which measured 4.3% in 2001, which measured 5.4% in 2003, recovered to 7.1% in 2006. Profitability restored, eventually. But better late than never, right?

Profitability restored eventually, reproduction restrained was the headline, but not the full story. The full story was the increased ratio of consumption of assets. The full story was increased output per hour per manufacturing worker despite the restraint of investment, a 31% increase between 2000 and 2005 equal to the increase during the investment boom of 1995-2000. The full story was declining unit labor costs.

When, and if a commodity's exchange value is realized as a profit, the profit exists as a relation not just to the costs of the production of that commodity, not just in relation to the necessary labor-time for its reproduction. The profit exists as a relation to the total profit materialized from all of capital's exchanges ; the profit exists not as a profit unto itself, but only as a proportion, a ratio of the profitability of reproduction as a whole. So underlying the restricted reproduction of capital, the return to profitability, the hoarding of cash is the aggrandizement of greater and greater shares of that profit by the oil industry.

3. When in 1997, the major US petroleum companies, participating the US Energy Information Agency's Federal Reporting System (FRS), reported profits equal to 1/7 of the total profits of US manufacturing companies; whey they reported a rate of profit (defined as net income plus interest divided by total invested capital) of 14.7 percent, a rate higher than that of US manufacturing companies, all across boardrooms in Houston, and Chicago, and White Plains, Los Angeles, refrains of "Happy Days Are Here Again" were heard.

What difference a day makes, or a year. By 1998, their good thing was gone, with profits down by 60 percent, net income at only 5% of US manufacturing totals, and the profit rate cut in half.

But along came Jones, Jones being OPEC and in 1999 the oil majors started their long march back. By 2000 net income exceeded the 1997 mark and measured at 16% of the total for US manufacturing. The rate of net income to invested capital also reached 16%, a level above that of US manufacturing.

In 2002, it was the same old song as profits shrunk with the overproduction of natural gas and the collapse in prices. And this time, the petroleum majors had plenty of company as net income dropped approximately 20% for U.S. manufacturing companies.

What the oil industry couldn't do without OPEC, and what OPEC couldn't do alone, could and was done with the full faith and credit of the government of the United States and its military through its destruction of Iraq.

With prices of petroleum climbing, FRS companies' net income doubled between 2003 and 2005, and climbed another 10% in 2006. U.S. manufacturing net income increased 33% in the same period, increasing another 20% by 2006. In that year, FRS net income equaled 28% of that for all US manufacturing. For every year 2003, 2004, 2005, 2006, the ratio of net income plus income to total invested capital of the FRS companies exceeded 14%, reaching approximately 22% in 2005 and 2006. For every year, the FRS rate exceeded that of all US manufacturing by a minimum of 40%. But most important of all, in 2006 the net income ratio for US manufacturing declined by more than a quarter, while that of the FRS majors remained steady.

Oil claimed and expanding share of a declining rate of profit. Cash was king. And oil was his sceptre.

4. If, and there is no if about it, Bush is the idiot spawn of an idiot president and an idiot first lady, namely Reagan and Thatcher, reprising what was venal and vicious on an even grander more venal, more vicious stage; if the oil price increases of 2003-2007 are the idiot replay of the price increases of 1979 and 1980; if, and there is no if about this either, Greenspan was the idiot spawn of Volcker and Ayn Rand; then and there is no if about this, the mortgage crisis of the 21st century is the idiot spawn of the Savings and Loan Crisis of the late 1980s, reprising that on a grander and more petty scale.

It was, after all, the Reagan era that joined death squad capitalism and the destruction of fixed assets in holy matrimony, turning the 80s into the lost decade for Latin American and for the working class everywhere.

It was, after all, the Reagan era that made margin, leverage, and liquidation the three kings.

And what did this mean for the financiers ? The once purveyor's of paper, now hucksters of the book entry? That army of well-dressed locusts who had been taught, who believed that cash was trash, provided they got theirs first? Many of whom only remembered Reagan from his funeral?

Corporate loan issuance between 2000 and 2004 declined approximately 22%. With that came the "redirection" of finance capital, a change in the focus of the locust. In 2000, mortgage lending and corporate lending amounts were nearly equivalent. In 2002, however, mortgage volume had practically doubled while corporate had withered away. The mortgage amounts loaned were some 60 times the corporate aggregates. In 2005, corporate borrowing had increased, but was still only 70% of its 2000 level. Mortgage borrowing had increased 260% from its 2000 level. Total amounts outstanding for the mortgage sector had doubled between 2000 and 2006 to ten trillion dollars, while the corporate sector had expanded by 27%, with that expansion coming in 2005, 2006, preceding and precipitating the decline in the rate of net income to capital invested.

Confronted with reduced accumulation, which looks to finance like reduced borrowing, but with excessive cash flows from corporations restraining investment (and the ghost of petro-dollars past), finance capital sees its own reproduction in segments, layers, tranches of asset backed securities and sees that as more than just an apportionment of profit, it sees in the exchange of the representation of an asset as a security as the source of profit itself.

Then, of course, capital runs up the inside of the cage of its own making. The asset class required for continued securitization must be refinanced for expansion despite its declining profitability. Loss, the simple destruction of assets, is and becomes the reproduction of capital in all its miserable complexity.

5. It is not default, bankruptcy, failure of a sector, of a "rating," that alone constitutes the predicament of capitalist reproduction. It is the general devaluation of all values that is so essential to the circuits of capital, and so frightening to the owners of the private property called capital. In that devaluation of value, that destruction of assets, capital and its owners, hear the hard charging footsteps of history; they catch a glimpse of their own mortality. In every FORECLOSURE sign punched into a loan, every offer for which there is no bid, all the supply with no demand, there is in fact the opposition of NEED to EXCHANGE, of social ownership of the means of production to private property.

We are at the start of this devaluation process.

June 20, 2008

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