Thursday, September 05, 2013

Smooth...And By the Numbers 4: Christmas in July, Snowballs in Hell

"Hold on baby" --Freddie Scott

1.  This past July, the EU parliament voted to repeal the law capping bonuses and other payouts to its poor, exploited, downtrodden, huddled masses of investment bankers.  The deciding votes securing the repeal were cast by two representatives from Greece, both of whom just happened to be members of the Communist Party of Greece, the Kommounistikó Kómma Elládas (KKE).   Said the sponsor of the original legislating that had capped the bonuses, "The Stalinists were half the problem."

And there in three words is the short-version of almost 100 years of class struggle.  The Stalinists have been and continue to be half the problem.

Of course, the truth, as certain thinkers and revolutionists have pointed, is the whole.  The whole problem is capitalism which has been able to reward itself bonus after bonus thanks to the timely support of the Stalinists.

So it was Merry Christmas in July.  It was goody time for the bankers.  And for everyone else?-- there was an overproduced lump of coking coal in those stockings, made in Bangladesh, hung-up over the fireplace. 

2.  However,  and there is always the "however" when it comes to capitalism, if Christmas came early, so did the New Year, washing in, and up, on the waves of overcapacity that dog the steps of "growth" everywhere-- in Europe, North America, the emerging markets, the BRICS.

Shortly after the Greek Stalinists voted to uncap those bonuses, the Stalinists of the State Council of China announced:
We will strictly prohibit providing new credit supply or direct financing in any form to illegal construction projects with overcapacity so as to avoid reckless investment exacerbating the problem of excess production capacity.
Meaning, of course.........we've supplied credit and direct financing in excess for years, funding overcapacity and exacerbating the conflict of industrial development with low agricultural productivity.  It's too late to do anything about it now, so we'll issue this statement.  

The statement itself was punctuated by the actions of China's 3rd largest shipbuilding corporation, China Rongsheng Heavy Industry Group, which, effectively bankrupt, appealed for government financing, laid off 40% of its workforce, and simply neglecting to pay the wages of those not laid off.   Merry Christmas, and Happy New Year.

3.  Meanwhile, North American automakers were decking the halls, although many fewer halls than before.  After closing 27 factories, reducing employment levels by 30%, lowering payment rates for overtime by initiating payments after 40 hrs per week, rather than 8 hrs per day, and tiering the wage structure so that new hires make about 50% less than those hired before 2008, profitability was the gift under this smaller tree.  Sales for 2013 are  running at 15.8 million units, down a bit from the 2005 record of 17.5 million units, but with 27 fewer factories and the reduced wage bill, the less than record sales are no price to pay.  It's goody time.

It's not so goody time for Detroit, however,  once upon a time the center of US auto manufacturing.  The "emergency manager" of the city-- a non-elected appointee of the governor-- pushed Detroit into Chapter 9 bankruptcy for the specific purpose of voiding the city's outstanding obligations to  retirees, past, present, and future.

Of course, once the pension fund is designated as an unsecured claimant, available revenues can and will be diverted to securing payments to those holding the municipal debt.  God bless our brave bondholders!  United the Asset Managers Stand!  Give me liquidation, and give them death!

When questioned about reports of his meeting with 2 Greek representatives of the EU parliament who were members of the KKE, the emergency manager had no comment.

Well, you know what they say about meat and poison, bankruptcy and windfall, vultures and carrion, vermin and plagues....

4.  US bankers, knowing never to leave well enough alone, have decided that the time is ripe to jump back into the asset-backed securities market, buoyed by the fact that defaults on credit card and auto loans have stabilized.  Our brave asset managers issued $332 billion in ABS in the first half of 2013.  Sure that was just a fraction of the 2007 sum of $1.2 trillion in ABS, but $332 billion in this six months, and another $332 billion in that six months........well, it adds up, doesn't it?  Pretty soon, there's serious money involved.

However,  back in Europe, ABS offerings were a levels even below that of 2009, which underscored the pleas of poverty coming from bankers addressed to the EU parliament.

Meanwhile, Wolfgang Schäuble welcomed the early Christmas with a speech to businessmen in Athens, where he initiated them into the fine points of  a German Christmas.  Gazing out at the freshly scrubbed faces of these captains of industry,  Herr Schäuble advised them "not to expect any debt forgiveness from Berlin." Frohe Weihnachten

«Πες μας κάτι που δεν ξέρουμε», σκέφτηκε το κοινό του, σε αρμονία.   
"Sagen Sie uns, was wir nicht wissen", dachte sein Publikum, im Einklang. 
"Tell us something we don't know," thought his audience, in unison. 

Indeed.  Since the bailout will cost the EU almost e240 billion, expect no debt forgiveness from Berlin. Ευτυχισμένο το Νέο Έτος. Glückliches neues Jahr.  Happy New Year.

Barely a month later, Jolly Old Wolfgang, reprising his role as Weihnachtsmann, made the mistake of admitting that Greece would need another bailout in 2014, precipitating consternation among the German electorate.  He thus became the first man in history to jeopardize the re-election of his party's leader by letting  a dead cat out of the body bag, and not getting it to bounce.

5.  It was Christmas in July.  Signs of recovery were detected in Europe by holding a mirror under the nose of the comatose body and observing the condensation.  

It was New Year's in August.  Eurozone property prices hit a 7 year low.

It was Christmas in July.  For the first time since 2007, the advanced countries, Japan, North America and the European Union contributed more to the growth in the global economy than that emerging market economies plus the BRICS.

The emerging markets, the "global South," and the BRICS were getting the North American version  of a German Christmas, courtesy of the US Federal Reserve, that withered arm holding the invisible hand of the alleged fictitious capital belonging to the so-called decrepit, hollowed-out, unproductive, archaic, obsolete, no longer central, etc.etc.etc. US capitalism.  

And how did the Fed inflict this misery on the vibrant, emerging, newly industrialized, emerging market countries?  Did it cancel its currency swap lines with other central banks?  Nope.  Did it raise its Fed funds rate?  Nope.  Did it tighten the rules of collateral in the repo markets?  Nope.  All the Fed did was indicate that it was closely monitoring the US economy for signs that the economy was strong enough to allow the Fed to reduce its purchases of US Treasury debt and FNMA/FMAC mortgage backed securities.

Testifying before the joint economic committee of the US Congress on 22 May, Bernanke said this:

The second policy tool now in use is large-scale purchases of longer-term Treasury securities and agency mortgage-backed securities (MBS). These purchases put downward pressure on longer-term interest rates, including mortgage rates. For some months, the FOMC has been buying longer-term Treasury securities at a pace of $45 billion per month and agency MBS at a pace of $40 billion per month. The Committee has said that it will continue its securities purchases until the outlook for the labor market has improved substantially in a context of price stability. The Committee also has stated that in determining the size, pace, and composition of its asset purchases, it will take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes. Accordingly, in considering whether a recalibration of the pace of its purchases is warranted, the Committee will continue to assess the degree of progress made toward its objectives in light of incoming information. The Committee also reiterated, consistent with its forward guidance regarding the federal funds rate, that it expects a highly accommodative stance of monetary policy to remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.
And then on July 17,  in the semi-annual report to Congress on the condition of the economy, Big Ben stated:
The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional. As I noted, the economic outcomes that Committee participants saw as most likely in their June projections involved continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the restraint from fiscal policy diminishes. Committee participants also saw inflation moving back toward our 2 percent objective over time. If the incoming data were to be broadly consistent with these projections, we anticipated that it would be appropriate to begin to moderate the monthly pace of purchases later this year. And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that point, if the economy had evolved along the lines we anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward our 2 percent objective. Such outcomes would be fully consistent with the goals of the asset purchase program that we established in September.

I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions--which have tightened recently--were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer. Indeed, if needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.
That was it.  Done, complete, finito.  Apparently, that was enough to reverse the currency flows of the last 5 years.  The currencies of the 20 largest emerging market economies all tumbled in synch in relation to the US dollar, conjuring painful memories of the "Asian Tigers" crash of the 90s.  

Brazil's airline rousted the government for aid, and in dollar denominations.  None of that unreal real currency for them.  And why in dollars?  Because 57% of its operating costs are denominated in dollars. 

Fuel purchases, equipment leases, equipment servicing contracts across the globe are denominated in dollars.  Purchases of aircraft, computer servers, work stations, pharmaceuticals are denominated in dollars, so when the money flowing from the "decrepit" advanced capitalist countries, when the "fictitious capital" from the fictitious capital asset management funds reverses course, the EM currencies bolstered by the flow decline.  Revenue follows currency, and the depreciation of the EM currencies amounts to a transfer of profits to the advanced capitalist enterprises.   

This is not a case of "unequal exchange," or rather, it is no more a case of unequal exchange than any of the other of capital's exchanges within any market, global or domestic, where the more advanced capitals claim a portion of the value proportional to their size and at the expense of smaller, less efficient capitals.  

This is no more, and no less, a case of "unequal exchange" than that which occurs between industry and agriculture, where the increased value of the machinery required for and engaged in farm production lowers the value, and the price, of the farm products.

This is no more unequal exchange than any exchange in capital in that exchange is never just exchanges of commodities, but always exchanges of commodities as vectors, vehicles, representatives of capitals claiming profits with exchange being the mechanism of distribution.  

So is that all it takes, one bearded central banker in Washington, DC cautiously suggesting a "tapering" in the quantities of debt instruments to be added monthly to the bank's balance sheet to reverse five years of money flow?    

Of course not.  No alteration in central bank asset purchases is ever made in isolation, and no decision by asset managers is ever made independent of the specifics of accumulation-- specifically independent from the rate of return, or "yield" that the asset managers think they can appropriate in the emerging, or developing markets.

In this instance, it is not just an impediment to continued accumulation that confronts the emerging markets if the Fed begins tapering.  It is the already existing accumulation that impedes rate, ratio, relation, increment of profit, that allows, actually compels, the private asset managers of the advanced capitalist countries, who control $54 trillion, 90% of the world's stock of reserve currencies,  to change course.  

The impediment is overproduction and it is acutely manifested in China.  China accounts for 15% of Brazil's exports.  China's significance as a market-maker for both exports and imports is critical for the other emerging market economies.  And China is where the overproduction of fixed assets has outstripped the ability of capital to sustain profitability, and support the credit markets.  It is not the overproduction of "fictitious capital"--  in property values, credit instruments, in special investment vehicles that threatens China's accumulated productive apparatus.  It is the  accumulated value of this apparatus that depresses profitability and  undermines all values.

After 2008,  China's government, its ruling class in formation, announced, and has attempted to execute, a policy of  internal development, turning to "domestic consumption" rather than fixed asset accumulation for export production.  The policy has failed.  Domestic consumption is a smaller portion of the Chinese economy today than it was in 2007.   The limits of that domestic market have been, and are, the low level of agricultural productivity in China, which is a product of the small average plot size, and which binds 40% of the population to rural life.  

Without the transformation of this agricultural base, China cannot truly create a domestic market capable of valorizing, profitably reproducing industrial output.  China cannot transform this organization of agriculture without uprooting hundreds of millions, without dispossessing these producers who are in essence small property holders, and it cannot uproot these millions without threatening every aspect of its social organization of labor; without threatening the FDI enterprises; without threatening the privately owned corporations; without threatening the state owned factories, mines, and transport networks which rely on exploitation no less severe than that of the private sector.

China remains, in a very real sense, the world's largest maquiladora.  FDI enterprises in China account for over one quarter of all value added  in the country's industrial production; and that portion climbs to 66% in the high technology industries.  The FDI enterprises account for 90% of China's high technology exports (see Peter Nolan's Is China Buying the World? Polity Press 2012). 

China has no more control over direction of capital accumulation and devaluation than any other "asset manager"-- and considerably less than some.

So it was Christmas in July all right.

However, the bourgeoisie have themselves a snowball's chance in hell at a Happy New Year 2014.