Thursday 31 May 2012

A few thoughts on debt and crisis

Hearing and watching radio and TV accounts of the debt crisis could easily lull one into thinking any of the following:
a) the 'bond markets' or 'the cost of bonds' was something a bit like weather, something that just 'happens'.
b) 'debt' is something that governments rack up and is always bad - usually called 'public sector debt' or 'public sector borrowing'
c) the private sector is some kind of virtuous club which contains within it the power to provide jobs and to share out wealth to everyone

None of these things is true.

These 'bonds' that everyone is now talking about are just a kind of moneylending. Human beings running this system of moneylending fix their interest rates. Governments usually raise money this way, so when the cost or price of the bonds goes up, that's how the moneylenders get us to pay them. 

However, this 'sector' of the economy, the banking and financial sector is in massive difficulties entirely of its own making and nothing to do with what governments do or have done. They made high-risk loans and then sold those 'debt packages' to other people in the financial sector. Those people often didn't have the cash to buy those loans so they 'leveraged' them ie they borrowed even more money. This way the debt mountain got bigger and bigger and bigger. This is the financial crisis. The financial crisis is not what governments have borrowed. 

Analogies are dangerous but let's take the mortgage one. So long as you (like a government) can pay your mortgage, your debt is not a problem. If your mortgage company lends vast amounts of money (or spends it) and finds that it's not getting enough income, it would, all other things being equal, try to get more money out of you and all the other mortgage-holders to get it out of the hole. This is where we're at. 

The banking sector has over-lent and is trying in various ways to get solvent through putting pressure on governments - that's us, to pay for their losses. The 'bonds market' is one of the instruments they can use. They simply up the interest rates. It was the 'fear' of this that George Osborne used when the Coalition came to power. What he said was that he had to cut the government debt otherwise the cost of government borrowing would be too high. But what he didn't say was that particular pressure was not caused by the government borrowing, it was caused by the banking sector's lending! In fact, one reason for some of the government debt was that same government had helped bail out some parts of the financial sector! 

So, when you look at the UK economy one distinctive thing about it is the huge size of the financial sector's debt. The government debt is 30% the size of the financial sector's debt.

Now to this virtuous private sector. We hear from apologists for the government as on tonight's BBC TV Newsnight that if only the public sector could be shrunk (that's to say if public sector workers are sacked and our services get worse), then young people would start up businesses and the economy would boom. It's a nonsense. The companies are holding over £700 billion. They don't want to invest (start up new businesses or expand present ones) because austerity - which the financial sector has demanded - is making people less willing to spend money. 

The main point here is that there is nothing 'virtuous' about the private sector. It exists in order to make profits. If it can't make profits, it shuts up shop.. It's not there to provide jobs or services or the things we need. It may happen to do that but only when and if it can make profits. When it can't, it sacks people, stops providing the things and services we need.

What we are seeing is a moment in history where the people who pocket the profits don't want to take the risk of starting up and expanding businesses and again, this is absolutely nothing to do with government debt, public sector borrowing, or what they call 'the need to cut the deficit'. It is entirely to do with the fact that they can't make profits, demand is too low. The main reason demand is too low is because the bankers have demanded that governments do things to make the demand low (ie sack people, impose wage freezes, cut back on services, cut back on government debt) so that governments can help the banks! 

There is nothing virtuous about any of this. It's all about the people who pocket profits trying to stay as rich as possible. To do that, they are trying to make the poor pay, they are trying to get governments to cut our standard of public service - schools, hospitals, transport, welfare. 

What's going on here is that the system has reached one of those points of crisis where 'business' (or capitalism as I would call it) can't solve the crisis by itself. Whether they know it or not, they are trying to make everything - labour costs (or wages, salaries and pay, as we call them), rent, money, raw materials, machines, cheap enough to make it worth their while to start up and expand businesses in order to make profits. 

This means destroying millions of people's lives. They are trying to make us all poorer and with a lower standard of living, education and health so that they can survive as the owners of wealth, the owners of businesses or as we call it 'the means of production'. 

That's what this crisis is really about. They are doing all they can to hang on to the 'means of production'. If this means millions of people being without jobs, electricity, food, hospitals, schools - so be it. 

That is the beauty of capitalism

But they can only get away with it, if they succeed in telling complete lies and phooey about what's causing the problem. That's why they talk about the 'bond markets' as if it's the weather. That's why they make out that it's the government debt that is the problem and not their own gargantuan debt. That's why they make out that a 'big public sector' is what's stopping them expanding and starting up new businesses when in reality  it's their own unwillingness to do it because they know that we haven't got the money to buy what they might make.

In other words, in order to hang on to those 'means of production' and the massive wealth they possess, they have to lie about what's going on.