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Postcapitalism
A Guide to Our Future
By Paul Mason Farrar, Straus and Giroux
Copyright © 2015 Paul Mason
All rights reserved.
ISBN: 978-0-374-71069-9
CHAPTER 1
Neoliberalism Is Broken
When Lehman Brothers collapsed, on 15 September 2008, my cameraman made me walk several times through the clutter of limos, satellite trucks, bodyguards and sacked bankers outside its New York HQ, so he could film me amid the chaos.
As I watch those rushes nearly seven years later – with the world still reeling from the consequences of that day – the question arises: what does that guy in front of the camera know now that he did not know then?
I knew that a recession had begun: I'd just trekked across America filming the closure of 600 Starbucks branches. I knew there was stress in the global finance system: I'd reported concerns that a major bank was about to go bust six weeks before it happened. I knew the US housing market was destroyed: I'd seen homes in Detroit on sale for $8,000 cash. I knew, in addition to all this, that I did not like capitalism.
But I had no idea that capitalism in its present form was about to self-destruct.
The 2008 crash wiped 13 per cent off global production and 20 per cent off global trade. It took global growth negative – on a scale where anything below +3 per cent is counted as a recession. In the West, it produced a depression phase longer than in 1929–33 and even now, amid a pallid recovery, has got mainstream economists terrified about the prospect of long-term stagnation.
But the post-Lehman depression is not the real problem. The real problem is what comes next. And to understand that we have to look beyond the immediate causes of the 2008 crash to their structural roots.
When the global finance system collapsed in 2008, it didn't take long to discover the proximate cause: the debts hidden in mispriced products known as 'structured investment vehicles'; the network of offshore and unregulated companies known – once it had started to implode – as the 'shadow banking system'. Then, as the prosecutions began, we were able to see the scale of the criminality that had become normal in the run-up to the crisis.
Ultimately, though, we were all flying blind. And that's because there is no model of a neoliberal economic crisis. Even if you don't buy the whole ideology – the end of history, the world is flat, friction-free capitalism – the basic idea behind the system is that markets correct themselves. The possibility that neoliberalism could collapse under its own contradictions was then, and remains now, unacceptable to most.
Seven years on, the system has been stabilized. By running government debts close to 100 per cent of GDP, and by printing money worth around a sixth of the world's output, America, Britain, Europe and Japan injected a shot of adrenaline to counteract the seizure. They saved the banks by burying their bad debt; some of it was written off, some assumed as sovereign debt, some buried inside entities made safe simply by central banks staking their credibility on them.
Then, through austerity programmes, they transferred the pain away from people who'd invested money stupidly, punishing instead welfare recipients, public sector workers, pensioners and, above all, future generations. In the worst-hit countries, the pension system has been destroyed, the retirement age is being hiked so that those currently leaving university will retire at seventy, and education is being privatized so that graduates will face a lifetime of high debt. Services are being dismantled and infrastructure projects put on hold.
Yet even now many people fail to grasp the true meaning of the word 'austerity'. Austerity is not seven years of spending cuts, as in the UK, or even the social catastrophe inflicted on Greece. Tidjane Thiam, the CEO of Prudential, spelled out the true meaning of austerity at the Davos forum in 2012. Unions are the 'enemy of young people', he said, and the minimum wage is 'a machine to destroy jobs'. Workers' rights and decent wages stand in the way of capitalism's revival and, says the millionaire finance guy without embarrassment, must go.
This is the real austerity project: to drive down wages and living standards in the West for decades, until they meet those of the middle class in China and India on the way up.
Meanwhile, lacking any alternative model, the conditions for another crisis are being assembled. Real wages have fallen or remained stagnant in Japan, the southern Eurozone, the USA and the UK. The shadow banking system has been reassembled, and is now bigger than it was in 2008. The combined global debt of banks, households, companies and states has risen by $57 trillion since the crisis, and stands at nearly three times global GDP. New rules demanding banks hold more reserves have been watered down and delayed. And the 1 per cent has got richer.
If there is another financial frenzy followed by another collapse, there can be no second bailout. With government debts at a post-war high and welfare systems in some countries crippled, there are no more bullets left in the clip – at least not of the kind fired in 2009–10. The bailout of Cyprus in 2013 was the test bed for what happens if a major bank or a state goes bust again. For savers, everything in the bank over &8364;100,000 was wiped out.
Here's a summary of what I've learned since the day Lehman died: the next generation will be poorer than this one; the old economic model is broken and cannot revive growth without reviving financial fragility. The markets that day were sending us a message about the future of capitalism – but it's a message that, at the time, I only partially understood.
'ANOTHER DRUG WE'RE ON ...'
In future, we should look for the emoticons, the smileys and digital winks in emails that the finance guys use when they know they're doing wrong.
'It's another drug we're on,' admits the Lehman executive running the infamous Repo 105 tactic in an email. The tactic involved hiding debts away from Lehman's balance sheet by temporarily 'selling' them and then buying them back once the bank's quarterly report had been submitted. Another Lehman exec is asked: is the tactic legal, do other banks do it, and is it disguising holes in our balance sheet? He emails back: 'Yes, no and yes:).'
At the ratings agency Standard & Poor's, where they've knowingly mispriced risk, one guy messages another: 'Let's hope we are all wealthy and retired by the time this house of cards falters,' adding the emoticon ':O)'.
Meanwhile, at Goldman Sachs in London, trader Fabrice Tourre jokes:
More and more leverage in the system, the entire system is about to crumble any moment ... the only potential survivor the fabulous Fab ... standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstrosities!!!
As more evidence of criminality and corruption emerges, there is always this knowing informality among bankers as they break the rules. 'Done, for you big boy,' writes one Barclays employee to another as they manipulate LIBOR, the rate at which banks lend to each other, the most important interest rate on the planet.
We should listen carefully to the tone in these emails – the irony, the dishonesty, the repeated use of smileys, slang and manic punctuation. It is evidence of systemic self-deception. At the heart of the finance system, which is itself the heart of the neoliberal world, they knew it didn't work.
John Maynard Keynes once called money 'a link between the present and the future'. He meant that what we do with money today is a signal of how we think things are going to change in years to come. What we did with money in the run-up to 2008 was to massively expand its volume: the global money supply rose from $25 trillion to $70 trillion in the seven years before the crash – incomparably faster than growth in the real economy. When money expands at this rate, it is a sign that we think the future is going to be spectacularly richer than the present. The crisis was simply a feedback signal from the future: we were wrong.
All the global elite could do once the crisis exploded was put more chips on the roulette table. Finding them, to the tune of $12 trillion in quantitative easing, was no problem since they themselves were the cashiers at the casino. But they had to spread their bets more evenly for a while, and become less reckless.
That, effectively, is what the policy of the world has been since 2008. You print so much money that the cost of borrowing it for banks becomes zero, or even negative. When real interest rates turn negative, savers – who can only keep their money safe by buying government bonds – are effectively forced to forgo any income from their savings. That, in turn, stimulates the revival of property, commodity, gold and stock markets by forcing savers to move their money into these more risky areas. The outcome to date has been a shallow recovery – but the strategic problems remain.
Growth in the developed world is slow. America has recovered only by carrying a $17 trillion Federal debt. Trillions of printed dollars, yen, pounds and now Euros are still in circulation. The debts of Western households remain unpaid. Entire ghost towns of speculative property – from Spain to China – continue unsold. The Eurozone – probably the most important and fragile economic construct in the world – remains stagnant, generating a level of political friction between classes and countries that could blow it apart.
Unless the future delivers spectacular riches, none of this is sustainable. But the kind of economy that's emerging from the crisis cannot produce such wealth. So we're at a strategic moment, both for the neoliberal model and, as I will show in chapter 2, for capitalism itself.
If we rewind the tape to New York in September 2008, you can see what was rational about the optimism that drove the boom. In my footage from that day there's a crowd of people outside the Lehman HQ taking photographs on their Nokias, Motorolas and Sony Ericssons. The handsets are long obsolete, the market dominance of those brand names already gone.
The rapid advance in digital technology that drove the pre-2007 boom has barely paused for breath during the slump. In the years since Lehman collapsed, the iPhone conquered the world and was itself surpassed by the Android smartphone. Tablets and e-books took off. Social networking – barely talked about back then – has become a central part of people's lives. Facebook had 100 million users when Lehman went bust; it has 1.3 billion users at time of writing and is bigger than the entire global internet was in 2008.
And technological progress is not confined to the digital sphere. In those seven years, despite a global financial crisis and a massive earthquake, Toyota has manufactured 5 million hybrid cars – five times the number it had made before the crisis hit. In 2008, there were 15,000 megawatts of solar power capacity in the world; by 2014 there were ten times that.
This, then, has been a depression like no other. We have seen crisis and stagnation combined with the rapid rollout of new technologies in a way that just didn't happen in the 1930s. And in policy terms it has been the 1930s in reverse. Instead of exacerbating the crisis, as they did in the 1930s, the global elite reached for policy tools to cushion the real economy – often in defiance of what their own economic theories told them to do. And in key emerging market countries, rising demand for commodities together with the global monetary stimulus turned the first years after 2008 into a bonanza.
The combined impact of technological progress, policy stimulus and the resilience of the emerging markets has produced a depression much milder in human terms than that of the 1930s. But as a turning point, this is bigger than the 1930s. To understand why, we have to explore the chain of cause and effect.
For both left- and right-wing economists, the immediate cause of the collapse is seen as 'cheap money': the decision by Western states to deregulate banking and loosen credit after the dotcom crash in 2001. It created the opportunity for the structured finance bubble – and the motive for all the crimes: bankers were effectively told by politicians that it was their duty to get rich, through speculative finance, so that their wealth could trickle down to the rest of us.
Once you acknowledge the centrality of cheap money, that leads to a deeper problem: 'global imbalances' – the division of labour that allowed countries such as the USA to live on credit and run high deficits while China, Germany, Japan and the other exporting countries took the flip side of the deal. Certainly these imbalances lay behind the glut of credit in Western economies. But why did they exist? Why did Chinese households save 25 per cent of their wages and lend them via the global finance system to American workers who saved nothing?
In the 2000s, economists debated rival explanations: either over-saving by the parsimonious people of Asia was to blame, or over-borrowing by the profligate people of the West. Either way, the imbalances were a fact of life. Dig for any deeper cause and you get to the hard bedrock of globalization itself, and in mainstream economics globalization cannot be questioned; it's just there.
The 'bad banking plus imbalanced growth' thesis became the explanation for the collapse. Put the banks right, manage the debts down, rebalance the world and things will be all right. That is the assumption that has guided policy since 2008.
Yet the persistence of low growth has now driven even mainstream economists beyond such complacency. Larry Summers, Treasury Secretary under Bill Clinton and an architect of bank deregulation, shook the economics world in 2013 by warning that the West faced 'secular stagnation' – that is, low growth for the foreseeable future. 'Unfortunately,' he admitted, low growth 'has been present for a long time, but has been masked by unsustainable finances'. Veteran US economist Robert Gordon went further, predicting persistent low growth in the USA for the next twenty-five years, as a result of lower productivity, an ageing population, high debts and growing inequality. Remorselessly, capitalism's failure to revive has moved concerns away from the scenario of a ten-year stagnation caused by overhanging debts, towards one where the system never regains its dynamism. Ever.
To understand what is rational about these premonitions of doom, we need critically to examine four things that at first allowed neoliberalism to flourish but which have begun to destroy it. They are:
1. 'Fiat money', which allowed every slowdown to be met with credit loosening, and the whole developed world to live on debt.
2. Financialization, which replaced the stagnant incomes of the developed world workforce with credit.
3. The global imbalances, and the risks remaining in the vast debts and currency reserves of major countries.
4. Information technology, which allowed everything else to happen, but whose future contribution to growth is in doubt.
The destiny of neoliberalism depends on whether these four things persist. The long-range destiny of capitalism depends on what happens if they don't. Let's look at them in detail.
FIAT MONEY
In 1837, the newly declared Republic of Texas issued its first banknotes. There are still a few preserved, crisp and clean, in the state's museums. Lacking a gold reserve, the new country promised to pay the bearer of these notes 10 per cent interest a year. By 1839, the value of a Texan dollar had fallen to 40 US cents. By 1842 the notes were so unpopular that the Texan government refused to let people pay their taxes with them. Shortly afterwards people began demanding the USA should annex Texas. By 1845, when this finally happened, the Texas dollar had recovered much of its value. The USA then wrote off $10 million of Texan public debt in 1850.
The episode is seen as a textbook case of what happens with 'fiat money' – that is, money not backed by gold. The Latin word 'fiat' means the same as it does in the biblical phrase fiat lux – let there be light; it means 'let there be money' created out of nowhere. In Texas, there was land, cattle and trade – but not enough of them to warrant printing $4 million and incurring a public debt of $10 million. The paper money collapsed and ultimately the Texan Republic disappeared.
In August 1971, the USA itself decided to repeat the experiment – this time using the whole world as its laboratory. Richard Nixon unilaterally scrapped an agreement that pegged all other currencies to the dollar and the dollar to gold. From then on, the global currency system was based on fiat money.
In the late 1960s the future Federal Reserve boss Alan Greenspan had denounced the proposed move away from gold as a plot by 'welfare statists' to finance government spending by confiscating people's money. But then, like the rest of America's elite, he realized that it would first allow the USA, effectively, to confiscate other countries' money – setting the scene for Washington to indulge in three decades of currency manipulation. The result enabled America to accumulate, at the time of writing, a $6 trillion debt with the rest of the world.
(Continues...)
Excerpted from Postcapitalism by Paul Mason. Copyright © 2015 Paul Mason. Excerpted by permission of Farrar, Straus and Giroux.
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