Nobody knows if capitalism, like a cat, has nine lives or not. We do know that global disequilibria have become unsustainable and that globalization as we know it is about to end. Fables and legends teach us something about the process. The cat and its nine lives
Eric Hobsbawm has reached an advanced age in full command of his abilities. He is one of the greatest historians of the twentieth century. During many years he was a member of the small British communist party. About a year ago he was interviewed by The Guardian regarding the world situation. He titled his remarks as follows: “Socialism has failed. Now capitalism is bankrupt. So what comes next?”
Nobody has an answer to Dr. Hobsbawm’s question for the time being. It is like the story of the cat and its presumed nine lives. We know that capitalism is subject to cycles, with periods of growth followed by periods of retrenchment. Such cycles are generally short, and do not imperil the system as a whole. The longer cycles (40 or 60 years) are a different matter altogether. The crises they entail are deeper. That is what happened with the Great Depression of the thirties and is now the case with the world economic crisis that started in 2007 and gives no clear signs of abatement. Is this the seventh, the eighth, or the ninth life of the cat? Personally I think this is not a terminal condition. We will witness readjustments that are difficult and even painful, but they will issue in the renewal of capitalism under a different guise and with different coordinates. The current crisis is rapidly displacing the dynamics of the economy from the West to the East, with the geopolitical shifts that it entails: the relative decline of Europe and the U.S., a new surge of Asian countries and a greater role for them in the leadership of the world. It remains to be seen whether the different centers of world power –governmental and not—will manage an orderly transition or sponsor chaos instead. As Den Xiao Ping was fond of saying, it matters little if the cat is black or white as long as it catches mice. And since that is a vision from China, let us talk about dragons.
The dragon economy
The dragon is a mythical creature that appears in the folk tales of many peoples in all times, from ancient China to Hollywood movies like Avatar. It is both revered and feared, friend or foe, helper or destroyer. It runs fast and also takes off in majestic flight. Its tail is long and formidable, with a spear at the end. Every child knows dragons, East or West.
The global economy, or if one prefers, late capiotalism, shares some features with the dragon of lore. The so-called markets lord over other life forms. Like the dragon they exhale flames and devastate whole areas. They fly high and can be mounted by heroes, though only for a short time. When they attack they do so with devastating fury. In their rampage they turn everything into a commodity: present, past, and future. The past becomes a packaged tale destined for touristic consumption. The present is colonized in the commoditization of thought, pleasure, and communication. The body itself becomes a merchandize, even in its innermost parts. But it is the colonization of the future that sounds the death knell of the dragon. The markets speculate with the future, and end up falling down a precipice, like the roadrunner in a cartoon.
We enter a dragon economy when the entire economic system revolves about the production of debt. Visible examples of debt are all around us: consumer credit, mortgages, investment credits, loans for the public and private sectors, promissory notes, and promises of a rosy tomorrows, government deficits, and so on ad infinitum. The most sophisticated “products” of Wall Street are evanescent forms of debt. When the amount of debt exceeds by far the value of real production, and expenditures runs ahead of income by many multiples, the economy breaks down.
Capitalism is not linear; it swings. It expands, and then retracts. Crises come and crises go. But the big crises –those that shake the system to its roots—appear when a cyclical downturn is joined by a financial meltdown. The principal characteristic of late capitalism is the dominance of finance over other forms of capital. The real, or productive economy, takes a back seat, and finance the steering wheel. In its globalizing phase, late capitalism moved real physical production from the West to the East, leaving a sort of vacuum filled by finance. Objects are traded for IOUs. Then a big crisis breaks out. In the language of myth, the dragon bites its own tail. In the real animal world there is frightful insect that acts like that. The scorpion attacks, kills and stuns by stinging with its tail. When surrounded by flames, however, it turns that sting unto itself and commits suicide.
The crisis that started in 2007 in the US and is everywhere today is the worst downturn since the Great Depression. Nobody denies the fact. However, the process is in many ways unique. In a thorough study of capitalist crises, the International Monetary Fund focuses on those that combine a recession with a financial breakdown. The IMF maintains that such combined crises have been historically the longest and the most intractable of all. They last on average some five years, before the economy turns around. If this is correct, we are now in the third year of the crisis, so we should expect two more of stagnation or decline. And in fact it is hard to envision a quick return to healthy growth in the central economies. If we take the Great Depression as a benchmark, we will have to wait seven more! We may seek consolation in the notion that history does no repeat itself. But, as Mark Twain used to say, history does rhyme from time to time. Another important finding of the IMF study is that financial crises tend to lead to crisis of sovereign default. That happened in the developing world a decade or more ago. The same pattern appeared in Argentina and in Brazil, in Indonesia and Thailand, in Chile and in Peru. Today however, we have a typical third-world crisis in the first world! That is a grave novelty indeed.
Crises of sovereign debt go through four stages in their natural lifespan. First, during a financial crisis the various governments come to the rescue of the financial sector with huge sums of funds. In fact, they socialize the losses of banks and other financial institutions deemed “too big to fail” by tapping the savings of the population at large. In this way private debt becomes public debt. With the ballooning of public expenditure and the dwindling of income (typical of recessions) governments run deficits that are sky high. To finance the deficit, these governments borrow money –at high rates—from the very institutions that they “rescued” in the first place! The markets now charge good interest rates, which of course accelerate the vicious circle of debt and contraction. Some of the countries in such predicament face the prospect of default. This is already happening in some countries that belong to the European Union, and it threatens the Union itself. All of those countries –including the most prestigious—are running deficits that are four times larger than those allowed by their own rules. The most important economies of the world –China excluded—now sport record deficits in their accounts.
The second phase of the crisis is a whirlwind of public spending that is hard to control. The public sector must go further into debt. The problem gets postponed by ever-larger doses of the same. When deficits go over 80 % of GDP, investors get nervous, and often panic. Fear multiplies the effects. The IMF reckons that in the next four years the central economies will have deficits exceeding 100% of their GDP. That is a dire prognosis indeed.
The third phase of the crisis is the downgrading of country after country in terms of their creditworthiness. This happens in the form of a chain reaction. The value of bonds collapses. Now it is no longer Argentina that gets bad grades by the rating agencies, but Greece, Spain, the UK and Japan. And so the fourth and final phase begins.
The fourth phase is default that is the sovereign repudiation of debt. For instance, the markets have already discounted Greek titles, aware that for every dollar lent they shall receive thirty cents. Country after country becomes insolvent, and is subject to internal upheaval and political mayhem. The default entails of course, the devaluation of currency.
None of this is news for Latin Americans. But it is a novelty in Europe. The great remaining question is: Will the United States be spared such fate? Some observers believe that the American crisis will end in a soft, more elegant form of default, through the devaluation of the dollar. The rescue of the banking sector, the rescue of declining corporations, the stimulus programs, and the plain printing of money by the Federal Reserve are likely to result in the final degradation of the currency. A sudden default is for the moment unthinkable. The plain repudiation of its debt by the American government would result first in competitive devaluations, then in financial warfare, and ultimately in war. One can well imagine an enraged China unable to make good on the bonds it holds invading Taiwan in fifteen days. The more likely scenario is a gradual and sustained devaluation, and the managed passage of economic leadership from West to East. In its long decay, the Roman Empire too had to degrade its coins.
For those who may think that such scenarios are products of my own delirium, I shall mention someone very different who nonetheless entertains similar thoughts. It is Alan Greenspan, the once revered and now much criticized “father of the bubble.” In recent statements before the U.S. Congress, Greenspan warned that the U.S. could face the specter of default if it continues along the present path. True, Mr. Greenspan is also a Republican, and therefore joins the partisan chorus of those who call for a halt to government spending. But he is not alone, and his ideas find echo in Europe as well. If heeded now, such advice would produce an immediate “double dip” and a second collapse. It happened with F.D. Roosevelt in 1937: an error of policy leading to a recrudescence of the Great Depression.
It is clear that the advanced centers of late capitalism are caught between a rock and a hard place. Too much spending would lead to unsustainable debt and possible default. Too little would deepen the recession. The immediate issue is deflation (too many goods chasing too little money); the future prospect is runaway inflation (too much money chasing too few goods). How to manage the tradeoff? To clarify the situation, one of the sharpest analysts of the Financial Times, Mr. Martin Wolf also resorted to the fabled animals of Aesop’s tales.
Wolf says that the present world division of labor is between three main actors: the ant countries, which save, the cicada countries, which spend and sing, and a third insect that Aesop did not take into account: the locust. The latter are not countries but rather a transnational plague: big finance. The ants finance the cicadas buying their bonds. The cicadas spend but do not produce. And the locust reaps benefits as intermediaries in a manner disproportionate to their contribution to the system as a whole. They just make things bigger and worse. Savers, spenders, and raptors together define our world.
The interaction of these actors is totally out of whack and cannot last much longer. To rebalance the world, the savers should save less and consume more, which means a redistribution of income downwards, especially in those countries that export cheap good on the exploitation of their abundant labor force. The consumers should save more and invent new ways of being productive rather than speculative. The financiers in turn should be strongly controlled, or brought to their knees. Think for a moment that today, the financial sector has at least half a trillion dollars in search of investment without success. Ideally, investment should go massively to countries that are spared the crisis and that produce materials and resources for the rest. Latin America is a case in point. However, past experience with loans and internal problems at home make these countries more prudent and reluctant than ever before. They seek to self-finance and keep their fiscal home in order. Should this impasse continue, we may very well see the end of globalization, as we have grown accustomed to. Economies could retreat to regional, national, and finally local enclaves. Nobody knows not only when but also how the crisis will end. A curious irony has seized late capitalism: as foreseen many years ago, the relations of production, having unleashed a phenomenal flow of productive forces, do not know what to do with them. Despite the more fashionable talk about sustainability –predicated on future scarcities—the real issue now is one of an unmanageable surplus: a crisis of “abundance” in a very unequal and unjust world. To end this note with another fable, namely George Orwell’s Animal Farm, let us beware of false prophets and redeemers: they are pigs.