Revolution Online, September 23, 2008
Financial Meltdown and the Madness of Imperialism (April 20, 2008)
by Raymond Lotta
The following are slightly edited excerpts from an article by Raymond Lotta written in April 2008. This analysis is highly relevant toward understanding the unfolding financial crisis and its deeper causes. The article develops and explores several important analytical points:
1) There is an essential relationship between the buildup of the financial sector in the U.S., and the general phenomenon of what the article describes as financialization, and the deepening globalization of world capitalist production. And central to the dynamic of growth and expansion of the last 15 years has been the relationship between U.S. imperialism and China.
2) This particular crisis has broken out because of the severe imbalances built up between the financial system—and its expectations of future profits—and the accumulation of capital, that is, the structures and actual production of profit based on exploitation of wage-labor.
3) A “dirty little secret” of this crisis is the enormous weight of militarization of the U.S. economy.
4) This crisis is a concentrated expression of the anarchy of capitalist production—the fact that production is not carried out according to any rational, society-wide plan.
The buildup and collapse of this latest speculative bubble, and intensifying financial fragility that could lead to massive breakdown, are in fact outward expressions of deeper processes and transformations at work in the world capitalist economy.
We need to take a step back.
A. Globalization and Financialization
For the last 15 years, world capitalist expansion has pivoted on a particular international dynamic and structure. This has involved heightened financialization and parasitism in the advanced capitalist countries—with the United States at the epicenter of this process; and the fuller integration of low-cost, export-producing countries of the Third World into the world capitalist market—with China at the epicenter of this process.
The turning point in this process was the collapse of the social-imperialist Soviet Union in 1990-91. With the implosion of the Soviet bloc, the main geopolitical obstacle to U.S. imperialist freedom of action was removed. At the same time, and very much in connection with this, imperialist globalization accelerated. (This is analyzed in considerable depth in Notes on Political Economy: Our Analysis of the 1980s, Issues of Methodology, and the Current World Situation, 2000, RCP Publications.)
Over the last 15 years, a globally integrated cheap-labor manufacturing economy, with huge labor reserves from China, India, and other parts of the Third World, along with labor from the former Soviet bloc, has been forged. The globalization of production has had enormous effects on world accumulation: raising profitability for imperialist capital, acting to compress wages, and lowering inflationary pressures. The integration of cheap-labor manufacturing into world production is now so deep that in the U.S., fully half of imports (mostly consumer goods) come from the Third World.
A revealing statistic: a University of California study looked into who gains when an iPod manufactured by national firms in China is sold in America for $299. Only $4 stays in China with the firms that assemble the devices, while $160 goes to American companies that design, transport, and retail iPods.1
When we speak of capitalist accumulation, we are referring to the competitive production of surplus value (the source of profit) based on the exploitation of wage labor; and the investment and reinvestment of profit on an expanding, cost-cheapening, and technologically more productive basis.
When we speak of “financialization,” we are referring to two particular features of the larger structure of capitalist accumulation in this period of imperialist globalization: a) the vast expansion of financial activities and of financial services, like organizing and financing corporate takeovers, insuring investments against risk, creating new financial instruments, etc.—activities in which profit-making involves the siphoning, centralization, and reinvestment of surplus value through financial channels; and b) the increasing separation of finance from production.
This process of financialization has gone the furthest in the United States, and it is a major factor in U.S. imperialism’s ability to preserve and extend its dominance in international financial markets.2
Financialization is also a means through which wealth, and effective control over productive forces, is centralized by the imperialist countries—even as production has grown more geographically dispersed and increasingly carried out within subcontractural networks in the Third World.
Financialization involves efforts to squeeze out more “value” from already created value. One measure of this is that in 2006, the daily volume of trading in foreign exchange markets and in derivatives (financial instruments) added up to $11.4 trillion—which almost equals the annual value of global merchandise exports that year. In terms of the shifts in the structure of the U.S. economy, the financial sector’s share of total corporate profits has risen from 8 percent in 1950 to 31 percent last year.3
B. Financialization and Production
As far removed as finance may be from processes of production, and as elaborate and multi-layered as its operations have become, finance cannot break free of the sphere of production. Even as it objectively seeks to do so—and even as the disjuncture between the two spheres (production and finance) grows—it is the underlying conditions and profitability of production that set the overall conditions for the accumulation of capital.
Imperialism is a worldwide system of production and exchange. It is the structure of social production—it is the global production of surplus value based on exploitation of people—that is at the foundation of this whole system. And in relation to the production of surplus value, “financialization” is both parasitic and functional. It is parasitic in the sense that financialization drains value from production.
But financialization is functional to the workings of global capitalism in the sense that it facilitates the gathering of money capital into ever-larger agglomerations of capital and finds new profit-yielding channels in which to rapidly invest it…and just as quickly to withdraw it! Global capital faces all kinds of financial uncertainties and risks on its competitive global playing field as it moves through different channels, or circuits, of production. And the “risk-management” techniques provided by the global financial system are actually vital to the accumulation of capital, to the success of “risk-taking,” in the turbo-charged globalized economy.4 That’s why, for example, money jumps into Thai real estate markets one day, and pulls out and goes into ethanol production in Brazil the next… and then back to mortgage securities.
And there is something else: the inflows and outflows of short-term and speculative capital also act as a perverse means of imposing discipline on and restructuring capitals—a major manufacturing firm can be starved of credit or threatened with a leveraged buyout. And this kind of “financial discipline” has been imposed on whole countries in the Third World—aided, abetted, and orchestrated by the U.S.-dominated International Monetary Fund.
All this is part of the reason that financial instability is a constant feature of capitalism in its more globalized and financialized forms of existence.
Financialization and the globalization of production have been tightly bound up with each other. It can be put this way: there is a relationship between sweatshop labor in Guangdong province in China, the recycling of China’s export earnings into the U.S. Treasury and U.S. financial markets, and the credit-financed expansion in the U.S. of the last decade. Or, to put it more graphically, there is a link between the agony of superexploited labor in the bowels of the new industrial zones of the Third World, the feverish search for high and quick returns at the top of the financial pyramids, and the chaos of the housing markets with people losing their homes in the U.S.
This is an extreme concentration of the nature of world capitalism. This world is highly bound together by production, trade, and finance. The requirements of life (consumer goods) and the requirements of production (machines and raw materials, etc.) are socially produced, that is, they involve the collective and interconnected efforts of wage-laborers in factories, warehouses, and so forth. But this wealth, the technology and means of producing it, and knowledge itself—all this is privately controlled and deployed by a small capitalist class.
C. Barriers, Contradictions, and Shifting Tectonic Plates
What we are witnessing now is that a particular dynamic of growth, marked by intensified financialization, is generating new contradictions and new barriers to sustained accumulation.
The level of debt to economic output in the U.S. is at an all-time high. The financing of the trade and government deficits of U.S. imperialism (that is, providing credit for purchases of imports and having investors buy Treasury debt) depends on a steady and growing inflow of capital from abroad. But the weakening of the dollar and the emergence of competitor currencies, like the euro, increasingly threatens these mechanisms. And very crucial to this has been the process where dollars earned by countries like China through trade with the U.S., are then recycled back into the U.S. economy through purchase of Treasury bonds and other investments.
In the U.S., the financial sector is seriously strained and is a flashpoint of heightened global financial instability, if not breakdown, leading to a major economic slump.
Here we come to a basic point of this analysis: A financial crisis has broken out because of the severe imbalances built up between the financial system—and its expectations of future profits—and the accumulation of capital, that is, the structures and actual production of profit based on exploitation of wage-labor.
The imperialist state is intervening to head off further damage and to discipline and restructure the financial system. But the very complexity of the “financial packages” created during the speculative boom—with their bundled-up loans and long strings of finance—are producing new challenges for policy-makers. As one Yale economist put it, perhaps unintentionally echoing a phrase from Marx: “like the sorcerer’s apprentice, we have created things we do not understand and cannot easily control.”5
This explosive uncertainty is developing against a larger international canvas. Major shifts are taking place in the world capitalist economy. The European market recently eclipsed the U.S. market in size. China’s growing demand for raw materials to fuel its export economy is making it a new player in the scramble for resources and control over them. And China’s increasing importance as a supplier of capital to the U.S. is giving it new leverage. Russia is reemerging as a world imperialist player, owing in part to its vast energy reserves and rising oil and gas prices.
At the same time, and at this very moment of financial crisis, U.S. imperialism’s freedom of maneuver is severely hobbled—and this includes its ability to stimulate the economy through fiscal and monetary policy. The United States has never run such large current account deficits and no single country’s deficit has ever bulked as large relative to the global economy.
D. The Military Fix
Which brings us to one of the “dirty little secrets” of the financial crisis: the military needs and the military costs of empire…and “greater empire.”
There is a brute fact of imperialist accumulation. The whole imperialist system rests on the domination of vast swaths of the globe through savage force, with the U.S. military colossus playing a special role. The U.S. military helps “create the conditions” for U.S. domination, pro-U.S. client regimes in the Third World, and conditions for investment by U.S. corporations.
In the Bush era, U.S. imperialism has been attempting to parlay its military might into a new world order. This involves a restructuring of global political and production relations that will enable it to resolve or mitigate some of the problems and tensions it faces—and to lock in its global supremacy over rivals and potential rivals for decades to come.
The U.S. share of world production has declined to about 20 percent, down from 30 percent forty years ago. But U.S. imperialism is compensating for this by pressing its military advantage as sole imperialist “superpower” (since the collapse of the Soviet Union).
In a recent study, Chalmers Johnson has calculated that defense-related spending for fiscal 2008 will exceed $1 trillion for the first time in history. Leaving out the wars in Iraq and Afghanistan, defense spending has doubled since the mid-1990s.6
Militarization is also embedded in the U.S. economy. It is a key structural component of growth, scientific research, and technological prowess of U.S. imperialism. And because of its sheer size, it also plays a role in the attempts of the U.S. imperialist state to “manage” and stimulate the economy.
But the recent wave of militarization has put enormous financial strains on U.S. imperialism. It has produced huge deficits that cannot be sustained without the inflow of capital into the U.S. And the wars for “greater empire” are incurring astronomically greater costs than military and government planners had anticipated. Not least because of the setbacks and difficulties U.S. imperialism has encountered in Iraq and Afghanistan.
This is a sharp contradiction for U.S. imperialism—because in many ways it is staking the future of empire on these wars; but these wars have become more costly to wage. And it is the height of hypocrisy for Democrats to now blame the Iraq war for financial crisis—as they consistently voted for war-spending authorizations, to the tune of $500 billion.
E. A Reflection: Transparency and Anarchy
The free market is extolled by bourgeois ideologues for its “transparency.” This is the idea that markets, prices, and interest rates convey all necessary information: about supply, efficiency, choice, and reward.
But one of the distinguishing features of this crisis is the incredible and pervasive lack of knowledge among lenders, borrowers, traders, and insurers about the quality and backing of what they borrow from others…and even of what they lend to others! Things are obscured, covered up, and very opaque.
- There is the anarchy of capitalism, as giant agglomerations of capital battle others for market share and profits, and pursue competitive strategies that have unforeseen effects on the larger system.
- There is the emergence of a newer banking system operating parallel to the older commercial banks. These are the so-called hedge funds, private equity firms, and investment banks. They move huge amounts of capital in and out of financial markets to take advantage of momentary and slight changes in bond prices, interest rates, and currency exchange rates. They borrow against assets that have a shadow existence, far removed from the actual production of value. They have led in creating new financial instruments, in which all kinds of loans of varying risk are bundled together into interest-yielding bonds and the like. And this newer banking system operates in a more unregulated environment than do the commercial banks.
- This is a highly competitive, turbo-charged financial world, where huge blocks of capital seek quick gains at the expense of others. In this setting, speculation, fraud, and deception become part of survival strategies. One example of this in the unfolding of the financial crisis: financial agencies that rate the risk of things like mortgage-backed securities earn higher fees for providing favorable ratings on these new “financial products.” So they lied and deceived investors about real risk. This led to mis-pricing and to baseless expectations of return on investments.
F. A Reflection: A House…Is Not Always a House
As we descend from the skyscrapers of finance to ground level, the human toll comes into clearer view. At the start of 2008, nearly 1.3 million homes in the U.S were in some phase of foreclosure. That works out to more than one in every 100 U.S. households. According to Moody’s Economy.com: “not since the Depression has a larger share of Americans owed more on their homes than they are worth.”7
Think about it. Something as basic and essential as shelter is commodified. A house becomes an investment; its purchase underwritten by tradable financial instruments; and the lure of homeownership then engulfed by the devastating trade winds of the market. And what happens? People’s savings are wiped out. Their creditworthiness is damaged if not destroyed. And many face the prospect of homelessness.
The problem is not that people don’t need houses. Nor is it that society doesn’t have the resources or knowledge to build houses. The problem is that capital stands as a barrier to meeting human need.
1 Cited in Charlemagne, “Winners and losers,” The Economist, March 1, 2008, p. 56. [back]
2. Among informative studies of financialization, neoliberalism, and dollar hegemony are David Harvey, A Brief History of Neoliberalism (London: Oxford, 2005); Andrew Glyn, Capitalism Unleashed (London: Oxford, 2006); Kevin Phillips, American Theocracy (New York: Viking, 2006); Ramaa Vasudevan, “Finance, Imperialism, and the Hegemony of the Dollar,” Monthly Review, April 2008; and C.P. Chandrasekhar, “Continuity or Change? Finance Capital in Developing Countries a Decade after the Asian Crisis,” Economic and Political Weekly, December 15, 2007. [back]
3. See Chandrasekhar, “Continuity or Change,” pp. 37-38; The New York Times, December 11, 2007. [back]
4. On financialization as a means to contain financial disorder and to impose neoliberal discipline, see Christopher Rude, “The Role of Financial Discipline in Imperial Strategy,” in Leo Panitch and Colin Leys, eds., Socialist Register 2005: The Empire Reloaded (London: Merlin Press, 2004). [back]
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