dittologica

 ”Behind the housing bubble, there’s a super bubble which has been growing for the last 25 years. Every bubble has an element of reality and an element of fantasy, of misinterpretation. The reality has been a trend of ever-increasing use of credit, of credit expansion.”
- George Soros [link]

The Disservice Economy
It would be nice to have a penny for every time in the last couple of decades someone said or wrote that the “modern” economy is a “service economy”. As if steel and  cement were no longer used to build buildings, ships to carry goods, and textiles to make clothes. Having extended the reach of the world economy to every corner of the globe (see Part 1 of this article), Western entrepreneurs arrived at the point where uprooting whole sectors of the economy and shipping them overseas was their best bet for keeping their rate of wealth accumulation rising. Calling the economy a “service economy” was a way of euphemising the fact that the core production capacity of the industrial world had been gutted and shipped off to low wage zones.

Having stripped what was formerly the industrial world of much of its production industry, the appetite for offshoring proceeded to bite into the service industries that characterised the supposedly modern, post–industrial West. Accounting, insurance, product support services and software and technology engineering–in fact, any business which could be performed more cheaply at a location remote from its end-users–could be sent anywhere in the world.

Operating offshore offered lowered costs for premises, equipment and-crucially–labor. In fact, lower labor costs were achieved in two ways. First, there was the direct use of the super-cheap labor of less-developed countries, where unions are suppressed and laws to protect workers are weak or rarely enforced. And secondly, the threat of moving operations offshore was used to hold down the wage expectations of workers and weaken unions in the developed countries. As a result, the real wages of the middle and lower classes began to decline in the mid-1970s and have continued downwards ever since. One distinct indicator of this trend was the rise of the multi-income family as the basic economic unit in developed countries.

As successful as the wage-lowering strategy of the entrepreneurs appeared to be, a serious contradiction was lodged within the process. Shrinking real wages along with growing unemployment and underemployment among would-be consumers created the imminent threat of a collapse in demand.

The reduced costs of production gave entrepreneurs some leeway to lower prices in an attempt to sustain demand for imported consumer goods, but this in itself was not enough to keep the rate of accumulation rising.

Let Them Eat Credit
A more effective tool for keeping Western consumption alive in the face of declining wages had to be found, and the answer came in the form of the creation of ever greater quantities of consumer credit. A few decades ago, when wages were higher relative to the cost of living, consumer debt was usually limited to a relatively manageable home mortgage and the very occasional use of a charge card or credit card–more as a matter of convenience than of necessity. As time went on new forms of credit proliferated, driven on one end by the high rate of return for financiers on capital from such “financial products”, and on the other end, by the need for a way to bridge the increasing gap between sinking wages and the escalating cost of living for the majority of people.

As it became more and more of a struggle for people to pay their daily living expenses, these expenses were increasingly diverted to credit accounts, and in turn, it grew harder for people to keep up payments on their various credit accounts and loans. Default, bankruptcy, repossession and collection activity increased sharply. In Western consumer-oriented economies, like the US, where more than two thirds of GDP is linked to consumer spending, this situation embodied the prospect of economic disaster. The use of credit was growing at an unsustainable rate, yet without credit purchasing power would nosedive and take the entire economy down with it. Thus there was demand both from working people for some way of maintaining personal liquidity and also from entrepreneurs for some means of keeping the process of consumption and accumulation alive.

Driven by a combination of enterprise and desperation, lenders increasingly relaxed the standards of credit-worthiness they required of their customers. To protect themselves from the threat of defaults, lenders began to sell loans and their accompanying risk to larger banks and investment houses. Financiers higher on the financial food chain bought up the loans and bundled them together with other loans and obligations to create “derivative” packages. As standards of credit worthiness were lowered, these packages were used as vehicles to mix risky instruments, such as sub-prime mortgages, with less risky ones in order to mask the “toxic” content of the former. This process made it possible for derivative vendors to obtain high credit ratings and sell the packages on to others. These derivative bundles–unregulated, off the books and camouflaged as reliable financial products–entered the economy in such huge quantities that eventually even the most “prestigious” banks and investment houses were infected to their entrails with uncollectable debts. What started out as a technique to minimize risk ended up swamping the world financial system with unprecedented levels of risk. The collapse of this financial bubble was inevitable, and it came in August 2007.

Après Mois Le Déluge
The world’s central bankers have addressed the collapse of the credit markets by flooding their economies with fiat money in an attempt to create liquidity, or in other words, to create the illusion of value where there is none. This monetization of bad debts has debased the world’s major currencies, while at the same time giving investors in failed financial ventures the capital to switch over to commodity speculation. The result is the swiftly accelerating rate of inflation which is now occurring. The world economic system appears to be entering a period of “stagflation”, the term for a combination of depressed consumer demand, economic contraction and rising prices.

It should be remembered that the financial crisis just described is not the cause, but a symptom. of the deep crisis in the world economy. Trends which began in the early 1970s ushered in a new social and economic order, which is still unfolding today. The breakdown of the Bretton Woods system and the end of the gold/dollar standard; the US defeat in Vietnam; the rise of OPEC; the reversal of the favorable US balance of trade and the growth of competition in international trade from the European Union trading bloc and China–all have played a role in bringing about the increasing ferment currently being experienced by the world economy. All of the preceding are connected with and affected by the imperative of entrepreneurs to ensure a rising level of accumulation. But nothing is so basic to and intimately connected with that imperative as the issue of labor costs and the effect of diminishing wage levels on consumption.

The next and final part of this article will look at the prospects for the future in light of the current crises and the broader underlying crisis.