The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment.
-Paul Krugman, 2002
[Perhaps this] borrowing to create cash flow … The personal ‘savings’ rate has fallen to a new all time record low of minus 6%. Rather than curtailing consumption, Americans have merely responded to higher gas prices by borrowing more money. Therefore, the immediate damage isn’t reduced consumption by increased debt. As a result, the actual damage is only being postponed, but with even greater consequences for future consumption, as not only will Americans be required to pay more for energy tomorrow, they will have to pay interest and principal associated with today’s purchases as well. What America has succeeded in creating is not an economy impervious to ‘shocks,’ but merely one which enables their consequences to be postponed to a later date. Unfortunately, that date may have finally arrived.
– Peter Schiff, 2008
The capitalist class, on average, is “bullish” on productive assets in periods of economic upswing and “bearish” on those same assets during slumps. By “productive assets,” I mean to refer specifically to shares in enterprises that create expanding value for the shareholder by producing goods and services and realizing a profit from the sale of those goods and services to the consuming masses.
It is thus self-evident that the value of a productive asset can only grow if said consuming masses (a) have cash or credit on hand and (b) are willing to spend this cash or credit on the goods or services that the enterprise in question produces. Notice I said cash or credit. By “cash,” I mean not necessarily physical dollar bills and coins but merely money that the consumer both owns and possesses outright, that he does not have to repay with interest to a lender.
The shareholders who collectively own a productive capitalist enterprise neither know nor care what proportion of their enterprise’s product was purchased with “owned” money and what proportion was purchased with “borrowed” money during a given quarter. In fact a good many shareholders are indifferent to what proportion of their company’s quarterly earnings comes from sales revenue at all, as opposed to interest on company bonds or capital gains from sales of the company’s own assets. Short term gain is the name of the game for our one percent, and as long as the sausage is juicy, they need not inquire into how it was made.
The short attention span of the investor class trickles down to the rest of us far more liberally than their wealth does. The result is a society divided between a “left” and a “right,” each of which offers a solution to one set of problems while ignoring another set of problems, which the solution to the first set of problems only exacerbates. Some would reinvigorate our moribund Keynesian social democracy by siphoning away the lion’s share of the one percent’s profits while others would pull the plug entirely on what’s left of our welfare state and “let them eat cake.” Everybody is seemingly interested in the misery of the working class and argues over whether this misery is the cause of or the solution to the crisis. For the “left,” unemployment is too high and wages are too low; for the right (though they’ll never admit this publicly during an election year), unemployment is too low and wages are too high.
Both sides of this banal, myopic debate, accept as an eternal given the wage system of employment. Each side insists that only its plan will enable society to achieve the “deleveraging” necessary for the resumption of growth. The “left” conveniently ignores the fact that fiscal stimulus money is borrowed money that can never be repaid. The “right,” meanwhile, willfully forgets that if wages are reduced to levels that are “competitive” on the world market, workers will finance a far greater proportion of the consumption upon which growth depends with borrowed money (if they continue to consume at all). Few among us possess the foresight and/or courage to acknowledge that regardless of whether we have a food stamp president or a paycheck president, we will inevitably continue to have a credit card president.
The rejection of the labor theory of value—what Marx termed the Law of Value—in mainstream American economics became for post-secondary education during and after the Cold War what the Pledge of Allegiance was for high school. We have all been raised to believe that value is purely subjective and that it is identical to price. It was this idea in particular that was responsible for the widespread belief through 2007 that home prices could continue to rise indefinitely. A house is a durable consumer good, not a productive asset. But until five years ago, houses in America were consumer goods that moonlighted as speculative assets. If one refuses to acknowledge that value is created by productive labor, one could easily come to assume that speculative gains cause economic growth as much as the production and sale of goods and services.
The tragedy of the capitalist system is that it both succeeds by failing and fails by succeeding. Furthermore, as time goes on, the system’s successes become increasingly spectacular and its failures become increasingly catastrophic. In the past several decades, the proportion of capital accumulation that is speculative has risen tremendously in comparison to the proportion of capital accumulation that results from the production and sale of goods and services. As long as the capitalist system continues to remain in place on this planet, that speculative gain will only continue to crowd out productive profit. Individuals, corporations, and governments will continue to borrow ever further beyond their ability to repay, and hedge fund swinging dicks will continue to keep rich people rich by dumping the liability for the defaults of a growing army of insolvent debtors on various suckers, chumps, and muppets.
All of the half-assed “reforms” that one hears proposed today from either side are very short-term solutions if they are solutions at all. Every ounce of these “cures” contains a pound of poison. The time has now come for anybody who is serious about the future of humanity to put aside their various idols and superstitions and start thinking seriously about how to wrest control of production away from the shareholders and directors who have proven themselves incapable of being competent stewards of the social product and into the hands of the workers upon whose toil all genuine growth has always depended. This is the only sort of political discussion today that is in any sense an adult discussion.