The goldrush of financial capitalism is driven forward without regard to environmental damage (e.g rainforest destruction, industrial agriculture’s effects on soil erosion, the depletion of the ozone layer and global warming) and unsustainable levels of resource extraction (e.g.deforestation). The attempts of borrowers to repay debt that grows at compound interest by investing in physical assets that display precisely the opposite tendency of compound decrement means substantial resource depletion. The goldrush of financial capitalism is driven forward similarly without regard to the socio-economic repercussions of the capital flight, example: corporate buyout by a multinational buying up smaller locally-based companies and the subsequent downsizing/asset-stripping/shedding of labour, or the misallocation of resources that private investment tends towards. In terms of the latter, distortions in the economy occur such as businessmen being misled to expand when there is no market for their goods or stock speculation to drive the market to unrealistic heights (e.g. the ‘net bubble’). There is left a massive susceptibility to the whims of the market and the threat to people’s livelihoods through a recession or market crash (this is especially true for the millions of people relying on pension funds which are inextricably linked to stock and share portfolios). For example, multinationals who are driven by their pressure to achieve rapid rates of return on their shareholders’ investment capital and interest-bearing bank credit such as through the “goldrush” of mineral extraction by Rio Tinto in regions like West Papua which occurred with scant regard for local indigenous populations and environmental limits, and resulted in a trail of environmental devastation.
Such is the continual pressure to increase share price and shareholder’s investment returns that the normal profitability of the business may be insufficient to achieve the desired level of yield required. The continuous expectation for the stockmarket to rise underscores the tendency for capitulation of companies and corporations to the pension fund owners who increasingly dominate management decisions for the sake of increasing their share-price, at the expense of asset-stripping and downsizing of thousands of workers in any part of a business which was not showing a ‘suitable’ level of profit, as has been the case with the oil multinationals in recent years where staff have been purged in mergers, leading to the combined fixed costs of the new merged business ending up much less than the sum of the previous components.
Here are the statistics for the top 11 stock exchanges ($US billions) as of 01/01/2018:
1). NYSE Euronext, United States, $21,377.
2). NASDAQ OMX Group, United States, $9,585.
3). Tokyo Stock Exchange, Japan $5,974.
4). Shanghai Stock Exchange, China $5,043
5). Euronext, European Union, $4,388
6). London Stock Exchange, $4,297.
7). Hong Kong Stock Exchange, $4,135.
8). Shenzhen Stock Exchange, $3,688.
10), TMX Group, Canada, $2,360.
11). National Stock Exchange of India, Mumbai, $2,194
12). Deutsche Börse, Germany, $1,486.
Note the two US stock exchanges are almost as big as the next 9 combined; with its allies, it is absolutely dominant.
Source: Courtesy of Socialist Fight magazine (published 1/1/2018).
The recent war in Ukraine and the inflationary effect on the world economy from rising energy prices as a result of sanctions has bucked a long-term trend moving towards deflation across the major economies of the USA, Europe, Japan and Australia/New Zealand – basically the world economy with the dollar as the principle currency of world trade. Deflationary wind-down closes in on the dollar empire like the grim-reaper as it has done in Japan, where levels of domestic consumption become increasingly no longer sufficient enough to keep the economic growth level sustained on an upward curve (Japan continues to rely almost exclusively on it’s export markets). Meanwhile, the pressure on the multinationals to maintain desired levels of profit margin into the future can be observed in the way corporations have been lobbying for the TTIP agreement which includes the “Dispute-Regulatory Mechanism” whereby a company may overrule a national government’s democratically-approved legislation on the grounds that it is an unfair restriction to trade. In keeping with the centralisation of capital through merger and acquisition, the corporates could be considered to be strategically consolidating their empires as they hedge their bets for the future, gaining ownership of electricity, water and gas companies, pension-funds, and in the UK through the Private Finance Initiative, making inroads into the health and education sectors.
The dollar empire and world financial system – a financial pyramidal deck of cards
Since the start of the New Millenium, several chickens have been coming home-to-roost for the economy of the United States. The whole foundation of American capitalism, is conceivably now more at risk of falling like a deck of cards than ever before, ever-since the financial crisis of Enron exposed the accounting deception at the heart of a major US multinational corporation, creating a surge of loss of confidence on the American stock exchange. The company had thousands of offshore partnerships, through which it had hidden over a billion dollars in debt.
At the heart of the future crisis for the US is the matter of financial insolvency of the US economy, a crisis which recently unravelled with the world financial crisis which started in the US through the combination of the actions by the Federal Reserve, the reliance of the economic growth on an excessive credit boom and the trend towards increased securitisation which can all be interpreted as a process which delayed the onset of a financial crash. It could be argued that this is continually a latent problem – only averted by regular credit-fuelled booms, as the extent of the debt in the private sector always risks causing a crisis should underlying economic activity slow down and reduce the flow of liquidity. The last credit-fuelled boom risked running out of steam and was only prolonged by further extensions of growth potential enabled through the further growth opportunities provided by new financial instruments used under securitisation, which were largely a means of making money out of repackaging and selling on existing debt obligations, including Mortgage-Backed Securities. Bank regulations became increasingly lax as leverage of debt was extended ever further, enabling financial companies to expand fast. However, some experts repeatedly warned of escalating household, public and financial sector indebtedness, particularly in the United States and the UK.
With the global economy with it’s complex tangled web of financial institutions, banks, corporations and stockholders working in tandem with eachother now transformed into one where much of the ever-expanding wealth in the world economy is comprised of financial capital flows in the non-banking financial institutions, it is one whose underlying economic performance is entirely dependent on highly leveraged and high-risk short-term trades of capital engaged in non-productive investment such as speculation in land, property and currencies, and predatory purchasing of mortgage, debt, insurance and pension policies. The panoply of financial gambling instruments across the global financial market playing field combine into a cacophony of white noise that is the melee of the financial markets – a tangled web of market signals across the world moving forward as the sweeping tide of collective force that is the capitalist economy.
The money-creation process concentrated within the private banking sector – which drives the engine of this financial capitalism without being able to take it’s foot off of the accelerator pedal – continues onwards and upwards. It is a self-perpetuating, positive feedback loop. Loan debt as credit for more economic growth grows in proportion to the underlying economic growth. However, because of the loan spiral tendency which tends to occur even though theoretically reserve ratios of liquidity in banks are meant to ensure there is an upper limit as to how much credit can be extended at any one time by a bank, the loan-spiral process leads to the tendency of capital over-extending itself in any boom period, as debt expands until such a point that economic activity, which the debt repayment is reliant upon, can’t keep up with the extent of return-on-investments needed (debt repayments), causing a pinprick in the economic bubble. This is the explanation for the very nature of the business cycle, boom then bust. The extent of a worldwide “bust” being larger than we have ever seen has a ring of prescient foreboding due to the extent with which high-risk short-term trades of capital continue to be so established in the marketplace. The same or effectively similar practices of short-term trades in the financial markets are more-or-less how they were before the 2008 worldwide financial crash – such as reits (Real Estate Investment Trusts) as opposed to mortgage-backed securities. Gillian Tett of the Financial Times on October 22, 2009 – a year after the height of the 2008 financial crisis in “Rally fueled by cheap money brings on sense of foreboding” (registration/subscription required):
“Earlier this month, I received a sobering e-mail from a senior, recently-retired banker. This particular man, a veteran of the credit world, had just chatted with ex-colleagues who are still in the markets – and [he] was feeling deeply shocked.”
“Forget about the events of the past 12 months … the punters are back punting as aggressively as ever,” he wrote. “Highly leveraged short-term trades are back in vogue as players … jostle to load up on everything from Reits [real estate investment trusts] and commercial property, commodities, emerging markets and regular stocks and bonds.”
“Oh, I am sure the banks’ public relations people will talk about the subdued atmosphere in banking, but don’t you believe it,” he continued bitterly, noting that when money is virtually free – or, at least, at 0.5 per cent – traders feel stupid if they don’t leverage up.”
“Any sense of control is being chucked out of the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months,” he added. He finished with a despairing question: “Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?”.
In 2013, in the US, the top 500 S&P companies spent $521 billion on stock buybacks (stock buyback, also known as a “share repurchase”, is where a company buys back its shares from the marketplace, investing in itself, or using its cash to buy its own shares by paying shareholders the market value per share, reabsorbing that portion of its ownership that was previously distributed among public and private investors). In 2014 that amount rose to $634 billion and moved higher still to $696 billion when total repurchases by all publicly traded companies in the U.S. market are included. (“Are Buybacks an Oasis or a Mirage?“, Research Affiliates). Standard & Poor’s 500 Index companies listed buybacks or dividends among the use of proceeds in $58 billion of bond deals in the last three months of 2015, the most on record, according to data compiled by Bloomberg and Sundial Capital Research Inc. More than $460 billion in repurchases were announced during the first five months of 2015, on pace to top last year’s record.” (Source: “Debt Gone Wild” – Debt Funded Stock Buybacks Soar“, Advisor Perspectives)
From BS News (26/01/2016):
“In 2015, the corporations in the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares — a 21% increase over 2012, calculates Rob Leiphart, an analyst at Birinyi Associates, a research firm in Westport, Connetticate. That brings total buybacks since the beginning of 2005 to $4.21 trillion—or nearly one-fifth of the total value of all U.S. stocks valued on the US Stock Exchange in January 2016” (Whitney, BS News, 26/01/2016).
Therefore, lending in the banking system has been increasingly used for the sole purpose of pushing stock prices so voracious CEOs and their shareholders can make a greater profits. One dollar more spent on stock buyback is one dollar less being reinvested into Research and Development or improving productivity. The result is the inflation of stock prices to line the pockets of the-rich one percenters.
Despite stricter rules on reserve ratios in banks by financial regulators across the world, with the extent of these highly leveraged short-term trades in stock markets reaching record levels over 10 years since the height of the 2008 global financial crash, and also taking into consideration the extent of the debt overhang in the derivatives world market (over $700 trillion), it is clear that the perfect conditions for a re-run of the bursting of the financial bubble are in place already. The financial-capitalist model is always susceptible to collapsing in on itself, as it nearly did in 2008. Lord Mervyn King, former governor of the Bank of England, said in February 2018 as published on 7/2/2018: “Debt in the private sector relative to GDP is higher now than it was in 2007, and of course public debt is even higher still.” (Source: This is Money – 7.2.2018). In an increasingly interconnected world with a financial system whose trajectory of progress survives on a positive spiral of monetary value forever spiralling upwards, it can just as easily spiral dramatically downwards at an accelerated speed with a financial collapse and run-on-the-banks, as happened in Argentina. This time, however, the speed with which this collapse may happen because of the extent of the implosion could be terrifying. America’s twin towers of debt (it’s current account and fiscal balance) would implode the American economy.
The stark reality is that the global economy – based upon confidence in a banking system which underwrites interconnected investment decisions based upon short-term speculation – creates value into perpetuity (which bears no relation to underlying environmental wealth/health) which is the sum of the total of the trillions of value held in property, shares, dividends and pension investments which in turn derive their value from the leeching of value from exploitative investments such as mining, trade and investment incomes from developments across the world and the money markets which make money out of money via speculation including a continuous recycling of debt into newer and newer repackaged financial assets. After the world financial crash of 2008, measures were undertaken by central banks to boost reserve-ratios, and were combined with regular and sustained injections of quantitative-easing (credit created by central-banks as new central-bank reserves) by central-banks across the world’s major economies, so as to keep the world economy afloat. During the period in the immediate aftermath of the 2008 financial crash, short-term radical measures such as 20 to 25% equity to assets on balance sheets and similarly high buffers for margin (or capital allocation) on repos and derivatives arguably slowed down the world economy in the short-to-medium term. Such is the inherent nature of financial capitalism as it is now structured that it cannot proceed with such radical measures in place holding it back. The whims of the marketplace – all of which are susceptible to a financial crash if the wheels of economic progress became suddenly halted to such an extent that it abruptly switched off the money flow to banks and so caused a banking crisis – in the long run is a hostage to fortune. Compared to the financial crash of 1929, a financial meltdown would be much more swifter and harsher now because the pyramids of bank-generated numbers upon numbers which the economic might of nations, corporations, financial institutions and individuals directly and indirectly props up is much larger in scale now than it was back then. And it would be precisely those economies deeply reliant upon investments abroad, inward investment coming from overseas and capital engaged in non-productive investment such as speculation in land, property and currencies, and predatory purchasing of mortgage, debt, and pension policies, which would have the furthest to fall down, as the financial bubble abruptly burst. With the threat of international capital flow suddenly drying-up in response to a financial crash, and so, accelerating the momentum of an economic downturn, Britain would be in a particularly vulnerable position, being as it is more dependent on investment incomes and ‘invisibles’ from capital investment abroad than probably any other economy in the world.
In the event of the American financial system totally collapsing, the already indebted local, state and national governments would default on their bonds, have no income to continue operating, and close down. There would be massive unemployment and civil unrest. As well as Britain, New-Zealand, Australia and Japan would also be very badly affected, being as they are so inter-connected with the US economy. As the largest creditor nation in the world, with most of Japan’s foreign reserves held in American dollars because of its long-term policy of purchasing dollars to prevent the continued strengthening of the yen against the dollar, Japan will have only ended up in accumulating what would be on the occasion of financial collapse worthless dollars. Its considerable investments in the US will become relatively worth much less. This will have a devastating effect on the Japanese banking system, already heavily indebted. The collapse of international trade and the fall of the dollar could have major recuperations to the Japanese export-oriented economy, causing a major depression in Japan.
China’s interdependence within the global economy in being effectively the principal export processing zone in the world is conversely creating with the economic upsurge of the Chinese economy it’s growing consumer market which may be served by it’s own productive base, so creating the basis of a growing economic independence from the world economy. However, the extent of China’s manufacturing export sector is such that China’s economic growth is obviously sensitive to the state of the world economy, as any national economy is. Furthermore, there is some speculation that China has been extending credit to companies with the least ability to pay them back, rendering China at risk to a debt crisis.
However, with the extent of the amount of financial dealing by financial market actors being conducted in such a way that is effectively holding the rest of us like hostages to fortune, we can view the sum of the successes and failures in the marketplace at any one time as the totality of the capitalist economic system as a whole akin to the swell of the ocean upon which sails the global economy caricatured rather like the Titanic, with the iceberg of huge financial meltdown never in sight through the mists generated from the continuous melee of the market. And, at any time in the hazy mist of economic buoyancy, the iceberg of a economic-shock has the potential to hit the global economy very hard. And after the crash, as ever, nations states and those sectors in the world economy increasingly owned by corporations, will have to pick themselves up and go on to regenerate.
As with the effect of global warming on planetary systems and the plunder of environmental biodiversity, altering this entire worldwide economic structure to make it “more environmentally and economically sustainable” is now analogous to turning a sea vessel in the middle of the ocean 180 degrees around after it’s inevitable course has already been set, as it passes through a storm at sea. The 180 degree turn would need to amount to something on a global scale which was more fundamental than the post-war Marshall Plan, such as cancellation of gargantuan debt across the world, such as through an emergency programme of short-to-medium term nationalisation of crucially some or all of the private-banking systems in all the major world economies and likewise across the world (making it subject to democratic control – read here). Major resource constraints such as with water (exacerbated by climate change) will test national claims of territorial sovereignty and age-old borders.
1). Socialist Fight! “The Hegemonic Domination of US Imperialism; 1/1/2018: “Ref: https://socialistfight.com/2017/12/30/the-hegemonic-domination-of-us-imperialism/?fb_action_ids=10215461924249208&fb_action_types=news.publishes”
2). Gillian Tett, Financial Times; October 22, 2009; “Rally fueled by cheap money brings on sense of foreboding” “Ref: https://www.ft.com/content/064f0ff2-bf2c-11de-a696-00144feab49a”
3). Chris Brightman, Vitali Kalesnik & Mark Clements, for Research Affiliates (Oct 2015): “Are Buybacks an Oasis or a Mirage?“. Ref: https://www.researchaffiliates.com/en_us/publications/articles/385_are_buybacks_an_oasis_or_a_mirage.html
4). Lance Roberts, for Advisor Perspectives (29/06/2015): “”Debt Gone Wild” – Debt Funded Stock Buybacks Soar“; Ref: https://www.advisorperspectives.com/commentaries/2015/06/29/debt-gone-wild-debt-funded-stock-buybacks-soar
5). Mark Whitney, 26.01.2016, BS News: “Stock Buybacks and the Wall Street Sharktank: “A Whole Lotta Stealin’ Goin’ On””; Ref: https://bsnews.info/stock-buybacks-and-the-wall-street-sharktank-a-whole-lotta-stealin-goin-on/
6). Jason Zweig, Wall Street Journal, 21/03/2014: “Will Stock Buybacks Bite Back?“; Ref: https://www.wsj.com/articles/will-stock-buybacks-bite-back-1395428707