Europe’s Decline and Its Sovereign Debt and Currency Crisis

Reader Jon B writes that I should build on my “analysis of the U.S. empire and the dollar-centered international monetary system by writing on the European debt/euro crisis, the possible outcomes for the world economy, and whether U.S. global domination is likely to be boosted or undercut.”

On November 30, it was announced that the world’s major central banks were extending their “swap agreements” in an attempt to control the growing European credit crisis centered on the “sovereign debts” of European governments. The announcement indicated that the crisis may be coming to a head, and that the U.S. Federal Reserve System stands ready to pump U.S. dollars into Europe in a bid to stave off a full-scale financial panic such as occurred when the Lehman Brothers investment bank collapsed in September 2008.

A few weeks earlier, the Greek government had agreed to a vicious austerity package. The government of Prime Minister George Papandreou, which had briefly threatened to hold a referendum on the austerity package, instead meekly resigned in favor of a so-called “technocratic government” headed by Lucas Papademos a former vice president of the European Central Bank. The new Greek bankers’ government, in order to broaden its base beyond the bankers, includes the racist LAOS party.

The European leaders, finally admitting that the Greek government couldn’t possibly pay its debts, agreed to a 50 percent write-down of Greece’s bonded debt.

This is similar to what happens when a U.S. corporation goes bankrupt under Chapter 11 of the bankruptcy law. In addition to the corporation getting out of any contracts it has signed with its workers, a portion of its bonded debt is written down. The “reorganized corporation” is then given another shot at making profits for its stockholders and bondholders.

The U.S. media proclaimed that this “agreement” indicated that the European crisis was finally on its way to being resolved—as the media have repeatedly done whenever top European leaders get together and announce “agreements.” They do add, just to cover themselves, that “much still has to be done” to fully resolve the crisis. Nor did the U.S. media—who pretend to support democracy all over the world—hide their delight that a government of unelected bankers had replaced the elected government of Greece.

The American Empire and the Evolution of the International Monetary System

As we have seen, the law of uneven development as it manifests itself under capitalism is rooted in the fundamental laws that rule capitalist production.

The law of the uneven development of capitalism means that capitalist production in one country will develop with a vigor that far exceeds the development of other countries engaged in capitalist production. But in the next historical period, the country that was developing its capitalist production with exceptional force begins to decay while another country—or group of countries—develop their capitalist production with great vigor, which in turn will be doomed to decay in the following historical period.

At the very dawn of capitalist production, the Italian city state of Venice was the leading capitalist power. Then came the turn of the Netherlands, followed by Britain and now the United States. During the 20th century, the United States evolved into a world-spanning empire with military bases around the globe.

The American empire commands military power that dwarfs any potential competitor. As Mao-Zedong bluntly put it, (political) power grows out of the barrel of a gun. And indeed, America’s unchallenged military power—the gun—translates into unprecedented political power. This is what we mean by the American empire, or “the Empire” for short. But “the gun” depends on the ability to produce “guns,” and the ability to produce guns reflects the development both relatively and absolutely of the productive forces.

The Federal Reserve System, Its History and Function, Part 2

This is the concluding part of a special post on the U.S. Federal Reserve System. It is written in response to the rise of the Occupy Wall Street movement. Part 1 was published on October 30. The next regularly scheduled reply on the crisis of the dollar system will be published on November 20.

Monetary policy under the New Deal

With the rise of Adolf Hitler to power in Germany in 1933, it was clear that a new European war was inevitable within a few years. Therefore, as soon as Roosevelt stabilized the price of gold—or more accurately the gold value of the dollar—in 1934, many wealthy Europeans, fearing that they could lose their gold due to the war and the revolutions that might result from the war, sold their gold hoards to the U.S. Treasury at the new official price of $35 an ounce. They reasoned that their money was much safer in the form of dollar deposits in the U.S. banking system than it was in the form of gold bars or coins in Europe.

Not all the gold that was flowing into the U.S. Treasury came from wealthy Europeans. A lot came out of gold mines as well. The collapse in commodity prices during the Depression and subsequent devaluations meant that, unlike the 1920s, commodity prices, when calculated in terms of gold, were now below their real values. This is shown by the record levels of gold production that occurred in the 1930s.

Therefore, the Roosevelt administration did not finance the New Deal by “running the printing presses.” The considerable expansion in the U.S. money supply reflected the growth in the quantity of gold in the United States, even if this gold was no longer circulated in the form of gold coin but stored instead in the vaults of the U.S. Treasury. Though prices rose in 1933-34 due to the dollar’s devaluation, thereafter prices stabilized at dollar levels that were still below the prices that prevailed during the 1920s.

These prices were even lower when calculated directly in gold. Therefore, despite the government deficit spending and the dire prophecies of right-wingers and Republicans that Roosevelt was bankrupting the United States, the U.S. was in reality awash in cash. This was in sharp contrast to the house of cards credit system that had marked the 1920s. The foundation for the post-World War II prosperity as well as the means to finance the war were being established not by the policies of the New Deal but by the effects of the Depression itself.

The Federal Reserve System, Its History and Function, Part 1

This is a special post in two parts on the U.S. Federal Reserve System. It is in response to the rise of the Occupy Wall Street movement. Part 2 will be published on November 6, and the next regularly scheduled reply on the crisis of the dollar system will be published on November 20.

The last weeks in the United States have seen a sudden surge of anti-Wall Street demonstrations that have targeted the policy of the U.S. government of “bailing out banks and not people.” The occupation movement has since spread first across the United States and now the world.

The followers of Ron Paul, a right-wing Republican congressman and presidential primary candidate from Texas, have appeared at some of the occupations and raised the slogan “End the Fed.” Paul believes that not only “the Fed” but democracy in any form should be abolished. Paul’s followers blame the Federal Reserve System for virtually all the problems faced by the lower 99 percent—high unemployment, the high cost of living, mass indebtedness, “underwater” homes, and foreclosures.

But what actually is the Fed, or to use its formal name, the Federal Reserve System? Is it some kind of privately owned bank, or is it a government agency? What is the difference between the Federal Reserve Board and a Federal Reserve bank? Is the Fed really to blame for the problems of the lower 99 percent of the population? And if the answer is yes, why would such an evil institution have been established in the first place?

The Bloody Rise of the Dollar System

The current dollar-centered international monetary system is the result of a century of competition among the capitalist nations, especially the imperialist countries. The competition that led to the current dollar system was not only economic but also political and not least military. The military competition took the form of not one but two of the bloodiest wars in world history.

Relationship between economic, political and military competition

Although there is not a one-to-one relationship between political-military and economic competition among capitalist countries, political-military competition is ultimately rooted in economic competition. So in examining competition among capitalist countries, we first have to look at economic competition. What are the economic laws that govern competition and trade among different capitalist countries?

First, let’s review the laws that do not govern international trade under the capitalist system. Using the quantity theory of money and, at least implicitly, Say’s Law, the (bourgeois) economists picture competition among capitalist nations as a friendly game in which everybody emerges the winner. Within each country, according to the economists, “full employment” reigns.

According to the modern marginalist economists, under perfect competition each “factor of production”—land represented by landowners, capital represented by capitalists, and labor represented by workers—gets back in rent on land, interest on capital, and the wages of labor precisely the value each creates. Our economists claim that as long as “perfect competition” exists, no “factor of production” can exploit another factor of production.

Similarly in world trade, every country benefits by “free trade.” According to the theory of comparative advantage, each country concentrates its production on what it is comparatively best at, not necessarily absolutely best at. According to this theory, even if a given country has a below-average level of labor productivity in every branch of production, there will always be some branch where it will enjoy a comparative advantage enabling it to prevail in international competition.

Therefore, if we are to believe the economists, countries that are deficient in modern productive forces benefit from international trade just as much as the countries that monopolize the world’s most advanced productive forces. The result, the economists claim, is the most efficient system of global production that the prevailing technical and natural conditions of production allow.

World Trade and the False Theory of Comparative Advantage

Some introductory remarks

This reply and the one that will follow should be seen as a continuation of my reply criticizing the view of economist Dean Baker that the U.S. dollar is “overvalued” and his claim that the U.S. trade deficit could easily be corrected and the U.S. unemployment crisis eased by simply lowering the exchange rate of the U.S. dollar against other currencies.

I had originally planned to continue the discussion of world trade and currency exchange rates the following month but the contrived U.S. government debt crisis in August forced a change of plans.

Reader Mike has made some interesting remarks about world trade and the dollar system—the foundation of the American empire, which has dominated the world politically, militarily as well as economically since World War II. To understand the growing threat of a renewed crisis barely two years after the official end of the “Great Recession” of 2007-09, it is important to understand both world trade and the dollar system.

Discussing Baker’s arguments for a lower dollar, Mike wants to know if there is an objective basis for determining if currencies are “high” or “low” in relation to one another. Baker summarizes his argument as follows:

“The U.S. pattern of spending more than it takes in is due to the fact that the dollar is too high. In a system of floating exchange rates, like the one we have, the price of currencies is supposed to fluctuate to bring trade into balance. This means that the trade deficit is caused by the over-valued dollar and a decline in the dollar is the predictable result.”

The obvious problem with the view that the U.S. dollar is “overvalued” is that ever since the end of the Bretton Woods system 40 years ago, the exchange rate of the U.S. dollar has shown a secular tendency to decline against other currencies. If the dollar was “too high” in the sense that there is a correct level of exchange rates that would end the U.S. trade deficit, why hasn’t the secular fall in the dollar brought the U.S. trade account into balance?

Crises Real and Artificial, and Why a New ‘New Deal’ is Not Feasible

I had originally planned to answer questions by Mike on exchange rates, which were partially taken up in my critique of an article by Dean Baker. While the factors that determine exchange rates are an important question in economics, especially for the theory of world trade, events over the last few weeks dictate that my reply to Mike’s questions be postponed.

These events include the threatened default of the U.S. government on its debt payments, the decision of the Obama administration to accept a compromise that includes no tax increases for the rich, a wave of panic selling on Wall Street and other world stock exchanges, a new plunge of the dollar against gold, the downgrading of the U.S. debt from AAA to AA+ by Standard and Poor’s, and a rare split vote by the Federal Reserve’s Open Market Committee on what to do next concerning the Federal Reserve’s monetary policy.

Any one of these events would probably have necessitated the decision to postpone the reply to Mike’s questions on exchange rates. However, the events of the last few weeks are closely intertwined with and relate to questions that this blog has been examining since its inception in the January following the late 2008 panic. In order to keep this reply within reasonable limits, I will concentrate on the question of the debt of the U.S. federal government and the threatened default by that government.

Debt default crisis a political and not a true financial crisis

Since World War I, the maximum debt that the U.S. government could carry has been determined by law. Every so often as the maximum debt limit was approached, Congress routinely voted to raise the debt limit. But this year the Republican-controlled House balked. The Republican majority threatened to refuse to raise the debt ceiling unless the Obama administration agreed not to raise taxes on the rich and corporations or even close tax loopholes that have often enabled the rich and corporations to pay no taxes at all.

The U.S. Treasury warned that if the debt limit was not raised by August 2, it would not have enough cash on hand to pay all its bills coming due, forcing it to default. The crisis was purely a legal and political one, since the U.S. government has been having no trouble recently selling its notes and bonds. Indeed, the federal government was able to sell them at prices that yielded some of the lowest interest rates it has ever had to pay. This would hardly be the case if there was a real threat of a federal default.

The media were taking the default threat seriously, but the markets—the capitalists in the know—were not. The markets were right. Over the weekend of July 30-August 1, the Democratic and Republican parties came up with a deal that raised the debt limit and averted the “danger” that the U.S. government would run out of money and default on payments on its huge debt.

The Oil Reserve Sales and Stagflation

Reader Jon B asks, what in my opinion are the reasons behind the decision of the U.S. to sell some 30 million barrels of oil from the U.S. strategic petroleum reserve? Could it reflect the cutoff of Libyan oi production and plans for increased warfare by the U.S. government in the Middle East and Africa over the coming months?

The unexpected failure of the Libyan government to quickly collapse before the combined U.S.-NATO-rebel assault means that disruption of Libya’s oil production and exports is likely to last longer than the U.S. government planners expected back in March when the U.S.-NATO war against Libya began. U.S. military activity against Yemen also appears to be increasing. There is also a growing danger of a U.S.-NATO war against Syria. This danger will increase if Libya’s resistance finally crumbles before the overwhelming firepower of the U.S-NATO assault.

It seems likely now, however, that the motive for the sale of oil reserves is largely economic. By driving down the price of crude oil and gasoline, the U.S. and other capitalist governments are attempting to boost purchasing power and thus pump some life into the faltering economic recovery from the “Great Recession.”

Dean Baker on the Price of Oil

Recently, Mrzine, the online magazine of the Monthly Review Foundation, published the testimony of the left Keynesian economist Dean Baker to the U.S Congress. Baker attempted in his testimony to refute the claims made by right-wing bourgeois economists that the spike in oil and gasoline prices earlier this year was caused by the U.S. Federal Reserve Board’s policy of “quantitative easing.”

What is “quantitative easing”? And why has the U.S. Federal Reserve System, which under the dollar system acts in effect as the world’s central bank, been following such a policy?

Last year, the outbreak of the European sovereign debt crisis, followed by a distinct pause in the global economic recovery, brought fears of a renewed global recession. The U.S. Federal Reserve Board announced that it would purchase $600 billion worth of U.S. bonds in a bid to stave off a “double-dip” global recession. Or what comes to exactly the same thing, the Fed in effect announced that it was going to transform $600 billion in U.S. government debt into green U.S. paper dollars—or their electronic equivalent.

Since last December when the quantitative easing program actually kicked in—it had been announced earlier—the quantity of token money denominated in U.S. dollars has jumped by more than 35 percent. To put this number into perspective, during the prosperous post-World War II years, the quantity of U.S. token money rarely grew more than 3 percent per year.

Between May 21, 2010, and April 29, 2011, oil prices jumped almost 62 percent, peaking out at over $113 per barrel. In response, gasoline prices have soared. World food prices have also increased sharply in terms of the depreciated U.S. dollar.

Even before the explosion in the quantity of dollar token money began, speculators anticipating the expected increase in token dollars began to push up the dollar price of gold, oil and primary food commodities. The dollar price of gold rose from $1,177 per troy ounce on May 21, 2010, to $1,556 per troy ounce on April 29, 2011. Or what comes to exactly the same thing, the U.S. dollar in terms of gold was devalued against gold by more than 24 percent in the same period.

When speculators expect a change in the quantity, or rate of growth of the quantity, of token money, they act accordingly, causing currency prices of gold and primary commodities to change even before the expected change actually occurs. If the expected change fails to materialize, markets will then react sharply in the opposite direction. This is exactly what happened in late 2008. But this was not the case in 2010 and 2011, since this time the expected changes in the quantity of dollar token money have indeed fully materialized.

So it would seem on this issue that the right-wing bourgeois economists who blame the U.S. Federal Reserve System for the spiking oil, gasoline and food prices have a point, though the alternative might well have been a renewed global recession.

However, in his congressional testimony the progressive economist Dean Baker challenged the view that the Federal Reserve policies have had much to do with this year’s spiking oil and gasoline prices. (Baker didn’t deal with the question of food prices in his congressional testimony.) Since the MRzine editors decided that Baker’s testimony was worth publishing, it is worth examining Baker’s arguments in some detail.

Presumably, MRzine published Dean Baker’s testimony because the editors believe that Baker is the kind of left Keynesian that Marxists can and should be working with as part of Monthly Review’s general policy of attempting to push the U.S. economics profession back toward Keynesianism, which dominated it in the years immediately after World War II, as opposed to the neo-liberal theories that have dominated since the 1970s. Indeed, Baker as an economist is probably about as far to the left as you can get in the U.S. and still be a bourgeois economist. It is therefore instructive to examine Baker’s approach to the question of the recent rise in oil and gasoline prices.

A Keynesian Takes on Karl Marx

In this reply, unless otherwise noted, text in italics and in brackets in Marx quotes is carried over from the version taken from the Marxist Internet Archive.

A friend N has asked if there is any difference between “the over-accumulation of capital” and “the overproduction of commodities.” Another friend M sent me a critical article by leading American Keynesian economist Brad DeLong on Chapter 17 of Marx’s “Theories of Surplus Value.” DeLong’s article is titled “Marx’s Half Baked Crisis Theory and His Theories of Surplus Value, Chapter 17.”

It so happens that in Chapter 17 Marx deals with the relationship between the “overproduction of capital”—also called the “over-accumulation of capital”—and “the overproduction of commodities.” The economists of Marx’s time—the middle years of the 19th century—admitted the “overproduction of capital”—equivalent to the over-accumulation of capital—while denying the “overproduction of commodities.”

Therefore, DeLong’s critique of Marx and N’s question about the relationship between the overproduction of commodities and the over-accumulation of capital are connected by Chapter 17 of “Theories of Surplus Value,” the target of Brad DeLong. It is therefore possible to deal with DeLong’s critique and N’s question in a single reply.