Across the globe, at least 2.4 million people have now died from contracting Covid-19. Livelihoods have been wrecked and economies have crashed, with the world economy shrinking by over 4% and the UK suffering a fall in the gross domestic product (GDP – total economic output) of 9.9% in 2020, the steepest collapse in over 300 years.
Yet for the self-proclaimed financial wizards, the pandemic has provided rich pickings. Wealth inequality has widened further as the asset-driven boom in shares, housing and crypto-currencies has seen the super-rich enjoy huge surges in paper profits.
There continues to be an extraordinary expansion in major stock markets as asset prices soar. After the financial crash and global recession of 2007-2009, it took several years for stock markets to recover lost ground. Yet, propelled by historically low-interest rates and the prodigious sums of central bank generated income pumped into economies through Quantitative Easing (QE), an unrelenting search for yield (profit) has seen the price of stocks rocket upwards, bearing no link to increased real values expressed by GDP growth.
Where once financial markets were seen as places where business and governments could raise capital for productive investment, now debt-fuelled finance drives markets further into the stratosphere, providing speculators with new gambling opportunities, but also dangerous fuel for another potential financial Armageddon.
Multitudes of financial bubbles endanger the world economy, combining to create a cocktail of risk expressed through inflated share prices, foreign currency speculations, emerging markets mayhem, commodities, junk bonds and parasitic debt-purchased company takeovers.
The IMF warns that 40% of corporate debt in eight major capitalist countries would be impossible to service in the event of another economic crash even half as serious as that of 2008-2009, while daily turnover on the world’s foreign currency exchanges is almost one hundred times the value of commodities being traded.
‘Weapons of mass financial destruction’
Borrowing and debt continue to plaster over the deep structural problems of global capitalism. QE money has largely ended up in the pockets of traders, hedge funds and companies that see little purpose in investing in productive capital when vast paper profits can apparently be conjured out of thin air through speculative dabbling in the casino that now masquerades as modern capitalism.
Revolutionary socialist Karl Marx long ago explained that new capital (surplus value) can only be produced through exploiting workers’ labour-power and producing commodities for exchange. Capitalism’s historic purpose was to then plough back into production a proportion of that surplus value as investment capital, thus increasing productivity growth.
Now, however, whole sections of the capitalist class prefer to transform themselves into speculators. Hence the increased movement of even sections of traditional industrial capital into shady and opaque get-rich-quick scams, rarely questioned by shareholders as long as dividends keep flowing.
More companies are priced today at more than 100 times their earnings than at any previous point in history, leading veteran investor Jeremy Grantham to warn in January that “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble.”
This era is characterised by unprecedented growth in what Marx called ‘fictitious capital’.
This traditionally included stocks, shares and other forms of financial security, but today is dominated by increasingly complex electronic financial products such as derivatives, securitised assets and foreign currency-held mortgages.
Paper money and cheque money (money of account) may still act as lubricants in circulation, but increasingly fictitious capital plays the dominant role. Over 90% of financial transactions through the electronic stock exchanges no longer have the remotest bearing on real commodity exchange, ie, real value.
These and other obscure financial instruments, unknown in Marx’s day, were famously condemned by US billionaire Warren Buffet who charged derivatives with being ‘weapons of mass financial destruction’ that triggered the 2007 US sub-prime housing meltdown.
The unproductive merry-go-round of finance capital
While many workers may scratch their heads and ask how derivatives, collateralised debt obligations (CDOs) and Credit-Default Swaps work, it’s sobering to learn that prior to 2007 a proper understanding of CDOs -which are structured bundles of sliced-up IOUs made available to investors by banks – would have required reading 30,000 pages of documentation. Few capitalists understood their destructive potential and fewer still cared while the sun shone.
The notional value of all derivatives reached $863 trillion in 2006 – eleven times greater than real-world capitalist output! When they turned sour as the US housing market collapsed, due to reckless lending by banks to workers who could not afford their mortgage repayments (the sub-prime housing crisis), these ‘credit slips’ held by a myriad of institutions around the world became instantly toxic, unleashing a contagion that penetrated into the real economy triggering the ‘Great Recession’ of 2008-2009.
Derivatives were largely unregulated before 2007. The credit rating agencies, nominally independent but in hock to finance capitalism, failed to distinguish between good investments and dodgy ones.
Credit Default Swaps, which are supposed to act as insurance policies, a hedge against risk that investors buy to protect themselves should a company default on its loans, routinely enabled speculators to stack bets on the same mortgage securities. That’s equivalent to permitting several separate parties to buy insurance on the same house!
The notorious act of ‘short-selling’ where investors borrow shares and immediately sell them, hoping they can buy again later at a lower price, return them to the lender and pocket the difference, is typical of the disease of greed that pervades the City of London and elsewhere.
An alphabet soup of new asset-backed securities are constantly being marketed, such is the absurd and wholly unproductive merry-go-round that is finance capital today. These barely contribute a fraction of real value to the world economy but load up more and more explosive under the foundations of capitalism.
Marx wryly commented that “Business is always thoroughly sound and the campaign in full swing, until the collapse suddenly overcomes them”, words the capitalists would be well advised to ponder on today. Though obviously unfamiliar with computer-driven algorithm models, Marx nevertheless well understood that speculation, like poverty, is woven into the very warp and weft of capitalism.
Rise of the crypto-currencies
The fabled ‘animal spirits’ of the hedge funds and assorted entrepreneurial bandits know no limits. The world’s top 15 private hedge fund managers raked in $23.2 billion last year through investing aggressively and using derivatives and leverage to make money for their millionaire clients.
New forms of speculation emerge like weeds, such as the rise of crypto-currencies. These digital currencies perform none of the functions that Marx attributed to money. Bitcoin and others are neither a universal equivalent, a medium of exchange, a unit of account, nor a reliable store of value.
Reliant on ‘blockchain’ technology, which is a shared database of transactions, the network is secured by individuals called ‘miners’ who use high-powered computers to verify transactions, with bitcoin offered as the reward.
Its price has skyrocketed to over $50,000 in the last days, as investors pour into the market trying to ‘earn’ easy money. Nouriel Roubini, a professor of economics who forecast the 2007 financial crash, has warned that the bubble will eventually burst, witheringly saying the Flintstones had a more stable monetary system when they exchanged shells!
But siren voices, led by Tesla boss Elon Musk, briefly the world’s richest capitalist and certainly one of the system’s most arrogant, have talked up its price by calling it the monetary system of the future.
Its evangels ignore its wildly unpredictable price swings and its minimal utility in being able to perform only five transactions per second, compared to the visa network which executes 24,000 per second.
A staggering amount of energy is consumed by bitcoin computer mining, now equivalent to the total annual energy usage of Japan. Any rigorous carbon tax applied to bitcoin would wipe out this frothy speculative mania.
Socialism – the only antidote to ruinous, parasitic capitalism
Only the tech giants – Apple, Amazon, Facebook, Google and Netflix – have really prospered in the last year. Capitalism generally is drowning in debt with worldwide public, private and consumer debt already exceeding $199 trillion by 2016. The emergency governmental bailouts of the last year have added innumerable noughts to this escalating ledger.
Productivity growth in the US and elsewhere are historically low. Meanwhile, capitalists withhold investment in productive fields, preferring to hoard their profits while instead reaping short-term easy gains from what they see as the ‘always a winner’ virtual magic roulette wheel.
Tomorrow, however, this turbo-charged speculative model will bring only further chaos, as bubbles burst, a new downturn strikes, and the underlying structural weaknesses of capitalism are laid bare.
Only the international socialist transformation of society can provide an antidote to this market madness.