[Peace-discuss] Deficits, Debts, and Deepening Crisis

[C. G. Estabrook]

Deficits, Debts, and Deepening Crisis
by Richard Wolff.
PUBLISHED ON AUGUST 18, 2011

Standard and Poor’s downgrades US debt, stock markets gyrate around the world, 
Sarkozy and Merkel perform yet another empty summit, the Chinese and Japanese 
economies look worrisome. Serious commentators worry about global recession, 
another global banking collapse, eurozone dissolution, and austerity programs 
that only make matters worse. Nouriel Roubini, famed Professor at NYU’s Stern 
School of Business asks this month, “Is Capitalism Doomed?” His answer: maybe.

The crisis of capitalism that erupted in mid-2007 now enters its fifth year. It 
grew out of excessive debts of US households and enterprises (especially 
financial enterprises) that their underlying incomes and wealth could not 
sustain. Key to the crisis was real wage stagnation since the mid-1970s. As the 
cost of the American Dream kept rising while real wages did not, households 
borrowed (mortgages, credit cards, student and car loans). Debts accumulated on 
the basis of stagnant real wages. That unsustainable credit bubble blew in 2007. 
Nothing since has significantly relieved or alleviated that basic contradiction. 
With high unemployment, total wage incomes have fallen and little extra credit 
will flow to already over-indebted workers. The crisis deepens as US demand 
remains hobbled.

Since the 1970s, banks, insurance companies, and hedge funds invented new 
speculations on the rising debts of US households (asset-backed securities, 
credit default swaps, etc.). Those financial speculations were even more 
profitable than the soaring profits of non-financial corporations who could keep 
their workers’ real wages flat even as rising productivity delivered ever more 
product per worker to those corporations. Huge speculative profits prompted 
financiers to borrow in a self-reinforcing spiral ever further removed from the 
household debts on which it was based. When that base collapsed as millions of 
US workers could not longer sustain their debts, so too did the financial 
speculations built upon it.

The wealth and power accumulated by the financial industry since the 1970s 
secured massive Government-funded bailouts after the crisis hit. Recoveries were 
underway for banks, insurance companies and larger bankrupt corporations by 
mid-2009. But no recoveries were provided for real wages, declining job 
benefits, excess household debts, falling public services – nor for the 
unemployed or the foreclosed.

By bailing out their private financial industries, the US and other governments 
took over (nationalized) that sector’s bad debts and soured speculations. 
Governments borrowed to do that, thereby adding massively to national debts. 
“Recovery” for the financial markets bypassed the mass of people. Economically 
depressed working classes and increasingly indebted states now combine to 
unravel even the financiers’ recovery.

The trail of failed economic policies undermining a dysfunctional capitalism 
displays multiple absurdities. Rising household debt had combined with stagnant 
wages by 2007 to collapse the US housing market, raise unemployment, freeze 
credit, cripple state and local finances, and so on. As demand for goods and 
services shrank fast, businesses and the rich stopped investing in production. 
Their investible funds were idled, and that only aggravated the crisis. The 
self-regulating, efficient capitalist market system proved to be the myth its 
critics had mocked. However, the market system did spread the US crisis quickly 
to Europe and beyond.

As crisis flared in 2008, governments unfroze credit markets by pouring money 
into tottering banks and insurance companies. Governments printed and created 
new money to pay for part of these policies; to cover the other part governments 
borrowed. The governments’ creditors included the banks and insurance companies 
they had bailed out. Governments also borrowed from the companies and rich 
individuals who had withheld investing in the production of goods and services 
and had thereby worsened the crisis. The absurdities of such “economic policies” 
(and their gross injustice) invite grim laughter if only to keep from crying.

But wait, the costly absurdities thicken. Banks and other financial companies 
that lent to governments got worried about fast-rising national debt levels. The 
US situation was especially worrisome and culminated in Standard and Poor’s 
downgrade this month. After all, Washington had enjoyed budget surpluses in the 
1990s. But then the last decade’s massive Bush tax cuts, multiple wars, and then 
the post-2007 bailouts exploded the US national debt. Politicians who voted for 
all those budget-busting actions now use the resulting national debt to justify 
cutting government spending on the mass of people.

Creditors know from history that governments invite political trouble with high 
and rising debt levels. The interest costs on national debt risk diverting tax 
revenues to satisfy creditors rather than to provide public services to tax 
payers. After four years of economic crisis, populations may not accept reduced 
government services while more of their taxes flow in interest payments to the 
banks, insurance companies and other financial enterprises they blame for the 
crisis. They may revolt when leaders cut pensions, health insurance, etc. 
“because our nation must reduce its budget deficits and debt.”

Those risks drove rating companies to downgrade the debts of ever more “advanced 
industrial countries.” Downgrades signify the historic dangers of this global 
capitalist crisis. They reflect the absurdities and contradictions of the 
ineffective, trickle-down policies pursued by governments since 2007.

Across Europe and the US, all sorts of campaigns seek to prevent or deflect 
awareness of this systemic crisis of capitalism (when its politics and economics 
undermine more than reinforce one another). Some aim to redefine the crisis in 
nationalist terms. For example, the German working class is prompted to blame 
economic difficulties and/or its government’s austerity policies on the Greek 
and Portuguese working classes and/or their governments’ social welfare 
programs. Other campaigns discover other scapegoats: “the financial industry,” 
“the bankers” or still more narrowly, the “central bank” are candidates. Texas 
Governor Perry, now running for President, narrowed scapegoating down to one 
man, the Federal Reserve Chairman.

Another diversion from seeing this as a systemic crisis of capitalism asserts 
that large “emerging” economies – China, India, Brazil, and so on - are escaping 
or even reversing the crisis. However, their profound dependence on trade and 
capital flows with the US and Europe should dispel fantasies about their 
independent development or super-fantasies that their development will revive 
the US and Europe. Ever more of this crisis’s victims are recognizing the 
historical roots and systemic contradictions deepening it. Demands for change, 
organized and disorganized, superficial and systemic, keep building, albeit 
unevenly, around the world.

http://rdwolff.com/content/deficits-debts-and-deepening-crisis