Economic Watch

Capitalism increasingly looks terminally ill

Capitalism off the rails - Michael Sauga
Michael Sauga.jpg

Has capitalism as the standard superstructure of the economy globally run its course and is it living out its final days before becoming part of history?

The global financial and economic crisis has entered it seventh or eighth year – depending on whether your count from the August 2007 BNP Paribas’s declaration of the “evaporation of liquidity” or the Lehman Brothers’ collapse of September 2008 – with no end in sight. On many fronts the crisis rather seems to be deepening.

And the questions about the survival of capitalism as we got to know it, are no more being asked just from leftist or hard-core socialist circles.

On 23 October this year the conservative and authoritative German magazine Der Spiegel published an article by its editor, Michael Sauga, under the telling headline The Zombie System: How Capitalism Has Gone Off the Rails.

“Today, no one talks anymore about the beneficial effects of (an) unimpeded capital movement. Today's issue is ‘secular stagnation’, as former US Treasury Secretary Larry Summers puts it,” Sauga writes.

It is also becoming abundantly clear that it is not just capitalism as an economic system that is under threat of collapse. There are also increasing fears that it might be dragging down with it democracy as preferred political system.

Already in March of last year Martin Schulz, president of the European parliament, warned that the economic crisis and the social injustice and unemployment associated with it threatens democracy in Europe.

Some of these fears for democracy and social stability in even some of the ostensibly richest countries of the world come from people as close to the heart of capitalism as it can get.

In his article Sauga reports how, at a meeting in May this year of 250 of wealthy and extremely wealthy individuals from around the globe, the investor and bank heir Lynn Forester de Rothschild, who was hosting the meeting, said she was concerned about social cohesion, noting that citizens had “lost confidence in their governments”.

Governments part of the problem

Governments across the globe, together with international institutions, were at the heart of the developing crisis right from the start. Initially they enforced way too liberal regulatory regimes for banks and other financial institutions, and then played too much of a direct and central role in attempts to save those institutions.

In the wake of the triumph of capitalism over communism a quarter of a century ago the deregulation of the market became the economic battle cry of the day.

Coupled with an almost naïve belief in the possibility of never-ending growth, financial institutions in particular were allowed to take on dangerous risks. Banks were seen as the drivers of growth and allowed to create an unsustainable mountain of debt in the process.

Banks also deviated from their core function of channeling surplus capital to productive sectors of what became known as the ‘real economy’. They became increasingly involved in trading in ‘financial products’. Many of these ‘products’ were not much more than high-risk speculation with so-called derivatives.

Eventually the housing bubble in the United States burst in 2007, raising serious concerns about the solvency of banks, a sharp decline in credit availability and a sharp drop in investor confidence, followed by a global economic slowdown.

Governments and central banks stepped in to bail out the banks and stimulate the economy. What, however, effectively happened, is that, in the words of Sauga, the “billions spent on economic stimulus packages … have created mountains of debt in most industrialized countries and they now lack funds for new spending programs.

“Central banks are also running out of ammunition. They have pushed interest rates close to zero and have spent hundreds of billions to buy government bonds. Yet the vast amounts of money they are pumping into the financial sector isn't making its way into the economy.”

In fact all that has really happened, is that speculative practices have become more risky with collateralised debt obligations (CDOs) and credit default swaps (CDSs). At the same time came computer driven ‘flash trading’, (high frequency trading) in shares.

While little investment is going into productive sectors, prices are going up dramatically on stock markets, real estate and bond markets around the world on the back of low interest money with the Bank for International Settlements warning about “worrisome signs” of an impending crash.

Other uncertainties

In the meantime one in five European Union banks have failed a stress test conducted by the European Central Bank and does not have enough capital to cope if another financial crisis should strike.

According to a report last month by Reuters, 400 sovereign funds – 157 held by central banks, 156 by public pension funds and 87 by sovereign wealth funds – have become huge players in the global economy.

These sovereign investors manage assets worth $29.1 trillion, which are equivalent to 40% of the global economy.

It is reported that: “Since central banks cut interest rates to record lows in a bid to shore up flagging economic growth, world governments have had to look further afield to grow public pension money or central bank currency reserves. But the resulting tide of money is in danger of distorting markets, causing prices to reflect political priorities rather than financial reality …

“It’s also threatening to inflate the very price bubbles that central bank teams globally are working so hard to prevent, experts suggest.”

In the meantime it is anyone’s guess what will happen when interest rates eventually go up, as is planned in the US for next year. Cost pressures could see government deficits explode, stock market bubbles burst and financial institutions and economies collapse.

Capitalism of uncertainty

Against this background it is small wonder that Sauga concludes: “Capitalism in the 21st century is a capitalism of uncertainty, as became evident once again last week. All it took were a few disappointing US trade figures and suddenly markets plunged worldwide, from the American bond market to crude oil trading.”

Measures by governments and central banks to get economies going and affect structural changes, have clearly failed to date. Instead:

• Banks are bigger and in riskier positions than ever;

• Cheap money has created dangerous bubbles on many fronts;

• Crisis policies have led to conflicts in some developed countries;

• Unemployment is up and those in employment live with stagnating wages and depleted interest on savings while wealthier classes profit handsomely, with private wealth increasing by 15% over the past year;

• Even in Germany only 20% of the population think economic conditions are fair and almost 90% believe the gap between rich and poor is widening;

Again in the words of Sauga: “… the crisis of capitalism has turned into a crisis of democracy. Many feel that their countries are no longer being governed by parliaments and legislatures, but by bank lobbyists ...”

As things stand, it would seem that the policies and measures to date have postponed the inevitable – a massive correction in the markets. The only certainty it would seem, is that the correction will come sooner or later and is likely to be messier than it might have been seven or eight years ago.

If capitalism as we got to know it will survive, remains to be seen.

by Piet Coetzer

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