US capitalism has been in decline for decades now. Capitalism as a whole is trapped in a long-term crisis of overproduction of commodities and over-accumulation of capital, with an overall trend of a declining rate of profit. This is the overarching economic situation from which the presidency of Donald Trump must be viewed.
Recently we have been hearing that the US Federal Reserve has been raising interest rates in the US. What does this mean, and what does it mean for the global capitalist system?
What is interest?
An owner of capital, instead of investing this directly in production (using it to buy machinery and hire workers) to produce commodities, may instead choose to lend money as capital to someone else who will themselves invest it in production, hire workers to generate profit, then return at a later date the capital they have been lent as well a portion of the profit (ie, of the surplus value) that has been derived from exploiting workers to produce commodities.
In a sentence, interest is the portion of the profit of exploitation that accrues to the moneylender for their help in setting the wheels of exploitation moving. As Marx put it: “The use-value of the loaned money lies in its being able to serve as capital and, as such, to produce the average profit under average conditions.” (Capital Vol 3, 1894, Chapter 21)
The moneylending capitalist pays very little attention to what is actually done with the capital they have advanced, they simply need to keep one eye on the capital lent and the interest that flows back on their loan – as if by magic.
This process is both parasitic and essential under modern capitalism. Gone are the days of Mr Moneybags the industrialist ploughing only his own profits back into his works; these days, to expand production a capitalist issues debt, sells shares and takes loans from banks in order to acquire the tremendous sums of capital that are needed for embarking on modern large-scale production.
But it is also parasitic in that those money capitalists produce nothing themselves; they are not part of the cycle of production and circulation of commodities, they simply advance money to those who are taking part in it, occupying this position in the chain by dint of the hoard they are already sitting on.
The Powell Fed
On 5 February 2018, Jerome H Powell took the chair of the board of governors at the US Federal Reserve. He succeeded Janet Yellen, who had held the position since February 2014. Powell was already on the board of governors at the Fed and is very much Trump’s ‘kind of guy’: a banker sat on an impressive capitalist hoard of around $112m, the wealthiest person ever to chair the Fed. (Powell is Trump’s kind of rich, Bloomberg, 2 November 2017)
The Federal Reserve has a statutory ‘dual mandate’ from the US state to achieve “maximum sustainable employment” (not to maximise employment) and to keep prices stable – ie, to try and manage inflation. The Fed does not control the economy – that is, the cut-throat struggle between capitalists to profit or perish – but it does have a number of very powerful levers with which to exert some influence over it.
The US Federal Reserve is already scheduled to raise its benchmark Federal funds effective rate three times this year, and analysts are predicting at least one more rate rise this year, bringing it to four.
The Federal funds effective rate is one of the most important benchmarks in the US’s (and hence the world’s) economy. It is the rate of interest at which US depository institutions (ie, businesses that take cash money deposits – banks, credit unions, building societies) lend money overnight to one other.
Every day, trillions of dollars, euros, yen, etc are transferred through the interbank transfer system. As a result of this, on any given day a bank will have either a surplus or a deficit of payments. If it has a surplus it will lend this out to banks with a deficit, if it has a deficit it will borrow from banks with a surplus to cover the shortfall.
This back-and-forth short-term lending tends to average itself out over time, unless many creditors start transferring their money away from a particular bank, and demanding their money back as real (ie, cash) money, as was seen during the collapse of the British bank Northern Rock.
This rate is not directly controlled by the Federal Reserve. It does not just announce that it is setting this rate at, say, 2.0 percent – that would be meaningless. Instead, it sets a target range and then attempts to move reality in the direction of this proposed target rate by changing the money supply.
If the money supply is restricted, the interest rate should go up, because money is in shorter supply. Conversely, if the money supply is increased there is more money around, and so the ‘cost’ of borrowing in the form of interest should be reduced.
The Federal Reserve does all this in order to try and offset the inevitable capitalist cycle of boom and depression by tightening the money supply to try and lessen the runaway aspect of the boom – overproduction – while simultaneously trying not to choke investment in production and cause a recession that way instead.
Raising interest rates ‘too soon’ can result in prematurely slowing down ‘economic growth’ – something no capitalist wants to see. During a recession, the Fed will seek to increase the money supply, lowering interest rates (and therefore the cost of borrowing capital) and thus ‘jump-starting’ the economy on its way to the next boom.
These Keynesian measures have been the name of the game since the heyday of Keynes himself, whose doctrine was universally accepted in the capitalist world after WW2, when the threat of socialist revolution hung like a spectre over the battered imperialists in Europe and the far east and the capitalists were desperate to reassure the workers that a secure life could be provided for them without the need to overthrow capitalism.
The federal funds effective rate was kept at a very low 0.0-0.25 percent from December 2008 to December 2015 – seven years of record low rates. This was followed by tiny 0.25 percent rises in 2015 and 2016 and a further three 0.25 percent rises in 2017.
2018 is expected to see at least another three 0.25 percent rises, putting the effective rate at 2.25 percent, with a possible fourth rise bumping it up to 2.5 percent – still very low by historic standards, but indicative of a steadily tightening monetary policy (ie, a slow restriction of the money supply to try to curtail a possible runaway boom) at the Federal Reserve.
In many ways, the economists at the Fed seek to do the ‘least harmful’ thing: booms and recessions will still occur, since they’re part of the capitalist cycle, but the Federal Reserve and other central banks and institutions will try to raise interest rates perfectly in time with the boom, walking a tightrope between the over- and under-availability of capital – too much capital will ‘overcook’ the boom, deepening the resultant depression, while too little will prematurely choke it off and cause the slump to set in early.
The US issues debt (borrows money) in the form of Treasury bonds. These ‘securities’ (ie, secure loans) pay a fixed amount of interest on the original loan until maturity, when the total value of the security is paid back – very much like an endowment mortgage.
These are considered some of the safest investments in the world because they are backed up by the ‘full faith and credit’ of the US government itself. They are seen as ‘risk-free’ securities because the US government has all the powers of a state and thus can always issue currency (ie, print money) or raise taxes to pay back creditors. In theory, then, there is zero chance such loans will be defaulted on.
As a general rule, the longer the security takes to mature, the higher the interest rate is because of the risk and inconvenience involved in having capital locked up and inaccessible for long periods of time. The interest being paid out at any moment on a ten-year Treasury note has thus become something of a standard for looking at the state of US capitalism as a whole.
Over the past year, the yield (ie, the interest paid out) on US Treasury securities has ‘flattened’. This means that the interest paid on short and long-term Treasuries has become more similar – the US government pays a similar rate of interest on three-year loans, for example, as on 10-year loans.
Looking at the figures available from the US Treasury department for 17 May 2018, yield on a 10-year security is 3.11 percent, while yield on a three-year security is 2.75 percent. Compare this to the same date one year ago, when yield on 10-year securities was 2.22 percent while three-year security yield was 1.42 percent.
Thus we can see that today there is a yield spread of 0.36 percent, compared to 0.53 percent one year ago. We should also note that the overall cost of borrowing to the US Treasury has risen substantially because investment in Treasury bonds is appearing riskier than before.
Flattened yield curves are often a precursor to a future ‘inverted’ yield curve. This is when the yield on long-term securities is lower than on short-term securities. This is an unusual yield relationship that has on many previous occasions preceded recessions and depressions.
Lower yield on long-term securities indicates that capitalists are putting their capital not into investing in production of commodities but into long-term lending to the US government.
Such a situation drives down the interest rate on long-term Treasury securities because there is a larger mass of capital that is being offered to the US government, allowing it to borrow money at better rates for itself – ie, the US government has no problem borrowing capital because nervous capitalists seek safe investments for their capital, and the US government is considered one of the safest investments.
Interest rates tend to fall during a recession, meaning that, as the turning point in the business cycle (the turn from boom to bust) is approached, many capitalists lock their capital into long-term investments at favourable interest rates, knowing that in the future – as the economy moves into recession due to overproduction – the yield on long-term bonds will fall below the interest rates presently on offer.
Pro-cyclical tax cuts
As previously discussed in this newspaper, Trump cut the US corporate tax rate from 35 percent to 21 percent in December 2017. (Trump: racist head of a racist imperialist state, Proletarian, February 2018)
This was a tax cut made during the boom phase of the business cycle – the approximately 10-year cycle of boom and bust that former British chancellor Gordon Brown famously announced he had “abolished”. Notwithstanding the fact that US corporations exert enormous effort to avoid paying the 35 percent tax on huge profits demanded by the US government, this is still a very significant tax cut.
A tax cut during a boom – known as a ‘pro-cyclical’ tax cut – fuels that boom (by leaving the capitalists more profit to reinvest in production), but it also lays the framework for a more severe crash than without the tax cut and simultaneously removes one of the tools that the government has to try and ‘stimulate’ its way out of a recession (ie, by cutting tax during when the need for more production is greatest).
This reckless government policy is set to add additional instability into a system that is already teetering on the brink of the next downward lurch in the spiral of capitalist crisis.
Trump has stoked the fire through these tax cuts, coupled with pumping billions of dollars into additional military spending. The Republican Party is presumably hoping that this will postpone the next recession until after the January 2019 elections – making a Republican victory a relatively plausible outcome, riding on economic ‘strength’ and ‘peace’ in the face of the Democrats’ more war-hungry stance.
It remains to be see whether this gamble will succeed.
Finance and ‘financialisation’
We must remember that the ‘financialisation’ of the capitalist economy is not something ‘bad’ to be rolled back to ‘save’ capitalism, but a very real requirement of the capitalist system in its current existence.
The finance system has grown out of the needs of capitalists themselves, and also as a means by which imperialist countries and their massive capitalist corporations maintain their economic power in the world.
It has been a common theme for certain strata in the imperialist countries to decry the ‘financialisation’ of capitalism – as did the short-lived Occupy movement that spread around various imperialist cities, for example.
Hardly a day seems to go by when the misdeeds of various bankers and financial dealers are not somewhere in the news. Even imperialist governments – representing, as they do, the capitalists of a single country – decry the ‘excesses’ of capitalist finance.
But without these ‘excesses’ there would be no capitalism. It is simply not possible to have today’s globalised capitalism without the huge and elaborate capital-managing structures.
Lending money and investing in shares are not just things that bankers ‘do’; they are as integral to modern capitalism as the oil industry. If ExxonMobile and the other oil monopolies stopped supplying oil to the countries of the world, capitalism as we know it would collapse – that is self-evident.
Likewise, if HSBC and other banks stopped supplying and managing capital flows then capitalism as we know it would also collapse. Both are essential for modern capitalist production.
Banks, brokers, asset managers, insurance companies and pension funds are all vital parts of the system of managing money capital that has been over-accumulated to such a degree that without such an elaborate management structure there would be even worse chaos than is normally inherent in capitalism.
The spinning plates of the finance system may seem absurd to those looking in from the outside, but financialisation is not the cause of capitalism’s stagnation and decay – the periodic crises followed by poor growth and weak recovery – but merely a symptom and a coping mechanism.
Stagnation and decay have led to financialisation, not the other way round, and the only way out of the mess is to replace the capitalist system entirely with planned socialist production. No tinkering or ‘third way’ will suffice to solve the problems the capitalist system has created.