Die Neue Zeit
14th August 2011, 16:20
http://thoughcowardsflinch.com/2011/08/05/the-ongoing-euro-debt-crisis/
By Paul Cockshott
The Euro Debt crisis grows more acute. The attempt to form a currency union without a European state and a single tax system linked to the currency would always be problematic. What has made it impossible is that now, the model on which Western Capitalism has been based post the crisis of the 1980s has run into the sands.
Capitalism has always had a fundamental problem in that those who produce society’s wealth are paid too little to consume the wealth that they produce. Property income, which always represents a large fraction of all income, is very concentrated. Huge wealth flows into the hands of a small number of companies and individuals. Unless this wealth is somehow spent, the economy goes into recession.
There are several possible solutions to this. In rapidly developing economies like China today of Japan 50 years ago, profit income is overwhelmingly directed into capital investment – recently as much as 50% of Chinese national income has been reinvested. But this process of reinvestment innevitably leads over time to a lower rate of return on capital, at which point further investment becomes unprofitable. By the 1990s Japan had reached the end point of this process with profits driven to the floor and the economy entering a long period of stagnation.
There are other possible solutions – Britain in the late 19th century had very low levels of investment out of profit, but very high levels of luxury consumption by the upper classes : the building of large stately homes, the employment of armies of butlers and maids etc. That model did not survive two world wars.
The period 1945 to 1980 in Europe was a different model, combining historically high levels industrial investment with relatively redistributive tax and spending regimes to maintain demand. By the end of this period the rate of profit had fallen to crisis levels. At this point a continuation of the trend towards greater social equality would have required private capitalism had to be replaced by state capitalism ( the Tony Benn strategy ) or the post war goals of social justice and full employment would have to be repudiated ( the Thatcher strategy).
We all know which model won out, first here, and then in other countries. Under the neo-liberal model, social inequality increased, taxes on the wealthy were cut and productive capital investment shrunk to barely replacement levels. There was a big increase in conspicuous consumption by the very rich, and social pressures on the population in general to also engage in conspicuous consumption. Economic activity could only be sustained by the extension of credit on a huge scale. States, unable or unwilling to tax the wealthy, became dependent on borrowing from them to cover public expenditure. Employees were encouraged to finance ‘aspirational’ consumption likewise. But this could only work for a couple of decades until the level of debt, public and private became unsustainable.
Now the conflict of interest between the bond holding classes and the rest of society has become intolerable. Monetary union was constructed according to rules that made the bond holding interest sacrosanct. Nation states lost the power to inflate away the national debt by the issue of fiat money. This would not have matered if the issue of the new currency had been under the control of a democratic federal state with its own tax raising and monetary powers. Without such a state we have had a series of crises as the financially weaker countries are forced into successive and counter productive austerity programmes.
Think about it, if the level of debt is to be reduced, then at the end of the process the debtor states and individuals must end up with less liabilities and the creditor class must end up with less assets. The liabilities of the debtor states and the assets of the bond holders are opposites sides of the same coin. Reducing social services does nothing to reduce the assets of the bond holders, since those hit by public expenditure cuts own little or no bonds. The only ways that the debt burden could be reduced would be:
a) deliberately inflating the Euro to reduce the real value of bonds,
b) instituting a uniform European system of property and income taxes that bore most heavily on the bond holding classes and firms,
c) or more radically, declaring a general debt amnesty – something sharper than Angela’s ‘haircut’.
By Paul Cockshott
The Euro Debt crisis grows more acute. The attempt to form a currency union without a European state and a single tax system linked to the currency would always be problematic. What has made it impossible is that now, the model on which Western Capitalism has been based post the crisis of the 1980s has run into the sands.
Capitalism has always had a fundamental problem in that those who produce society’s wealth are paid too little to consume the wealth that they produce. Property income, which always represents a large fraction of all income, is very concentrated. Huge wealth flows into the hands of a small number of companies and individuals. Unless this wealth is somehow spent, the economy goes into recession.
There are several possible solutions to this. In rapidly developing economies like China today of Japan 50 years ago, profit income is overwhelmingly directed into capital investment – recently as much as 50% of Chinese national income has been reinvested. But this process of reinvestment innevitably leads over time to a lower rate of return on capital, at which point further investment becomes unprofitable. By the 1990s Japan had reached the end point of this process with profits driven to the floor and the economy entering a long period of stagnation.
There are other possible solutions – Britain in the late 19th century had very low levels of investment out of profit, but very high levels of luxury consumption by the upper classes : the building of large stately homes, the employment of armies of butlers and maids etc. That model did not survive two world wars.
The period 1945 to 1980 in Europe was a different model, combining historically high levels industrial investment with relatively redistributive tax and spending regimes to maintain demand. By the end of this period the rate of profit had fallen to crisis levels. At this point a continuation of the trend towards greater social equality would have required private capitalism had to be replaced by state capitalism ( the Tony Benn strategy ) or the post war goals of social justice and full employment would have to be repudiated ( the Thatcher strategy).
We all know which model won out, first here, and then in other countries. Under the neo-liberal model, social inequality increased, taxes on the wealthy were cut and productive capital investment shrunk to barely replacement levels. There was a big increase in conspicuous consumption by the very rich, and social pressures on the population in general to also engage in conspicuous consumption. Economic activity could only be sustained by the extension of credit on a huge scale. States, unable or unwilling to tax the wealthy, became dependent on borrowing from them to cover public expenditure. Employees were encouraged to finance ‘aspirational’ consumption likewise. But this could only work for a couple of decades until the level of debt, public and private became unsustainable.
Now the conflict of interest between the bond holding classes and the rest of society has become intolerable. Monetary union was constructed according to rules that made the bond holding interest sacrosanct. Nation states lost the power to inflate away the national debt by the issue of fiat money. This would not have matered if the issue of the new currency had been under the control of a democratic federal state with its own tax raising and monetary powers. Without such a state we have had a series of crises as the financially weaker countries are forced into successive and counter productive austerity programmes.
Think about it, if the level of debt is to be reduced, then at the end of the process the debtor states and individuals must end up with less liabilities and the creditor class must end up with less assets. The liabilities of the debtor states and the assets of the bond holders are opposites sides of the same coin. Reducing social services does nothing to reduce the assets of the bond holders, since those hit by public expenditure cuts own little or no bonds. The only ways that the debt burden could be reduced would be:
a) deliberately inflating the Euro to reduce the real value of bonds,
b) instituting a uniform European system of property and income taxes that bore most heavily on the bond holding classes and firms,
c) or more radically, declaring a general debt amnesty – something sharper than Angela’s ‘haircut’.