Finance Capital’s Looting And Wrecking Of The World Economy

Careening down narrow mountain roads, you are a passenger in a vehicle driven by a madman whose every move brings you closer to disaster. That’s the West’s economy and its stewards in a nutshell. Maybe collapse will be avoided by the time this article appears, but it’s not guaranteed.

The US Federal Reserve (hereafter, “the Fed”) has been increasing the money supply at a fantastic rate since the year 2000 to fund banks and investment houses to buy stocks, bonds and other financial assets and real estate for themselves and their wealthy clients under the Fed’s outrageous “Wealth effect” policy.^[1] In October 2019 this game produced yet another crisis in the “Repo” financial market, like the one that brought down the economy in 2008. The Fed tried to bailout the Repo market but the market kept exploding (see Figure 1). Finally, in March 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES) together with the lockdowns calmed markets as the Fed flooded the world with still more trillions, rapidly, in the biggest bank bailout ever. The flood of money has brought inflation to the US and the rest of the Western world, measured in July 2022 as 8.3% in the USA,^[2] 10.9% in Germany,^[3] the sort of inflation normally restricted to developing countries. This inflation is the smoke from the raging fire of a severe economic crisis still in progress. Let’s review the background.

The top curve of Figure 2 shows the fantastic growth in wealth of the households of the top 0.1% of USA millionaires and billionaires since the year 2000. This expansion in their wealth caused the crisis. Wolf Richter writes:

“What kind of outrageous gift they got from the Fed’s money printing and interest rate repression…It was also the greatest economic injustice committed in recent US history over such a short period of time. These monetary policies are largely responsible for the worst inflation in 4 decades that is mauling the “Bottom 50%” of households because they have so little, and spend all their money on necessities…”^[4]

The top 0.1% rode the huge balloon in the US money supply from 4 trillion in 2000 to 22 trillion now (see Figure 3). Karl Marx warned in Capital:

“If the quantity of paper money represents twice the amount of gold available, then in practice £1 would be the money-name not of 1/4 of an ounce of gold, but of 1/8 of an ounce…The values previously expressed by the price of £1 would now be expressed by the price of £2.”^[5]

The reason for the doubling of the price is that there is twice as much money demanding the same quantity of use values, that is, useful goods or services that people are interested in purchasing. For as Marx says, “Use values…are the material bearers of exchange value,”^[6] or price. Between 2000 and 2022, the US money supply increased four and half times. Based on Marx’s reasoning, which is shared by many other economists, prices would be expected to increase 4 and a half times or 450% during such a period (2000—2022), all things being equal. But the consumer price index (CPI) increased only 75 percent from 169 in January 2000 to 296 in August 2022.^[7] The index didn’t even double. If somehow during such increase of the money supply additional use values entered the market and became available, the inflation would be less, since there would be additional real goods to correspond to the increase in demand for goods in the form of the increase in the money supply. Did US industrial production increase during this period to produce the needed use values? Table I says No: It shows that industrial production declined in several core areas. No, sufficient use values did not enter the US market from internal production, but rather from abroad. Under the regime of imperialism, use value is brought into the US economy from abroad at very low cost and this use value supports the American currency and retards or prevents inflation. One clear mechanism for this moderation of inflation is the ‘importation’ of raw materials from developing sector economies, such as the oil that the US Army has looted from Syria during its ongoing occupation of the eastern part of the country, or the lithium that Elon Musk’s companies are removing from south America for electric car batteries. These free or cheap raw materials ‘imports’ reduce production costs for American companies and reduce prices, as follows: As Marx has shown,^[8] the price of a manufactured article is broken down into the constant capital (C) and variable capital (V) that went into its production together with surplus value (S) or profit. Constant capital (C) is the cost of replacing raw materials and manufacturing plant and equipment; variable capital (V) is the cost of sustaining and reproducing labor. Look at Marx’s representation of the price of an ell of linen in Figure 4, example I. The price is 2 shillings. With imperialist raw materials imports from the developing sector, the constant capital component of the cost could be reduced from 80 Pounds, for example, to, say, 20 Pounds, and then the price of the ell of linen would be cut in half to 1 shilling. This constantly in-effect mechanism reduces price inflation in imperialist economies. Importing finished goods, e.g., clothing, from cheap labor markets also retards inflation, because then both constant capital and variable capital costs are lower. Americans should not worry about the 8% inflation that they are experiencing. Based on the expansion of the money supply, they should expect approximately 20% inflation per year since the year 2000.^[9]

Another peculiarity in the inflation data is that Germany’s inflation exceeds that of the US: Germany is a highly industrialized country with a strong basic industry producing steel, machine tools, agricultural equipment and automobiles. Why is their publicly announced rate of inflation of 10.9% higher than that of the US? There are two primary reasons. First, Germany does not benefit from imperialist hegemony over the vast regions of the world from which the US extracts value. Second, the US also dominates Germany and forces it to buy its expensive products, e.g., Liquified Natural Gas (LNG).

All this is very troubling, but why, out of the blue, have we got inflation now since Spring 2021? First, the money supply went through the roof in 2020. That’s the last big jump in Figure 3. That’s the effect of the CARES Act. The US had to do it because of the pandemic, right? Wrong. As Marx wrote in his Preface to A Contribution to a Critique of Political Economy, the reasons people give for doing something are ideological and usually not the reasons they actually do them, which are economic.

Marx wrote:

“It is always necessary to distinguish between the material transformation of the economic conditions of production…and the legal, political, religious, artistic or philosophic – in short, ideological forms in which men become conscious of this conflict and fight it out. Just as one does not judge an individual by what he thinks about himself, so one cannot judge such a period of transformation by its consciousness, but, on the contrary, this consciousness must be explained from the contradictions of material life, from the conflict existing between the social forces of production and the relations of production.”^[10]

The economic reason for the hyperinflationary CARES Act was the crisis in financial markets from Fall 2019 to March 2020, as shown in Figure 1. What especially aggravated the financial system was the government’s response to the crisis in the Repurchase (Repo) Market in 2019. The Repo Market is where giant financial institutions borrow trillions of dollars from each other and from central banks every day, often just for overnight. The Repo Market was what brought down the economy in 2008. From 2010 to 2019 it was relatively calm: Banks and corporations traded Repos with no seeming problem. Then in Fall 2019 lenders began to distrust the collateral that their Repo borrowers were putting up to secure their loans. They refused to extend credit. The Fed stepped in as in 2008 and bought up the outstanding Repos that lenders refused to buy. Again, the Fed bailed out the investment banks that had gotten themselves into trouble as in 2008. The amount of Repos purchased by the Fed per day grew from zero on September 4, 2019, to 200 Billion in October and exploded to 450 Billion in March 2020. The government then had two responses: First, the lockdowns. Because they shut down the economy, they eliminated pressures on financial markets, and the Repo market began to settle down. Then the CARES Act provided the biggest bailout to NY banks in the history of the country—at first $2 Trillion (including $290 Billion in payments to taxpayers who had to hand it back to the banks again in Covid-19 Lockdown emergency spending). In 2020 and 2021 the money supply increased by $4.8 trillion. Inflation exploded in 2021 and jumped from 1.7% per year in February to 5% in May, and now up to 8%.^[11] So, the cause of the inflation is the government’s attempt to stabilize financial markets. Why did the Repo market get jittery? It all comes down to real value, or rather the absence of it in the US economy. In the last few years, the world economy’s big actors outside the West—the BRICS countries, China, Russia, India, etc.—have been moving away from using the US dollar as their reserve currency, as the currency in which all international trade takes place.[12] The US has bullied the world with the hegemony of the dollar, and the world got tired of it. Now the world is trading in Rubles and other currencies. Instead of the Petrodollar, we have the Petroruble. The dominance of the dollar was the dollar’s only support. With the decline of the Petrodollar comes the decline of the US economy, first signaled by the highest rate of inflation in over 40 years. The US is on the way down.

The Federal Reserve piggy bank has been pumping out money for its friends in investment banking like mad. They all got rich; we got inflation and economic crisis. This is the way it works, according to 18^th century Irish political economist Richard Cantillon: The people who are closest to where the new money enters the economy—investment bankers—can benefit from the new money before prices rise. They buy new homes, land, gold, stocks and other investments. But the people who are farthest away from where the new money enters the economy—that’s wage earners—suffer from the inflation it causes. Cantillon explains:

In general, an increase of hard money in a state will cause a corresponding increase in consumption and this will gradually produce increased prices…Those who will suffer from these higher prices and increased consumption will be…all the workmen or fixed wage earners who support their families on a salary. They all must diminish their expenditures in proportion to the new consumption [by the rich].^[13]

That’s the Cantillon effect. So, Wall Street grabs up all the value in the economy with the new money pumped out by its friends at the Federal Reserve. What’s left for us is the inflation they caused by expanding the money supply without expanding the real economy of manufacturing, construction, transportation and energy production. Look at the Bureau of Labor Statistics reports on inflation and you will see that wage earners suffer the highest rate of inflation in the country, a 9.1% annual rate in July 2020, while the average rate for everybody, bankers and wage workers included, was 8.5%. Under the Cantillon Effect wage earners suffer higher inflation that anyone else. This is one of the processes that drives inequality. The working poor suffer the highest inflation. Figure 5 from a Bureau of Labor Statistics report shows price increases by social group since 2003. The top curve shows the highest inflation rate suffered by the lowest income quartile, the 25% of Americans with the lowest income share in the country. The bottom curve shows the lowest inflation enjoyed by the highest income quartile, the richest 25% of the population.^[14] The average annual rates of inflation by social group are given in Table 2. That brings us back to square 1, the economic injustice we referred to at the top. The growth in speculative investment that has been going on for decades, has driven up US “gross domestic product” (GDP) per capita from $20,000 in 1968 to $46,000 in 2014 in fixed 2005 dollars at a nearly constant rate of $565 per year. That increase does not represent an increase in real goods and services but rather the paper wealth of the Wall Street millionaires averaged over the whole population, for US industrial production has collapsed. This same process has driven down the relative incomes of everyone else since 1968, for as Figure 6 shows, the ratio of the income share of the lower 80% to the income share of the highest quintile has fallen from 135% in 1968 to 95% in 2014. For more than 50 years, finance capital—the Federal Reserve banks, the big commercial banks, the investment banks—have been sucking wealth out of the US population and the world at a fantastic rate. Like Cantillon, many ‘conservatives’ oppose the Fed’s monetary and ‘wealth’ policies. These conservatives represent industrial capital, not finance capital.

[1] https://wolfstreet.com/wealth-effect/

[2] Reported by Bureau of Labor Statistics.

[3] https://wolfstreet.com/2022/09/30/eurozone-inflation-spikes-to-10-in-germany-10-9-without-energy-6-4-from-temporary-inflation-mid-2021-to-runaway-inflation/

[4] https://wolfstreet.com/2022/09/26/my-wealth-disparity-monitor-september-update-qt-rate-hikes-dropping-stocks-bonds-reduce-outrageous-us-wealth-disparity/

[5] Marx, Karl, Capital, vol. 1; Penguin: London, 1976, Chapter on Money, section on “Coin and symbols of value,” p. 225.

[6] Ibid., p. 126.

[7] Bureau of Labor Statistics.

[8] Marx, Op. Cit., p. 962.

[9] If the money supply increases 450% over 22 years (from 4 trillion to 22 trillion), then so do prices, which inflation would average to 20% per year.

[10] K. Marx, “Preface” to A Contribution to the Critique of Political Economy, 1859; translation from edition of Progress Publishers, Moscow, 1977

[11] Bureau of Labor Statistics.

[12] On ruble-rupee trade, cf. https://www.rt.com/business/562727-russia-india-trade-doubles/ and https://www.iasparliament.com/current-affairs/rupee-rouble-trade-arrangement

[13] Richard Cantillon, Essai sur la Nature du Commerce en Général, Paris, 1755, Pt. 2, Ch. 6; translated as An Essay on Economic Theory by C. Saucier, published by Ludwig von Mises Institute, 2010.

[14] J. Klick and A. Stockburger, “Experimental CPI for lower and higher income households,” U.S. Bureau of Labor Statistics Working Paper 537 March 8, 2021