By Francis Lee for the Saker Blog

The present economic/political crises is not amenable to solutions which might have been effective in the past. We seem to be fighting today’s battles with yesterday’s tactics and weapons.

‘’The ultimate reason for all real crises remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.’’(1)

‘’The class war will find me on the side of the educated bourgeoisie.’’ (2)

We are now at the beginning of the most serious series of financial/economic crises since the great depression of the inter-war period and the beginning of a new cycle 2000, 2008, 2020. These are no bog-standard business cycles of short, relatively painless duration, as was the case in the early 80s and 90s, it is an epochal event which will lead to fundamental political and economic reconfigurations; the end of an era, no less. The ancien regime is collapsing; this is hardly surprising since it has very little idea of what it is dealing with and is attempting to fight today’s battles with yesterday’s weapons and tactics.


At this stage it should be understood that this is not a crisis within the system but a series of crises of the system; a systemic crisis if you will. This fact has not yet dawned on the authorities, since to pose the question in this way would be to challenge the whole system of capitalist accumulation and its viability which has been in the ascendancy for the last 30 to 40 years.


The roots of the problem are traceable to the Reagan-Thatcher counter-revolution of the early 80s and the subsequent Blair/Clinton consolidation period thereafter. The stagflation years of the 1970s gave rise to a general debilitation on the part of left-of-centre governments and policies in the developed world. As a consequence of this the radical right became increasingly assertive and eventually gained power, but, curiously enough, with little ideological baggage in train at the time. However, their on-the-job learning curve developed into a more coherent strategy in due course. There were four main targets for the Khmer Bleu: The social-democratic post war settlement, which incorporated the historic gains of millions of ordinary people; the Soviet bloc; the European social market model; the East Asian developmental model. Initially, the counter-revolutionary movement’s seemingly unstoppable momentum carried all before it. Globalisation, flexible labour markets, financialisation, de-regulation and liberalisation formed the core components of the Anglo-American model, and this paradigm seemed to be the future with the fuddy-duddy, post-war social democratic versions of capitalism becoming increasing passé. The spurt of growth which followed on from this new dispensation surged toward the millennium and beyond; this change in objective conditions was now accompanied by the growth of myriad claptrap theories and theorists. Assorted mountebanks and charlatans in the academic, media and political world posited a new age of boundless capitalist expansion – the ‘new economic paradigm’ ‘post-industrial knowledge economies’ and of course ‘no more boom and bust’.


There were, however, disturbing harbingers of possible trouble in the future. The stock market crisis of 1987; house price bubble and bust of the early 1990s, the bubble of 2001, the property bubble of 2008 and, perhaps most ominously of all, the everything bubble of 2020

The appearance of bubbles was the most disturbing aspect of the system from the mid 1990s onwards. The genesis of these bubbles implied that there was a global surplus of capital feverishly searching for diminishing investment opportunities. Anything which looked promising in terms of growth and good returns on investment will attract such surplus capital or footloose ‘hot money’. Since the early and mid 90s we have seen massive surges of hot money into what have been perceived to be viable investment outlets. In the early 90s there was the forced exit by the pound and lira from the Exchange Rate Mechanism (ERM) when speculators led by ubiquitous George Soros gambled that the pound was overvalued against the Deutschmark and won the bet. Similarly the East Asian financial crisis – 1992-97- occurred when hot money entered these ‘emerging markets’ driving up shares, property and currency prices way beyond their value. The hot money left as quickly as it entered and left the predictable financial and economic chaos in its wake. This is exactly what happens when capital flows are not regulated. More recently (1999-2001) there was the bubble and bust. Latterly, in 2008 and most catastrophic in 2020 has been the emergence (some have suggested engineered) everything Covid-19 bubble of 2020 still in its early stages and which has ushered in the most turbulent period for capitalism in 60 years


The financialisation of the Anglo-American economies, soon to be emulated in most of the rest of the world, in particular meant that financial interests and priorities were privileged over manufacturing. In this ‘New Economy’ money was to be made by financial engineering, asset-stripping, speculation, asset-price inflation, the creation and sale of exotic (and toxic) debt instruments (derivatives) which no-body really understood, least of all the punters who invested in them; increasing market concentration through Mergers and Acquisitions. The policy was essentially a strategy which boiled down to separating fools from money. Making tangible items for sale on domestic and world markets, and the corollary of saving and investment were soooo yesterday. According to the newly established conventional wisdom the route to wealth was borrowing and spending; by the 90s this nonsense had hardened into the conventional wisdom.

Assuredly this financialisation of the economy could not have taken place without the active collusion of monetary authorities. Greenspan/Bernanke/Yellen/Powell in the US and Mervyn King, Mark Carney (a Canadian) and at the present time Andrew Bailey, in the UK, all of whom presided over a period of low to zero interest rates and easy credit. This increasing mass of bubble money eventually fed through into a property bubble. And as asset-inflation – in both equities and property – took hold, more credit was made available to the punters on the basis of appreciating asset valuations. Trouble was that this money was not real money at all but just paper money or fictitious capital as Marx once called it.


This represented a massive market failure as the price of assets pulled away from the gravitational pull of their real value, this being manifested in the divide between Main Street and Wall Street; burgeoning unemployment and a massively overvalued stock market boom. The price mechanism was not working since it was giving manifestly false signals as to the real value of these assets. As we now see this has resulted in a massive misallocation of resources as multiple building projects now stand idle, new shopping centres stand eerily empty, and financial institutions have toxic debt instruments on their books which destabilise their balance sheets and hence their ability to lend, even if they wanted to. And now we have the everything/corona bubble which is even more all-encompassing than the previous blowouts in 2000 and 2008. Where this latter 2020 event is going to lead is a moot point, but it already can be surmised that we are in the early stages as mass global unemployment and bankruptcies particularly of small and medium (SMEs) size business is self-evident. All of this against a political background of instability and discontent which is the political face of an economic system in turmoil

The foundations initially laid down in the early 80s of this new system were basically rotten and unsustainable. The system went through a period where finance and financial capitalism during the Thatcher/Reagan ascendency was established and productive economies were down-graded as being of a secondary sector of the economy. In short, the economy was transformed from a productive to an extractive mechanism. Such debt-fuelled growth was tantamount to borrowing consumption from the future, since such debt was repayable. Real growth, as was occasioned in the post war period 1947-1973 was brought about by productivity gains, normal profit levels and strong wage increases. As the Nobel Prize winner and regular columnist for the New York Times, Paul Krugman pointed out: ‘’Over the period 1947-1973 (The Golden Age -FL) the incomes of all groups rose roughly at the same clip, more than 2.5% annually. That is to say that the good years were about equally good for everyone. However, between 1973 and 1979, as the economy was battered by slow productivity growth and oil shocks, income growth became much slower and more uneven, and the altogether new morbid emergence of ‘stagflation’ – rising price levels and low growth. Finally after 1979 a new pattern emerged – generally slower income growth, but in particular a strong tilt in the growth pattern with incomes rising much faster at the top and of the distribution hierarchy than in the middle, and actually declining at the bottom.’’ (3)


This maldistribution of income would, in normal circumstances, have caused an ongoing stagnation in the economy. Given that an increasing portion of the national cake was going to profits, rent and interest, it followed that the portion of the cake represented by salaries and wages would decline; this would give rise to excess saving since the higher income groups had a greater marginal propensity to save. This was Keynes theory of unemployment – a phenomenon attributable to excess saving and the corollary of idled capital which was neither invested nor consumed. His solution was to redistribute income to ensure a greater propensity to consume; and since the lower income groups tended to consume rather than save, then redistributive fiscal policy should specifically be aimed at them. However, it was apparent at the time that the economy was not stagnating, far from it. Growth rates had almost reached the golden age to which Krugman alludes. So, was Keynes wrong?


American Family Circa 1934

Wage levels in the Anglo-American economies have been – when inflation has been factored in – stagnant or actually falling for decades. That was, whisper it softly, the whole purpose of the neo-liberal, counter-revolution. And yet there was no fall of aggregate demand. What was the answer to this apparent conundrum? In short – debt, debt, and more debt. Any demand deficiency occasioned by stagnant wage levels was compensated for by an explosion in debt and credit availability. Levels of savings in both the US and UK fell to zero and were even to become negative. But the bubble euphoria was such that the palpable unsustainability of the Anglo-American bubble economies was simply ignored.


Enter the US sub-prime crisis 2008 which detonated the explosion and subsequent collapse of this global house of cards: firstly of the financial system, where investment banking is now an historical memory, and the system of credit and lending has gone into a deep freeze mode and the knock on: secondary crisis in the real economy. We now had a conjoint financial and economic crisis, with collapsing property values, worthless financial debt instruments – mortgage backed securities, collateralised debt obligations, credit default swaps – involving trillions of lost dollars, rising unemployment, accelerating house repossessions, corporate bankruptcies; this to be followed by currency instability as nations seek to gain trading advantage by devaluing their currencies and try to export their way out of trouble, and, add into the mix, fiscal crises as countries try to spend their way out of recession by borrowing money that they don’t have. In this latter sense an inflationary crisis was on the cards and a little further down the road. And right on cue – Bang, 2020 comes into sight



In their desperate search for a way out of the emergency, central banks around the world have yielded to the clamour for interest rate cuts. This is the first weapon in the Keynesian armoury of counter-cyclical measures. It may work in some situations but not this one apparently. Banks are still refusing to lend at 2007 levels, and besides companies are deleveraging (liquidating their debts) and consumers who became maxed-out during the spend, spend, spend, bubble years are beginning to pay down their debts. They are wise to do so since piling on more debts to an already over-leveraged balance sheet will just store up bigger trouble for the future. A future which is now with us. Short-term US interest rates are of today 2020 less than 1%, 10 Year Treasuries are 0.64%. Now factor in inflation and these rates are actually negative in real rather than nominal terms. Who exactly is going to buy a US Treasury Bond at a minus yield! Taken together these downward pressures are going to devalue the US dollar globally. In the UK interest rate is 0.1% nominal but a minus figure in real terms, similarly yields on UK Gilts 0.19%. Again both negative in real terms. In both instances it seems that short term interest rates will fall to 0% and have no discernible effect. Central banks – whose sole policy to counter the now entrenched massive market correction consists of an attempt to restore the status quo ante by reigniting the credit-property bubble – will not stop the process with monetary means alone. This policy was tried in Japan after the bust of the Japanese property/equity bubble in 1989. Interest rates were reduced to zero but it made no difference. Like Japan the Anglo-American economies are now in a liquidity trap – a situation where monetary loosening has reached zero or close to zero interest rates and cannot be reduced further: thus monetary policy is now ineffective, or shortly will be.


In 2008 the next big gun of US Treasury departments, active fiscal policy, was wheeled out to try to arrest the tide of deflationary collapse. To try to contextualise the level of this intervention in money terms I will quote the following figures from the US:

“Here’s how this bonanza broke down:
•       $29 billion for Bear Stearns
•       $143.8 billion for AIG (thus far, it keeps growing)
•       $100 billion for Fannie Mae
•       $100 billion for Freddie Mac
•       $700 billion for Wall Street, including Bank of America (Merrill Lynch), Citigroup, JP Morgan (WaMu), Wells Fargo (Wachovia), Morgan Stanley, Goldman Sachs, and a lot more . On top of  $45 billion for Citibank, comes a guarantee of $306 billion in bad loans.$800 billion to buy mortgages issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks.
•       $200 billion for the auto industry
•       $200 billion to buy securities tied to student loans, car-loans, credit card debt and small business loans.
•       $8 billion for IndyMac
•       $700 billion to $1 trillion stimulus package (from January)
•       $50 billion for money market funds
•       $138 billion for Lehman K.Marx, Das Kapital, Volume 3, p.484)Bros. (post bankruptcy) through JP Morgan
•       $620 billion for general currency swaps from the Fed

“The numbers change so fast, it is hard to even add them up. Rough total: $3,651,800,000,000.00

“Note: This list will almost assuredly be out-of-date when you read it.”

He was right about that…by the end of the week, it was out of date.  Kathleen Pender at the San Francisco Chronicle reports:

“The federal government committed an additional $800 billion to two new loan programs on Tuesday, bringing its cumulative commitment to financial rescue initiatives to a staggering $8.5 trillion, according to Bloomberg News.

That sum represents almost 60 percent of the nation’s estimated gross domestic product.

Clearly the American Treasury Department and Federal Reserve Board are in kitchen sink mode. And this is just the start.

The British Treasury also committed huge sums amounting to some 8% of GDP without counting the off balance sheet items such as PPP, PFI, Trident, ongoing wars in Afghanistan and Iraq which would surely push this percentage up. Again this was consistent with orthodox Keynesian policy but with a number of important differences. Firstly, Keynes assumed a closed economy; that is an economic system with no leakages out into imports and savings. Any injection of aggregate demand brought about by active fiscal policy – either tax cuts or public works programmes – would have a growth multiplier effect throughout the economy. However, this is patently not the economic system in which we live. It seems highly likely that, given the fact of globalization, any additional liquidity extended to consumers will be saved or spent on Chinese consumer goods rather than stimulating the UK economy. Moreover, given the dire state of the government’s fiscal position its attempt to borrow on the money markets may well be confronted by a possible bond market embargo as foreign investors demand ever more higher interest premiums for the purchase of UK governments gilts – even if they can be persuaded to purchase sterling denominated assets at all. Long term interest rates are almost certain to rise in this situation, with all that this implies for the UK economy in the not too distant future.


Keynes prescriptions may have been sufficient for a time when the UK had a protected trading position based upon a system of imperial preference, and where the pound was sufficiently robust, being based on Britain’s industrial and financial pre-eminence. Those days are clearly over and Britain is now in a uniquely exposed position among the nations of the developed world due to the criminally stupid economic policies – deindustrialisation – which have been followed since the 1970s and perhaps even earlier.

There are also grave inflationary possibilities in the present fiscal and monetary loosening. Keynes himself was well aware of this but regarded inflation as a lesser evil than deflation. In a rather manipulative language he described this process:

‘’ … inflation means injustice to individuals and classes-particularly to rentiers; and is therefore unfavourable to saving … deflation means injustice to borrowers … Of the two perhaps deflation is, if we rule out exaggerated inflations such as that in Germany (1923), the worse, because it is worse in an impoverished world to provoke unemployment than to disappoint the rentier.’’

This was a rather dishonest argument since the millions of ordinary savers are by no means ‘rentiers’ – they are ordinary working people who have behaved in the way in which they were enjoined to behave: saving for a rainy day, acting in a prudent and responsible manner. The use of the word ‘rentier’ is clearly intended as an ad hominem appeal to the audience. Secondly, can we with any confidence rule out a Weimar-style inflation, as Keynes seems to assume, given the massive capital injections of fiat money which is now taking place throughout the developed world? To state this as though it is somehow true is to massively beg the question. And be in no doubt that any inflation of double digit magnitude would surely have dire consequences for the savings and pensions of millions of ordinary souls. Moreover, it is not even clear whether or not such policies would even work. In this nightmare scenario we would have the worst of both worlds; a stagflationary collapse which could last for years if not decades.

Keynes was at pains to rescue the capitalist system from the stupidity of the capitalists themselves and from the vagaries of the trade cycle. His policy of counter-cyclical deficit financing was workable in conditions of stable growth and low inflation; a system of fine-tuning which involved cyclical deficits in downturns, and cyclical surpluses during the growth years. However US and UK governments have been running permanent deficits in both upturns and downturns – i.e., structural deficits ad infinitum.

It has to be said that Keynes attempt to cure the trade cycle and the longer waves of capitalist development ultimately failed. Roosevelt’s New Deal was the most comprehensive attempt at implementing Keynes prescriptions, but although unemployment in the US fell consistently from 1933, when it stood at 25% of the labour force, to 14% in 1937, there was a fresh recession in 1938 which saw the total unemployment level rise back to 21%. In truth it has to be admitted that it was rearmament and war – a sort of militarized Keynesianism – which finally ended the great inter-war depression. The massive destruction of capital values from 1933 to 1945, set up the world economy for the most successful run in its history circa 1947-1973, but since then it has been a reversion to capitalism’s historical mean – boom-and-bust, business as usual. To be fair, many of Keynes more radical proposals – e.g. the setting up of a global currency – Bancor – the comprehensive socialization of investment, a more interventionist IMF and World Bank – where either ruled out by the American negotiator, Harry Dexter White, during the Bretton Woods negotiations, or simply ignored by the UK government. It should also be borne in mind that by this time Keynes was a very sick man; he died in 1946.

But all the foregoing economic, and indeed social and political developments, which have taken place in the global economy during the 21st century seem to strongly indicate that things are coming to a head. We pulled the trick off once, but it will be a long-shot if we are able to repeat the performance. Catastrophes which were somehow averted in 2000 and 2008 but which now have reached in 2020 a condition of bankruptcy where the PTB have basically run out of ideas other than printing money, in what seems like a final collision of these long-run tendencies.

Summing up the present situation, therefore, I think that we have a classical crisis of capital over-accumulation. That is to say capital has grown too large relative to its level of profitability. In addition there are what Marx would have called increasing realization difficulties; that is the conversion of surplus value into money profit, or what Keynes would have called insufficient aggregate demand and a decline in the marginal efficiency of capital. This takes us back to the famous quote at the beginning of the article. The ratio of capital to viable investment outlets has risen inexorably. Much capital is now effectively redundant. It is ripe for liquidation, but the economic consequences of this process would be social and political dynamite. So there seem to be three alternatives. Firstly, that governments and central banks somehow stave off the present catastrophe but this will only postpone the inevitable; secondly, the necessary destruction of capital values (devalorization of capital) will take place. This will involve a massive struggle for political power between the haves and have nots of this world. Either the system will reconstitute itself and go forward to a fresh round of accumulation or the system as we know it will be replaced by another, more viable economic and political system. Political struggle will determine the outcome.

Change as Bertolt Brecht once observed, is required ‘’because things are the way they are, things will not stay the way they are.’’ But the PTB has postponed indefinitely, dealing decisively with the challenges choosing instead to risk stagnation and/or collapse. Anyone who questions the present received wisdom is held up to ridicule as a professional pessimist, or worse still as a ‘conspiracy theorist’.

But as Ayn Rand was to succinctly sum up. ’’We can ignore reality, but we cannot ignore the consequences of ignoring reality.”


(1) ‘’The ultimate reason for all real crises remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.’’ Marx, Capital Volume 3, p.404

(2) (J.M.Keynes – Nation and Athenaeum 1925)

(3) Krugman 1994

(4) The Economic Consequences of Peace – 1919

(5) Keynes – Ibid -– 1919


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