Tuesday, January 21, 2014

Changing economic paradigms: Governments and financial industry crowding out capital and labor

The great divide of 19th and 20th century capitalism was the antithesis between capital and labor. Our perceptions today are molded in this framework, but this is slowly being displaced in the 21st century by a new divide line between governments, big bureaucracies like the European Union with their banking industry partners declaring war on capital and labor mutually, putting them both under severe pressure by massive socialization of losses created by their policy decisions at the expense of general society.

Essentially this new state corporatism is a modern form of rent extraction fuelled by ‘pretend and extend’ policies on unsustainable public debt levels. This is crowding out productive investment, creating negative returns on capital and reducing wages in a downward spiral of debt deflation and at best sub-par recovery with high levels of unemployment. 

The old Marxist theory was that capitalism was unstable because the capitalists were using their power to suppress wages and this was leading to ever deeper economic cycles of boom and bust. Gradually with mass production, entrepreneurs like Henry Ford realized the importance of a mass consumer markets to sell these products even to their own workforce. Later in the Great Depression era, this evolved to the Keynesian view that governments can soften the impact of economic downturns by increasing their spending for economic stimulus to reflate. 

In the last 30 years, we are experiencing very high debt levels in excess of those that preceded the Great Depression and overly saturated consumer markets primed by bank credit. Today we have an evolving system of state corporatism. 

There is nowhere where this is more heavily concentrated than the Eurozone in the European Union. The common currency system has made governments reliant on commercial banking system to finance their deficits. The trade deficits are locked in because there is no natural adjustment mechanism by currency devaluation. The only way for member states to adjust the imbalances is either to borrow or to reduce consumption by aggressive use of deflation. Use of deflation results in bankrupting the domestic banking and pension systems as well as massive unemployment. 

This process has created mountains of unsustainable government debt, it has infected the entire EU banking system and it is currently being shored up by ECB programs like LITRO and OMT. The hard monetary policy of the ECB militates against monetization and the Eurozone policy has been to increase tax levels and declare war on capital with increasing use of the banking system as means of tax collection. The high levels of taxation are pro-cyclical and deepen the recessions. Greece is a textbook case.

Despite years of austerity with GDP output decline to Great Depression levels and massive PSI+ haircuts, Greek public debt levels remain as high as ever and unsustainable. The ultimate in this policy thinking was the Cyprus bail-in where depositors become shareholders and were taxed directly to absorb the banking losses, generated from default and haircuts on government debt instruments. Decisions are arbitrarily made by EU policy makers and their governments without direct representation of the people affected in the member states. The old rules of no taxation without representation have been broken. 

With the massive economic scandals in Greece with the TT and arms procurement, the Greek political elite are increasingly looking like a class of robber barons. This same class of people has been aggressively increasing levels of taxation on businesses and private individuals with new draconian and repressive tax laws with powers of garnishment and expropriation of bank accounts and income streams for collection. Backlash and resentment is rising to the boiling point in Greece. 

In the shipping community, we have an interesting phenomenon of ship owners, office staff and Piraeus port dock workers all adversely affected by these policies. The Greek shipping SME’s (small medium businesses) cannot get sufficient bank credit from the Greek banking system to roll over and renew their fleets, the management companies are forced to pay double Greek flag tonnage tax on their vessels, the service offices have been arbitrarily taxed (even retroactively) on their imported foreign exchange to pay general office expenses, the office staff is being taxed right and left reducing their disposable income and the dock workers face low wages, unemployment and competition from foreign immigrants for labor needs. 

Admittedly, these groups do not perceive necessarily that they are all in the same basket with common adversaries, but in fact a new dividing line is becoming increasingly clear. The zero sum game is between EU policy makers, the political elite with their banking system partners diverting resources from the general population and the business class. The resources are going to sustain the Eurocurrency system and the political elite at the expense of both capital and labour, putting them mutually under increasing pressure, resulting in increasing business closures and high unemployment.  

Added to this, the political dynamics of the Eurozone are changing with the recent turn of the French government (presently at record lows in public opinion polls} in complete capitulation to the Germans by embracing of Say’s Law (supply creates its own demand). The old French-German partnership that drove the European Union is being superseded by an all-powerful Germany, who drives major policy decisions as it sees fit. This is more than just a calamity of economic policy but an event of major political consequences. 

  • It fuels domestically in France the Eurosceptic movement of Marine LePen leading in the polls for the forthcoming Euro parliament elections. 
  • It reinforces the German supply-side consensus and establishes the principle that the only way to co-exist in a monetary union with Germany and the other Nordics is to become like them. 
  • This makes Eurozone membership virtually compulsory to stay in the EU, which will ultimately lead to the exit of the United Kingdom. 
  •  It also makes adjustment in EU periphery countries like Greece likewise virtually impossible to remain in the Eurozone and EU. 
In the forthcoming Euro-elections there is a deepening divide between the Federalists, who want more EU centralization and integration and those, who want to break up the Eurozone, want to reaffirm the sovereignty of the nation-state with a smaller, weaker EU that functions as a trade zone.

For these reasons, the party system in Greece is fragmenting and the two main political parties are in disrepute. There is likely going to be increasing instability in Greece and the European Union in the coming months. The Europarliamentary elections are likely to be a catalyst for major policy changes, should the prevailing 'status quo' be altered by the results.

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