Just a few months after the Fed surprised many analysts by delaying the “taper”–the gradual phase-out of the “Quantitative Easing” money-printing program–it announced on Dec. 18 that the first reduction would come in January 2014. The “QE” life-support program has been in place in one form or another since December 2008.
Contrary to ruling-class ideologues’ claim that capitalism is rooted in “free markets” and personal risk-taking, their system in fact could not survive without the regular, massive intervention of the state. U.S. monopoly capitalism is on life-support, relying on stimulus provided in part by artificially low interest rates induced by the $85 billion a month program of “quantitative easing” courtesy of the Federal Reserve.
QE was born out of the failure of the economy to rebound from the most intense global crisis since the Great Depression, despite the government’s desperate measures to stave off an even bigger crash. The bank bailouts at the onset of the crisis were emergency measures that prevented the complete collapse of global finance, but they were insufficient to restore the strength of U.S. capitalism. Huge infusions of cash were needed on a regular basis to push down long-term interest rates and strengthen bank finances, enabling the banks and capitalist industry, especially credit-dependent housing and auto, to get back on their feet.
Prior to the decision to taper, the Fed supported the big banks by buying, with newly created dollars, $40 billion of mortgage-backed securities and $45 billion in Treasury securities per month. This will now be reduced to $35 billion and $40 billion in purchases, respectively. If all goes according to plan, QE could be completely gone before the end of next year.
However, the December meeting of the Federal Reserve Open Market Committee made it clear that the original and more traditional tool the Fed uses in its attempts to stimulate economic growth, near zero percent short-term interest rates, would remain in place for a long time. Essentially, the Fed was expressing cautious optimism by beginning the taper in a very gradual and easily reversible way while guaranteeing that the cheap-money regime would remain basically intact until at least 2015 in recognition of the obstacles still facing the recovery.
Outgoing Fed Chairman Ben Bernanke is an ardent proponent of “forward guidance,” the institution’s practice of telling finance capitalists what they will do before they do it. Forward guidance represents an expansion of the Fed’s role in setting monetary policy, and allows us to look at the Fed’s projections in order to gauge the consensus–or at least majority–view of the big bankers on the state of the capitalist economic recovery.
Some positive developments for Wall Street
Fed officials likely felt emboldened by a series of promising recently released economic indicators. With the exception of October, when the government shutdown disrupted the economy, the official unemployment rate has decreased every month since June. Official unemployment is now at its lowest level since November 2008, though much of that drop is accounted for by discouraged workers dropping out of the active labor force.
Industrial production and capacity utilization increased by more than expected in November, with the former reaching a new record high according to government statistics, and the housing market continues to improve, benefiting from the low long-term interest rates. GDP growth appears to be back on track after a very weak first quarter. Although the strong 4.1 percent third-quarter GDP growth was reported two days after the taper was announced, the number seems to vindicate the Fed’s decision.
A strong factor in the Fed’s decision was the stabilization of domestic bourgeois politics as reflected in negotiations in Congress over the federal budget. The Fed’s statement read, “Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing.”
“Fiscal policy” refers to Congress’s budget drama. Although the fake “debt ceiling” and “fiscal cliff” crises were useful when it came to scaring poor and working people into accepting vicious cuts to social programs, this strategy had created significant uncertainty about government fiscal policy and its impact on the economy.
By noting that this “restraint may be diminishing,” the Fed is registering its approval of the Ryan-Murray budget deal recently approved by Congress and signed into law. This replaces some of the sequester cuts that had been in place with other measures, some of which are just as damaging to workers. Because this is a two-year agreement, the Fed believes that capitalists will now feel more confident making investments.
But the Fed’s announcement by no means indicates they believe the economy can continue to recover with only pre-crisis levels of assistance. This is shown by the assurances given by Bernanke that QE and near zero percent short-term interest rates will continue for a prolonged period. The bankers clearly are not confident that the economy is out of the woods yet.
Perhaps the central threat to the current recovery is the rise since the middle of last year (despite the Fed’s attempt through its QE program to hold them down) of long-term interest rates, including mortgage rates. Since July 2012, the rate on the 10-year government bond has more than doubled, from well under 1.5 percent to just over 3 percent. Mortgage rates have risen sharply in step, threatening the housing recovery now underway.
Rising long-term interest rates also squeeze what Karl Marx called the “profit of enterprise”–the difference between the rate of profit overall and the rate of interest. The profit of enterprise is the key driver of productive investment, since if it falls to zero there is no more incentive for the industrial capitalists to produce, and they then either hoard their money, such as by buying gold, or lend it out at interest for unproductive consumption, such as the government’s war spending.
Of course, interest rates naturally rise during the rising phase of the capitalist industrial cycle as demand for credit increases. But profits also rise – that is, until the “boom” phase of the cycle, when capitalist industry begins to produce more goods than can be sold at a profit. Such “overproduction” can be prolonged by the greater and greater extension of credit, as happened during the last housing boom, but inevitably rising interest rates eliminate the profit of enterprise and an “overproduction crisis” ensues.
The immediate question is, then, will the capitalist rate of profit rise sufficiently during the current phase of the industrial cycle to offset the rise in long-term interest rates so as to keep the upturn going all the way to another boom–which, assuming a normal 10-year cycle, isn’t due until around 2016-17?
Long-term tendency for rate of profit to decline
In addition to analyzing the effects of cyclical fluctuations in the rate of profit, Marx showed that there was a long-term tendency for the capitalist rate of profit to fall. As capitalism develops and becomes more centralized and concentrated, the capitalists invest more and more money in machines, technology and other enhanced production techniques–“dead labor”–over long periods of time compared to the amounts they invest in hiring workers–“living labor.” Since it is only “living labor” that produces capitalist profit (surplus value), the inevitable result is a falling tendency of the profit rate–profit divided by total cost of production.
Although there is controversy over which indicators to use to best calculate the overall rate of profit in the U.S. economy, most measures show that it declined from 1965 through the early 1980s, but then recovered beginning in the mid-1980s. This deviation from the tendency of the rate of profit to fall was fueled by what is often called neo-liberalism–privatization, deep cuts to social programs and the de-industrialization of the imperialist metropoles in favor of increased super-exploitation of oppressed countries. This lowered the cost of “variable capital”–wages–which reduced the total cost of production, thereby increasing the rate of profit.
However, around 1997 this strategy ran out of steam and the rate of profit resumed its decline. The economy was brought out of crisis in the early 2000s with a significant role played by extreme predatory lending, which only set the world economy up for an even bigger crash in the subsequent Great Recession.
Stock market at record highs
At this point, it appears that the stock market, now at all-time record highs, is betting that capitalist production will continue to be profitable for some time to come. Although it has been wrong at times, historically the stock market has been a fairly reliable predictor of the economy–if only over six to nine months into the future. Based on current stock market trends, 2014 could be a year of continued, if sluggish, economic upturn.
Alongside all this, though, is the potential for renewed political instability. The Ryan-Murray budget deal temporarily ended the budget drama, but within several months the debate over the “debt ceiling” will reemerge. It is possible that congressional Republicans will demand approval of the construction of the Keystone XL pipeline in return for an increase in the government’s borrowing limit, marking a return to the brinksmanship that Wall Street disdains. While the Republican leadership does not want to interfere with the recovery, many Republicans in Congress are facing primary challenges by the semi-fascist Tea Party and will want to bolster their right-wing credentials.
In Europe, the region that is having perhaps the most difficulty recovering, the campaign season leading up to elections for the European Parliament in May might discourage decisive crisis-fighting measures. Greece, the most vulnerable link in the Eurozone chain, will hold municipal elections in May, with the government there barely surviving with a razor-thin majority in parliament. Greece is almost certain to need to impose additional, deeply unpopular debt-relief measures, which the government is planning on aggressively seeking after it announces a primary budget surplus for 2013 early next year.
Even though some of the Eurozone countries in bailout programs have successfully completed their anti-worker “structural adjustments,” Standard & Poor’s downgraded the European Union’s credit rating on Dec. 20, arguing that the European Parliament is becoming increasingly dysfunctional. This will likely further complicate the situation, as will complaints out of many corners that the bloc’s newly created supranational banking union will be too weak to effectively contain a crisis.
Clearly, major uncertainty still exists about global capitalism’s ability to recover from the Great Recession and subsequent period of economic stagnation. However, there is no uncertainty about the suffering the bankers and CEOs will continue to inflict on poor and working people. If their economy recovers, it will be on the backs of workers who are forced to endure permanently high unemployment, low wages and little to no assistance during hard times. And then it will be only a matter of time until the next devastating crisis hits.
The logic of profit has led to greater and greater threats to the well-being of society. We need a new system where the people, not a handful of unelected bankers and billionaires, control the institutions that shape our destiny.