U.S. law prevents the federal government from allowing its debt to rise beyond a specific limit. As of May 2023, the limit is $31.4 trillion though this will be raised in the coming weeks. If either or both houses of Congress don’t, the federal government will be forced to reduce expenditures and forced into default. Finance capital won’t allow that.
On January 19, 2023, the day the legal limit was reached, the debt ceiling was not raised because of various technical loopholes in the law, but they are not unlimited. This is not the first time for this kind of artificial government debt crisis, which has become a regular feature of U.S. politics since the Obama administration. Treasury Secretary Janet Yellen estimates that the legal wiggle room (technical loopholes) will be exhausted by June 1, 2023. So while an over-the-weekend theatrical default is possible, the chance of an extended default is less likely than the Vatican announcing its conversion to Judaism or Islam.
Is the federal debt crisis just for show? Not at all. A bill will be passed within the next few weeks, raising the current $31.4 trillion debt limit. To become law, the bill must be passed by both houses of Congress and signed by the President. The Democrats narrowly control the Senate, but the House of Representatives has a slim Republican majority. The House already passed a bill to raise the debt limit, but it contains provisions cutting the budget. Of course, cutting the war budget is off the table — instead, the GOP wants to gut social programs. The most important provision is to attach work requirements to Medicaid and food stamps benefits, as well as measures to promote the production of more fossil fuels. They also want Biden’s limited student debt forgiveness canceled.
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On Wednesday, March 8, California-based Silvergate Bank announced it was voluntarily winding up operations. The same day, Silicon Valley Bank, the favorite bank of the area’s companies and venture capitalists, announced it was selling off its portfolio of government bonds to raise cash. This triggered a run on the bank, forcing the Federal Deposit Insurance Corporation (FDIC) to shut it down on March 10. On Sunday, March 14, the FDIC announced it was shutting down New York-based Signature Bank. Both Silvergate and Signature were commercial banks heavily involved in lending to cryptocurrency companies. Problems leading to their collapse can be traced back to the collapse of Sam Bankman-Fried’s FTX cryptocurrency exchange last year.
Under U.S. law, bank deposits are insured up to $250,000. The idea is to insure small and medium-sized deposits. They wasted little time announcing that all deposits would be fully redeemed. The sound (or not-so-sound) commercial banks will be asked to cough up the money to make up for the massive losses FDIC will incur by paying off large capitalist deposit owners who weren’t supposed to be insured.
The FDIC hopes to stave off a general collapse of the currency system, which is based on using bank deposits as currency instead of traditional dollar bills and coins. If the bank deposits as currency were to collapse, it would lead to an economic crisis worse than the bank runs of 1931-33. Those marked the transformation of the recession that began in 1929 into the Great Depression. In bygone years, in capitalist countries, spending money mainly meant using coins and some paper banknotes redeemable in gold (or silver) at the government treasury or the central bank. At this earlier stage of capitalist development, extreme monetary crises in the form of bank runs did not threaten the purchasing power of the basic currency.
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In January, the U.S. Labor Department estimated that the non-farming sector of the economy created 517,000 new jobs on a seasonally adjusted basis. Reading the fine print, you see these new jobs exist only on the statistician’s worksheet. The estimate is that on a non-seasonally adjusted basis, the economy lost 2.5 million jobs. Just before the holidays, additional workers are hired to meet the extra demand and are laid off at the season’s end.
The variations are taken into account and smoothed over to reveal the underlying trend. This year, they figured about 3 million workers would be laid off. But these are estimates. Since only 2.5 million were let go on a seasonally adjusted basis, the economy created about half a million additional jobs. But how to make the seasonal adjustment is a complex subject. We are still in the aftermath of a collapse in the hotel and restaurant industries caused by COVID-19. Employment numbers tanked when people stopped traveling and eating out and have yet to return to pre-pandemic levels. Perhaps fewer workers than usual were hired this holiday season, so fewer workers were laid off when it ended.
Another factor was the unusually mild weather that occurred over the country in January. With little snow on the East Coast and Midwest, major storms were limited mainly to California. Wind-driven rain ravaged most of the state, except for higher elevations in the thinly populated Sierra Nevada and Cascade mountain ranges. The economy was disrupted less by winter storms than usual. Weather is not accounted for in making seasonal adjustments.
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The final two months of 2022 were full of events promising to lead to even more important ones in 2023. Here’s a list of some of the most important.
1. Railroad workers
What may be the most significant event of November-December 2022 was the Biden administration’s decision, backed by Congressional Democrats and Republicans, to force a contract on railroad workers without meeting their basic demand for sick days! This might be tolerable if workers never got sick. However, rail bosses and their government servants denied sick days despite the continuing global COVID-19 pandemic that’s taken more than a million lives in the U.S. and continues claiming victims here and around the world daily. Forcing workers to work sick spreads disease. This refusal of the railroad bosses and government is dangerous and potentially deadly to people beyond the railroad industry.
The great labor upsurge of the 1930s, represented by the Congress of Industrial Organizations (CIO), established industrial unions in basic industry outside the Jim Crow South, but the upsurge bypassed the railroad industry. Since rail’s origin, the government hasn’t recognized their right to strike. Since then, rail workers have been hobbled by weak craft unions. The need to organize along industrial lines — where all workers in an industry belong to a single union regardless of craft — was realized long ago by conservative craft unionist Eugene Debs. In the 1890s, he came to this conclusion not by reading books but through his daily experience as a rail worker and union leader.
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Capitalist production is based on the world market. To understand the laws governing the capitalist system, one must understand those governing world trade. The orthodox or neoclassical theory of foreign trade is based on the theory of comparative advantage. [See “World Trade and the False Theory of Comparative Advantage” and “Comparative Advantage, Monopoly, Money, John Maynard Keynes, and Anwar Shaikh”]
The theory of comparative advantage holds that in national trade: the industrial capitalist with the lowest cost price when producing a commodity of a given use value and quality prevails in competition. In international trade: the capitalist with the comparative advantage prevails.
The view that different laws govern national and international trade precedes neoclassical economics. The originator of this theory is the classical British economist David Ricardo, who formulated the comparative law more clearly than neoclassical economists. This is because of his labor-based theory of value, where the value of a commodity of a given use value and quality is determined by the quantity of labor necessary to produce it.
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On August 8, former U.S. President Donald Trump announced that the FBI was searching his luxurious palace-like mansion in Mar-a-Lago in Palm Beach, Florida. Trump wasn’t in Mar-a-Lago. He was in his Trump Tower residence high above Manhattan in New York City, another one of his many residences. Trump claimed he observed the FBI search live on close circuit TV. The FBI raid was ordered by U.S. Attorney-General Merrick Garland. President Joseph Biden claimed he didn’t know about the raid in advance.
The search warrant, soon made public with redactions, is a legal document U.S. police agencies — in this case, the FBI — need for a legal search without the approval of the person who is being searched. According to U.S. law, to obtain a search warrant, the police agency conducting the search must convince a judge — in this case, a federal judge — that there is probable cause of a crime. The alleged crimes being investigated center on Trump’s possession of secret documents with various degrees of classification. Documents with high degrees of classification are documents whose contents are hidden from the American people and everybody else, except for certain high-ranking government officials, for “national security” reasons.
The classified documents allegedly stored at Mar-a-Lago without authorization might include military secrets (including those of nuclear weapons), as well as information, if made public, embarrassing to powerful people. They are supposed to be stored in highly secure government buildings — it’s a crime to hold them in a private residence or other unsecured location. Only Trump and a handful of government officials know what’s in them.
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The U.S. Supreme Court’s decision on June 24, 2022, to strip women of their right to abortion dominates the news. The Court overturned its 1973 Roe v. Wade decision establishing abortion as a constitutional right. The other event dominating U.S. politics was the congressional hearings into the events of January 6, 2021. These issues unfold against a background of high inflation, a looming recession, and disastrously low approval ratings for President Joseph Biden. On July 11, The New York Times/Siena College poll gave Biden a 33% approval rating. The same poll showed only 26% of Democrat voters support his renomination for a second term.
Democrats, appearing likely to lose control of the House and maybe the Senate, hope to recoup power by making abortion a prime issue. A bill to make abortion rights a federal law has gone nowhere. Democratic Senators Joseph Manchin and Kyrsten Sinema refuse to suspend a Senate rule that effectively gives the Republican Party veto power over all legislation, the filibuster rule. Democrats hope the outrage felt by women and many men over the Supreme Court decision will cause them to vote Democratic in the November congressional elections. These elections will determine the make-up of Congress for the final two years of Biden’s term.
However, attempts by Democrats to profit from the outrage over the Court decision were undermined when it was revealed Biden made a deal with Senate Republican leader Mitch McConnell to nominate anti-abortion Republican Chad Meredith to a lifetime federal judgeship. This deal — though it appears to have fallen through — is typical of Biden’s 50-year-long political career. As a young Senator, Biden played a crucial role in securing Senate approval of Republican President George H.W. Bush nominee Clarence Thomas to a lifetime position on the Supreme Court. Thomas joined the Court majority in throwing out the right of abortion as a constitutional right.
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In June 2022, the news in the United States was dominated by two stories. One was the decision of the Federal Reserve System to raise its target for the federal funds rate by 0.75%. The new rate range is between 1.50% and 1.75%. The second story broke the same week: The congressional hearings into the events of January 6, 2021. On that date, a right-wing mob, supported and inspired by President Donald Trump, broke into the U.S. Capitol. It was an attempt to force Congress to reverse the 2020 presidential election results. Is there a connection between these two? Yes, even if it isn’t a direct one.
Let’s begin with the Federal Reserve story. For most people, Federal Reserve operations are a mystery. The federal funds rate is the interest rate charged on overnight loans that U.S. commercial banks make to one another. The law, as well as financial prudence, require commercial banks to maintain a certain minimum of ready money to cover their deposit liabilities. Many are surprised to learn that under the fractional reserve system, commercial banks maintain only enough cash on hand to redeem a small portion of the money the public has on deposit. If all depositors were to try to withdraw all their money at the same time, every bank would fail. The reason? Most of the money on deposit does not represent actual cash in the form of legal tender — bills and coins — but is imaginary money created by the banks themselves through their loans and discounts. To prevent collapse, a minimal cash amount backs up deposit liabilities.
Commercial banks are for-profit enterprises. To maximize profits, cash on hand is kept to a minimum as it earns no interest. To put it in more scientific terms: The cash commercial banks must keep on hand to redeem deposits does not entitle the bank’s shareholders to a portion of the unpaid labor — surplus value — performed by the working class.
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According to Russian Foreign Minister Sergey Lavrov, the “collective West” launched a “total hybrid war” against Russia. The shooting war in the Donbass and Ukraine is only part of it. Thousands of dead Ukrainian and Russian soldiers are bad enough. But this is only the beginning of the story. The disruption of trade as well as grain and fertilizer production — of which both Russia and Ukraine are critical suppliers — is threatening to create global food shortages and, in some areas, full-scale famine. Food shortages bring death to people of the Global South and beyond. Deaths occur not only from starvation but also from weakening immune systems making them more susceptible to COVID and other infectious diseases. But the biggest threat is that it could end in nuclear war. What has led to this dangerous, disastrous state of affairs in the relationship between the two powers?
Anyone who has taken college-level economic courses has run into the theory that claims that comparative advantage, not absolute advantage, rules international trade. This theory holds that free trade is equally in the interests of all nations regardless of their degree of economic development. Yet the governments of underdeveloped nations showing any independence from imperialism often follow policies neoclassical economists call neo-mercantilist. Comparative advantage supporters claim that such policies are harmful to both developing and developed countries alike.
Left-wing economists who reject neoclassical economics generally support neo-mercantilist policies for developing countries. These economists learned the theory of comparative advantage from neoclassical teachers. But, unlike orthodox neoclassical economists, they admit the law of comparative advantage doesn’t work out as the textbooks say it should.
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Three factors shape the current global economic conjuncture.
The first is the sluggish but long rise in the capitalist global industrial cycle following the world economic crisis of 2007-09. This rise continued until February 2020.
The second factor is the worldwide COVID-19 pandemic that shut down large parts of the global economy and world trade in 2020. This sent unemployment rates into double digits. The West’s capitalist governments increasingly treat COVID-19 as endemic rather than a pandemic. Shutdowns are over and even mask-wearing is becoming a thing of the past. But the virus continues. On-and-off shutdowns continue in the world’s leading manufacturing nation: China.
The third factor is the global economic and financial war launched by the U.S. world empire against Russia. This war was formally launched in response to the Russo-Ukrainian war, ongoing since the U.S.-supported right-wing Euromaidan coup in 2014. It entered a new stage with Moscow’s launching of a special military operation on Feb. 24, 2022. The war had already taken about 15,000 people’s lives before the military operation began. Fighting was limited in recent years, but in the weeks leading up to Feb. 24 Kiev stepped up shelling the Donbass. All indications are Washington encouraged its puppet Euromaidan government to launch an offensive to crush the ethnically Russian People’s Republics of Lugansk and Donetsk.
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