The New Banking Crisis

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.

Where is the U.S. Economy Going?

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.

Money and Anwar Shaikh

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, T he 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.

The Fed Meets and Congress Investigates January 6

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.

A return to austerity

On June 23, President Joseph Biden announced a bi-partisan deal between the Democrats and “moderate” Senate Republicans to pass a $953 billion infrastructure plan, which includes only $559 billion in new spending. This was a small fraction of Biden’s original promise to push for a $4 trillion infrastructure plan. Biden claims he still seeks to pass his original plan. But considering the GOP’s virtual veto power in the U.S. Congress, the plan seems as good as dead. It is worth noting that the $953 billion compromise contains none of the “green energy” proposals that were part of the original plan.

What the bipartisan deal does include is “asset-recycling,” which had also been central to Trump’s infrastructure plans. Under “asset-recycling,” the federal government borrows money at high interest rates from private for-profit companies that the federal government depends on to build infrastructure projects. As collateral on the loans, the companies take possession of roads, bridges, and other public works for the life of the loan — about 30 years.

The private companies then set up toll booths on previously public roads and bridges that the federal government has leased to them as collateral, in effect treating them as their private property until the loans are repaid with interest. The public is skinned twice, once through paying off the loans and the interest on the loans as taxpayers, and second through paying tolls on previously public roads and bridges. The government then uses the borrowed money to carry out other parts of the infrastructure plan.

The proposed “compromise” with the GOP on infrastructure is typical of Joseph Biden’s 50-year-long political career in the service of U.S. capital. The “compromise” is so reactionary that members of the “progressive” Justice Democrat faction of the Democratic Party in Congress threaten to vote against it.

Earlier this year, it was widely believed in progressive circles that the Biden administration was breaking with decades of neoliberal austerity policies and returning to full-blooded “Keynesianism” of the “golden years” of the 1950s and 1960s. The $4 trillion infrastructure plan was supposed to mark the definitive end of the neo-liberal policies that have dominated Washington’s policies since the “Volcker shock” under Carter and then the election of Ronald Reagan some 40 years ago.

Progressives were hoping that a massive “Keynesian” public works program would bring about a return of the kind of full-blooded capitalist prosperity not seen in decades. True, the Biden administration did restore half of the $600 a week in extra unemployment benefits the U.S. government under Donald Trump instituted in the spring (northern hemisphere) of 2020 but then allowed to run out after a few months. And this spring, the Biden administration mailed out $1,400 checks to all “legal” adult working-class and lower-middle-class U.S. residents. It also granted temporary tax relief to families raising young children.

Since it took office on Jan. 20, the Biden administration has been running down the U.S. government’s swollen checking account at the Federal Reserve Bank of New York. This has allowed the U.S. government to slow the rate at which it has been borrowing money, allowing long-term interest rates to dip in recent months.

Hence, a huge amount of purchasing power has been pumped into the U.S. and world capitalist economy in the opening months of the Biden administration. As a result, according to the U.S. Labor Department, total employment rose 850,000 in June. For the first time in months, this number met the expectation of economic pundits. But maintaining this economic momentum long enough to set off a sustained rise in the industrial cycle capable of restoring old-time capitalist prosperity is another matter entirely.

The U.S. capitalists claim they are facing a huge labor shortage even as employment remains millions below the level that prevailed in February 2020 just before COVID-19 hit with full force. However, the capitalists’ complaints about the “labor shortage” are having their effect on government policy in the U.S., at both the federal and state levels.

Republican state governments have already ended the expanded unemployment benefits, while the Democrat-run government of California has announced that people must now give evidence that they are actively seeking employment or lose benefits. This occurs even as COVID-19 cases are once again rising, especially among the unvaccinated or partially vaccinated. In September, the extended unemployment benefits are scheduled to run out entirely. There is virtually no chance in light of the alleged “labor shortage” being trumpeted by the media that the extra benefits will be extended.

Nor is there much chance in light of the “labor shortage” of any more stimulus checks. The mailing out of additional stimulus checks would encourage workers to hold out for wages and working conditions higher than the bosses are offering. The capitalists are therefore using their control over both the Democrats and the Republicans to make sure there are no more stimulus checks.

In addition, the U.S. Treasury is nearing the end of the rundown of its checking account at the New York Fed. As the account balance shrinks, either U.S. government borrowing will have to rise once again, which will renew upward pressure on interest rates, or government spending will have to fall, or some combination of the above. This means that U.S. fiscal policy will be a great deal less expansionary beginning in the second half of 2021 and beyond than it was in the first half of the year.

The drift back to the fiscal austerity typical of post-Volcker shock neo-liberalism almost certainly means that the rate of economic growth and with it the rise in employment will soon be slowing down.

The Federal Reserve’s Open Market Committee Meets

On June 16, the U.S. Federal Reserve’s Open Market Committee concluded its two-day meeting and announced its decisions. The FOMC consists of the seven members of the Board of Governors, the head of the Federal Reserve Bank of New York, and (on a rotating basis) the heads of four of the 11 other Federal Reserve Banks that make up the Federal Reserve System. The four Federal Reserve Bank presidents serve one-year terms.

The only concrete decision announced was a rise in the interest rate Federal Reserve Banks pay on the deposits commercial banks keep with them, from 0.10% to 0.15% per year. This represents a very slight “tightening move.” However, as is usually the case, more attention was paid to the tone of the FOMC report than on any concrete decisions made.

Speculators in the gold market, commodities markets, bond market, and stock market hang on every phrase of Federal Reserve statements. The general reaction was that the FOMC indicated that it would move to “tighten” its stance sooner than had been expected. As a result, the price of stocks fell while the U.S. dollar rose sharply against gold.

The Fed’s leadership is nervous about the dollar’s recent weakness against gold and a surge in primary commodity as well as wholesale and consumer prices. Though the FOMC repeated its belief that the current surge in inflation will soon taper off, it no longer seems so sure. As I explained last month, Fed leaders cannot ignore the very real danger that dollar weakness and rising inflation could signal a return to “stagflation” over the next several years and the sharp rise in interest rates and deep recession that inevitably follow.

The Federal Reserve System’s leaders hope to guide the U.S. and world capitalist economies onto a path of a sustained rise in the global industrial cycle, which would normally be expected to last about nine years. They hope that the cyclical upturn will be stronger than the one that followed the Great Recession. But they have to reckon with the very real danger that the current apparent upturn in the worldwide industrial cycle will abort if the Fed allows the dollar to plunge against gold causing inflation and interest rates to rise.

This would make a deep global recession with soaring unemployment inevitable, perhaps before the end of Biden’s four-year term. Far worse from the viewpoint of U.S. imperialism, it would endanger the dollar system, which forms the foundation of the U.S. global empire.

Ultimately, the decisions of the Federal Reserve and its Open Market Committee are constrained by the economic laws that govern the circulation of money. This is why Pichit Likitkijsomboon’s article in Monthly Review critiquing what he calls the “anti-quantity theory of money” takes on special importance. Before we continue our examination of his critique, let’s take a brief look at the current economic situation.

Analyzing Currency Circulation

On May 20, a ceasefire was announced between the Hamas-led government of Gaza and Israel. The truce followed an 11-day pounding of Gaza’s 2 million-plus residents by Israeli bombers and rockets. Residents of Gaza, described as the world’s largest open-air prison, are not allowed to leave. According to Gaza’s Ministry of Health, total deaths among Gaza residents — or perhaps we should say inmates — were at least 248. Of these, 39 were women and 66 were children. An additional 1,910 people were wounded. According to UN officials as a result of the Israeli assault, 800,000 people in Gaza do not have access to clean water. All of this is amid the COVID-19 pandemic, which has swept through Gaza as it has through the rest of the world.

According to the Israeli government, Israeli casualties from rockets fired from Gaza include 12 deaths, of which two were children. Israel is well supplied by the United States with bombers and highly accurate computer-guided missiles, while Gaza residents have only highly inaccurate missiles that can only be shot in the general direction of their targets. In addition, most of the Gazan missiles have been shot down by the Israeli military using the U.S.-provided Iron Dome anti-missile system. As a result, physical damage done to Israel by Gazan missiles has been minimal.

The accuracy of the U.S.-provided bombs and missiles is illustrated by the destruction of a Gaza high-rise that housed both the Al Jazeera news agency and the U.S.-based Associated Press. The Israeli government gave journalists minutes to leave claiming that the building was being used by Hamas, the elected governing party in Gaza. However, AP claimed there was no evidence that Hamas used the building.

What is true is that the high-rise provided an excellent view of Gaza and therefore of the toll the Israeli assault was taking on the besieged city. Perhaps the Israelis were more concerned about Al Jazeera than they were about AP. Still, the attack on the building was a clear attack by the Israeli government on journalists and freedom of the press.

AP was therefore forced to protest. However, the next day AP under right-wing pressure fired an American journalist, Emily Wilder, for pro-Palestinian tweets when she was a college student as if that is a crime. Wilder was active as a college student in the Jewish Voice for Peace and so happens to be Jewish.

She is not alone in the American Jewish community. Increasingly, younger Jews have come to oppose the actions of the Israeli government, which claims to represent all Jews, including those who do not live or wish to live in Israel, but not its Arab citizens. Most of the American Jewish community opposed the administration of Donald Trump, not least because Trump’s racist demagoguery was reminiscent of the ideology that eventually led to the Third Reich in Germany. Indeed, extreme antisemitism is widespread among Trump’s supporters.

This did not prevent Trump from claiming that he was the most pro-Israel president ever. He pointed to his decision to move the U.S. embassy from Tel-Aviv to Jerusalem. The former president when speaking to Jewish-American organizations repeatedly described Israeli Prime Minister Benjamin Netanyahu as “your prime minister,” which drew protests even from docile (to American imperialism) pro-Zionist Jewish organizations. This did not prevent these same organizations from coming out once again in support of the latest Israeli war against the Palestinian people.

Netanyahu and most of the Israeli population, in contrast, strongly supported Trump. The racist rhetoric of the former — and possible future — U.S. president was music to their ears. The latest crisis broke out when the Israeli government moved to evict some four Palestinian families from their East Jerusalem neighborhood of Sheikh Jarrah to make room for Jewish settlers in the historically Arab area. The Zionist propaganda machine claimed that this was a routine eviction case involving the fact that the Arab residents had not paid rent for 39 years to Jewish landlords who the Zionists claim had owned the apartments since the 1870s.

Putting monopoly super-profits over human lives

The 2020 recession was more than the usual cyclical downturn. There were, however, signs a cyclical recession was developing before the COVID-19 pandemic hit with full force in March 2020. Industrial production in most countries had already ceased to rise. The U.S. Federal Reserve System had already initiated an “easing” cycle in an attempt to contain the incipient downturn. That was the situation when it became impossible to deny that the COVID pandemic was rapidly spreading in the United States and around the world.

As the reality of the deadly global pandemic became widely known, the travel, hotel and hospitality industries came to a grinding halt. Many other industries were devastated. As people were forced to hunker down across the globe, both the production of surplus value and its realization were sharply curtailed. As sales of commodities plummeted, the velocity of circulation of the currency dropped drastically. This meant that a given quantity of currency generated far less monetarily effective demand than it would under normal recession conditions.

Eager to get both the production of surplus value and its realization back to normal, capitalist politicians, most notoriously former President Donald Trump, pushed for “reopening” the economy. Trump originally set a target of Easter 2020 for the reopening! So began a cycle of premature “re-openings,” followed by rising COVID cases, hospitalizations, and deaths to new highs leading to renewed, if ever more limited, shutdowns.

Among the countries that dealt with the pandemic the worst was the world’s richest country, the United States. In no other country in the world does the capitalist class have more unbridled power. Business pushed for the fastest reopening possible so that normal profit-making could resume. President Trump was more than willing to oblige since he had planned to pitch his reelection campaign around the theme that the U.S. was experiencing “the greatest economy ever.” Democrats and Republicans competed with one another on who could reopen their state and local economies fastest. As a result, the total number of official U.S. COVID-19 deaths now approaches 600,000. Worldwide, more than 3 million people and rising have died.

Brianna Griffith, writing in the online socialist publication Liberation News, reported: “India, South Africa and 80 other countries proposed a temporary waiver of the Trade-Related Aspects of International Property agreement on patents. The proposal was blocked in February by the United States, European Union, United Kingdom, Japan, and Australia. It is also opposed by the U.S. Chamber of Commerce, Pfizer, BioNTech, Moderna and Johnson & Johnson — key beneficiaries that stand to profit immensely from global suffering.”

So far, the Biden administration, just like its notorious predecessor, prefers to safeguard the monopoly super-profits of big pharmaceutical companies holding the patents on the lifesaving vaccines. The result is that less vaccine is being produced than would be the case without the state-enforced monopolistic profit protection for “Big Pharma,” and the vaccines being produced are selling at prices far above their prices of production.

The greater the price of a vaccine relative to its price of production, the harder it is for governments to find the money to purchase it and the greater the number of preventable deaths and serious illnesses. Naturally, the people of the most exploited countries and classes in the world are hit the hardest. (3 ) Therefore, safeguarding the patents of the drug companies begun under Trump and continuing under Biden is not just a policy of putting profits over people but rather putting super-profits above human lives.

Commodity Money Versus Non-Commodity Money

On March 11, President Joseph Biden signed into law a $1.9 trillion package called the Coronavirus Relief bill. It provides for $300-a-week extra in unemployment insurance payments — only half the original $600 provided by the CARES Act passed last year — and only until Sept. 6. It also provides $25 billion for rental relief and utility assistance and $350 billion relief for hard-pressed state and local and Native American tribal governments.

The bill includes a one-time $1,400 payment for low- and middle-income Americans. Also, $20 billion will be spent on COVID-19 vaccinations. Democrats are especially proud of a provision that extends for a year a child tax credit that was part of the CARES Act. They claim this will reduce child poverty in the richest nation in the world by one-half. This tells you a lot about the nature of the U.S. tax system, which pushes many children of working-class families below the official federal poverty line while allowing billionaires like former President Trump as well as giant corporations like Apple to get away with paying virtually no taxes.

Progressives were hoping that the stimulus bill would have a provision raising the federal minimum wage to $15 an hour from the current $7.25. This was important because the bizarre and undemocratic rules that govern the U.S. Senate mean only a few bills can be passed through a process known as “budgetary reconciliation” with a simple majority vote. All other bills need the support of 60 senators. This means that given the composition of the current Senate, 50 Democrats and 50 Republicans with Democratic Vice President Kamala Harris casting the tie-breaking vote, the GOP has veto power over most other proposed legislation coming up this session.

For the minimum wage hike to have had any chance of passing in the current session, it would have been necessary to include it in the stimulus bill. President Biden gave lip service to the proposed minimum wage hike but failed to push it. This gave the green light to conservative Democrats to ally with the GOP to exclude the $15-an-hour minimum wage from the bill — effectively killing it. This is the exact outcome the capitalists wanted. Once again, the Democrats and Republicans working together delivered the goods for capital.

The Second Trump Impeachment Trial

Former President Donald Trump was acquitted on an insurrection count on Feb. 13 in his second impeachment trial, though 57 senators out of a hundred, including seven Republicans, voted to convict him. However, this was short of the two-thirds’ majority required to convict a federal official or ex-official on an impeachment count.

Senate Republican minority leader Mitch McConnell admitted that, while Trump was guilty, it was unconstitutional for the Senate to try a former official on an impeachment count after the official had left office. This was despite the fact that there was precedent to do so.

In the days leading up to the five-day impeachment trial, Trump had blackmailed the Republicans by threatening to form a new far-right “Patriot Party.” Such a party would split much of Trump’s MAGA base away from the Republicans, which would make many, perhaps most, Republican politicians unelectable.

Besides the acquittal, the trial was notable not only for its brevity — particularly considering the gravity of the count — but by the agreement between the Republicans and Democrats to not call witnesses.

The issue was not simply Trump’s incendiary speech to a MAGA crowd of tens of thousands gathered in front of the White House on Jan. 6. It could be argued that Trump’s speech, however despicable its content, was protected speech under the First Amendment. You can be sure that if a U.S. president can be convicted in an impeachment trial for exercising his right of free speech, Black Lives Matter activists, leftists of all types, trade unionists, and other progressive activists can be convicted at a criminal trial for exercising the same right.

What made Jan. 6 a failed putsch rather than a right-wing demonstration that got out of hand was not the content of Trump’s speech. It was the fact that National Guard and police forces were withheld for hours even though the Pentagon and FBI as well as the police knew that a dangerous armed demonstration was planned. Indeed, Washington, D.C., Mayor Muriel Bowser had specifically requested on Jan. 5 that National Guard forces be called to the capital in case needed to prevent the impending violence.