Political and Economic Crises (Pt 12)

Political crisis engulfs the U.S. and Britain

On Sept. 24, 2019, Democratic Speaker of the U.S. House Nancy Pelosi announced the opening of an impeachment inquiry directed against Donald Trump. This is not yet an actual impeachment of the U.S. president, still less his removal from office. But it is considered a major step toward impeachment, which had appeared to be a dead letter after the Mueller report failed to produce any evidence that the 2016 Trump campaign had collaborated illegally with the Russian government.

A CIA whistle-blower reported that he or she had heard from other government officials that President Trump had withheld military aid to Ukraine to pressure the Ukrainian government to investigate Hunter and Joseph Biden. Joseph Biden is considered a front-runner in the race to be the Democratic presidential nominee for the 2020 election. Since the 2014 Euromaidan coup spearheaded by fascist and openly pro-Nazi elements, Ukraine has been reduced to the status of a virtual U.S. colony. The Democrats consider this colonization of Ukraine a great achievement of the Obama-Biden administration.

In the wake of the Euromaidan coup, the younger Biden was appointed to the Board of Directors of Burisma, Ukraine’s leading producer of natural gas, in an obvious move to please Ukraine’s new masters. If Trump demanded in a meeting he held with Ukrainian President Volodymyr Zelensky that Zelensky investigate the Bidens or else the U.S. would withhold military aid, Trump would violate U.S. laws that prohibit seeking the aid of a foreign government in a U.S. election. The Democrats failed to prove that Trump received such aid from the Russian government in the 2016 election. Now they believe they are on the verge of proving it concerning Ukraine’s government.

Trump has all but admitted that he did indeed pressure Ukraine to investigate the Bidens when he publicly suggested that Ukraine, and China as well, open investigations of Joe and Hunter Biden. But Trump’s lawyers can still argue that Trump didn’t say this in so many words and therefore no U.S. law was broken. It is illegal for a U.S. President to use services of value of a foreign government in a U.S. election. (1) If Trump is impeached by a vote of the majority of the House of Representatives, he would still have to be tried in the U.S. Senate. If two-thirds of the Senate then vote to remove Trump, he will be ousted from the presidency.

While the Democrats have a majority in the House of Representatives — all that is needed for impeachment — they are in a minority in the Senate. A purely partisan removal of Trump through impeachment is therefore impossible. Assuming that as now seems likely Trump is impeached, his fate will be in the hands of the Senate Republicans. The Senate Republicans are an extremely reactionary group of mostly elderly and very rich white men. So far, in public at least, they seem to be loyal to Trump, whose “pro-business” policies they strongly support, though many of them in private reportedly would like to see the erratic Trump gone.

In the event of an impeachment trial, a vote on whether to convict Trump will be held in full view of the Republican rank-and-file, where the racist Trump has a strong cult following. With the election approaching, the Democrats may be hoping that Trump and the Republicans will be so discredited as a result of the impeachment process and ensuing revelations that Trump will be defeated in the 2020 election, taking many Republicans down with him. This would put the “Party of Order” back in control.

An even more profound political crisis is unfolding in Britain, where Parliament is virtually paralyzed over Brexit. Crises of this sort often herald the end of parliamentary rule and its replacement by either a presidential system as in France in 1958 or an outright dictatorship as in Italy in 1922 when Mussolini was appointed prime minister with dictatorial powers. Britain is the pioneer of parliamentary democracy. In a centuries-long struggle, executive power was wrenched from the crown by Parliament and the monarchy reduced to a point where the king or queen reigns but does not rule. This makes introducing a presidential system difficult because it is hard to see how it could be done without eliminating the monarchy. What both the U.S. and British political crises have in common is the contradiction between imperialist democracy in decline and powerful tendencies toward Bonapartism.

These crises are developing rapidly as I write these lines, and important developments — Britain is supposed to leave the European Union on Oct. 31 — will almost certainly occur over the next month. This month, I want to start examining what on the surface appears to be a far less important crisis. This involves the U.S. market for overnight repurchase agreements, nicknamed repos.

Crisis in the repo market

On Sept. 16-17, the rate of interest on overnight financial instruments known as repurchase agreements, or repos, suddenly spiked as high as 10 percent. This was all the more startling since it occurred the very same week that the Federal Reserve System’s Open Market Committee was expected to — and indeed did — reduce its target for the federal funds rate, the rate on funds commercial banks loan one another overnight, by another 0.25 percent. The interest rate on federal funds and repos is generally pretty much the same.

The Fed responded with open market operations — purchases of short-term U.S. government securities — that added $75 billion to the U.S. commercial banking system. This is the biggest such operation by the Federal Reserve since the panic days of 2008. It then announced that it would continue these operations through Oct. 10. Then on October 4, the Fed announced that the emergency operation would be extended through Nov 4. If the crisis was a mere technical glitch and had no real importance, as was claimed, why did the Fed’s open market operation have to be extended for weeks? Certainly more is involved! And yes, a lot more is involved.

Does this mean that a new 2008-type financial crisis and associated “Great Recession” — or worse — is imminent for the global and U.S. economy? Or assuming that such a crisis is threatening, does the Federal Reserve have the power to nip it in the bud through its timely response to the repo crisis?

This is a fast-developing story, so here we can make only a preliminary assessment. However, for those who have been following this blog closely the repo market crisis should not have come as a complete surprise in light of the 20 percent decline in the U.S. dollar-denominated monetary base since October 2015. But what is the repo market anyway and why is it important? What happened on Sept. 16 in the repo market that brought things to a head? To answer these questions, we need to take a look at the operations of the modern commercial banking system.

Bank capital, bank solvency, and bank liquidity

The capital, or stockholders’ equity, of a corporation — and virtually all commercial banks (2) are now organized as corporations — is defined as the difference between the total assets of a corporation and its liabilities. As the term stockholders’ equity implies, the capital of a commercial banking corporation is defined as the capital owned by the bank’s stockholders as opposed to the capital owned by the creditors.

In the case of a commercial bank, the creditors are mostly depositors. The assets of a commercial bank consist mostly of its loans, while its liabilities consist mostly of its deposits. So the capital the stockholders of the bank own consists of all the bank’s assets (mostly loans) minus its liabilities (mostly deposits).

During the downward phase of the industrial cycle, the sales of industrial and commercial capitalists slow. Also, a significant percentage of the purchasers of consumer durable goods such as houses, cars and appliances face total or partial unemployment. Therefore, an increasing percentage of the banks’ debtors, which consist of industrial and commercial capitalists plus the purchasers of durable consumer goods on credit, fall behind on their repayment of loans.

Bank managers, however, are reluctant to write down the value of their loan portfolio even if accounting principles say they should. Instead, if they possibly can, bank managers who stand to lose their jobs and the value of the shares they own in the bank if the bank is seized by the bank regulators and declared insolvent will roll over “non-performing loans” by extending new loans or simply increasing the terms of existing loans. Bank inspectors, they hope, will be satisfied the bank is solvent despite any “temporary” difficulties.

The bank managers hope that many of the non-performing loans will become performing loans once again as business picks up and unemployed and underemployed durable consumer goods purchasers once again find jobs or can again work overtime. Therefore, why shouldn’t bank managers help their clients get over their “temporary difficulties”?

In that case, everybody wins. The banks’ stockholders keep their capital, the bank managers keep their jobs and bank shares, and the banks’ debtors stay in business or retain the ownership of the durable goods that they purchased with the money the banks lent them. As for the bank inspectors, why should they spoil the fun and shut down a bank that is experiencing “temporary difficulties”? Isn’t this what the central bankers and the politicians that run the government desire?

However, if loan repayments, whether they be on the inventories of industrial and commercial capitalists or durable consumer goods bought on credit, continue to be non-performing — or a particularly severe downturn makes a large enough portion of the banks’ loan portfolio “non-performing” — the point is reached where the increasingly fictitious character of bank balance sheets (3) can no longer be concealed.

Therefore, when the wiping out of bank assets in the form of bad loans reaches the point where the bank becomes insolvent, the regulators are supposed to move to liquidate the bank. This has been standard regulatory doctrine at least since the 19th century. At this point, government and central bank regulators are supposed to shut down the bank and liquidate it an “orderly way.”

Since the stockholders’ equity has become negative, the stockholders are wiped out. They lose their entire investment, though under the “limited liability” doctrine they get to kept any other assets in the form of capital and landed property they own. However, even if the bank managers and government are honest — and in the case of insolvency, they have a strong incentive not to be — it is quite difficult to be sure at what point a bank — or other business — becomes insolvent. For example, non-performing loans may indeed become performing if a strong economic upswing develops. And who knows at what price the bank’s assets could be sold if they are dumped on the market?

What happens when an insolvent bank is liquidated?

What the bank regulators — either the central bank or bank deposit insurance agencies such as the Federal Deposit Insurance Corporation — do when bank inspectors declare a bank is insolvent is seize and close down the bank. Deposit owners are then allowed to withdraw their deposits up to at least the insured limit, and often it is announced that all deposits will be redeemed at full value.

The bank is then divided into a bad bank whose assets are made up of non-performing loans, and a good bank whose assets are made up of performing loans. The performing loans are sold to other presumably solvent and generally bigger banks, while the loans of the bad bank are sold off at a huge discount to any presumably solvent banks willing to purchase them. The losses are eaten by the insurance fund or sometimes the taxpayers, depending on the extent of the losses. The stockholders get nothing and are wiped out.

The ‘free market’ way of keeping banks solvent

But what happens when bank inspectors do not do their jobs properly and allow insolvent banks to remain in operation? The “free market” method of keeping the banking system solvent in the long run comes into play. This method involves what is called a bank run. During a bank run, many depositors lose confidence in the banking system and demand payment in legal-tender cash at the same time. A bank run involves what is called a liquidity crisis. During a run, the depositors demand payment not in terms of bank loans but in terms of legal-tender cash. Bank runs provide the classic example of the role of money as means of payment, which comes into great prominence during a crisis, at the expense of money’s role as means of circulation.

In the time of Marx and Engels, Britain was the world’s leading capitalist nation. The Bank of England — sometimes referred to as “the Bank” with a capital B — was the capitalist world’s leading central bank. During the political lifetimes of Marx and Engels, there were three general bank runs in Britain, the first in 1847, the second in 1857, and the third in 1866.

During these runs — and two earlier runs that occurred in 1825 and 1837 — the Bank of England examined the books of the banks and determined whether a commercial bank was solvent or insolvent. If solvent, the commercial bank was experiencing only a liquidity crisis. The bank owners had enough capital but due to the exceptional conditions of the crisis, the capital couldn’t immediately be converted into legal-tender cash such as Bank of England banknotes. Behind the aforementioned British banking crises were crises of the general relative overproduction of commodities, though banking crises can be caused by other factors as well.

During a general bank run, the Bank would extend discounts — purchase commercial bank assets such as bills of exchange at a stiff discount. The idea was to discourage commercial banks from becoming dependent on the central bank for normal operations. The Bank told the bank-run-stricken commercial banks, we are bailing you out because you are not insolvent but are only experiencing a liquidity crisis. But don’t make a habit of depending on our discounts. They don’t come cheap!

The Bank purchased the bills of exchange either with newly issued Bank of England notes that themselves were payable in gold sovereigns to the bearer on demand or in promises to pay in such notes. The promises to pay in Bank of England notes were extended by simply crediting the accounts of the commercial banks held in the Bank of England. Such promises are called by economists “central bank money.”

During the crises of 1847, 1857 and 1866, the Bank’s discount operations were hindered by the Bank Act of 1844, which legally prohibited the Bank issuing additional banknotes not backed by gold. It is quite possible that the bank runs that accompanied these cyclical recessions would not have occurred if the Bank Act of 1844 had not been in effect. Fortunately for British capitalism, the Bank Act of 1844 had an escape hatch and could be suspended temporarily in a crisis. As soon as suspension of the Bank Act was announced, the runs halted.

If, however, a commercial bank was determined to be facing not simply a liquidity crisis but a crisis of insolvency, it was seized and liquidated. In this case, the commercial bank stockholders were wiped out and the managers and other bank employees such as tellers lost their jobs.

Why capitalist governments and central banks do everything they can to avoid bank runs

During a general bank run, the banks scramble for cash. To conserve cash, the commercial banks halt new loans and discounts, and existing loans are called in. A general bank run causes credit, in general, to seize up throughout the economy because non-bank credit is largely dependent on the “health” of bank credit. The owners of commodity capital — industrial and commercial capitalists — also are forced to scramble for cash as their debts are called in by the banks and other creditors. Forced to raise cash quickly, they dump their unsold commodities at great losses causing prices to fall sharply. Production, trade and, most significantly, employment contract sharply.

However, for the capitalist economy, there is an upside to this process. Within a relatively short period, inventories run out and have to be rebuilt. The industrial cycle then turns sharply upward. Bank runs, therefore, keep the banking system healthy in the long run. They keep the capitalist system as a whole healthy by periodically cleaning up overproduction. But — and this is the catch — before the industrial cycle turns upward capitalist society is shaken to its foundations and capitalist governments having the bad luck to be in office tumble. The most famous example was Herbert Hoover, who had the bad luck to be U.S. president during the worst bank run of all time, which occurred between 1931 and 1933.

Because of this, capitalist governments, beginning with Britain in the 19th century, do everything they can to prevent bank runs. Over time, the measures that capitalist governments and their central banks implement to prevent runs have become more and more extreme. The quantity of gold that must be held in reserve to back the currency, which can limit the quantity of extra currency central banks can create in a crisis, was steadily reduced and then abolished as the international gold standard morphed into the paper dollar standard. We have examined this evolution and its consequences throughout this blog. Another method employed by governments against bank runs is government-sponsored deposit insurance.

Deposit insurance and moral hazard

When bank deposits are insured, commercial banks are required to pay into a insurance fund. The fund, which acts as an insurance company, then invests conservatively in government securities to earn interest. In the event of a bank failure, the fund is used to promptly repay the depositors, at least up to the insured limit and sometimes beyond that. In the U.S., privately run bank deposit insurance schemes existed before the New Deal, but they tended to quickly run out of cash during general bank runs. However, in 1934 the Federal Deposit Insurance Corporation was established backed by the full credit of the U.S. government. Even if the Federal Deposit Insurance Fund were exhausted, the U.S. government is charged with coming up with the money to pay off the depositors of failed banks, at least up to the insured limit.

The job of inspecting banks’ books to make sure they are solvent falls to the FDIC. If the FDIC decides a bank is insolvent, it is seized and liquidated as described above while depositors are promptly paid up to the full value of the insured deposits — now $250,000 — and sometimes all depositors are paid off. Rather than periodic bank runs, the FDIC and its bank inspectors are supposed to make sure the U.S. banking system — the backbone of the global capitalist banking system — remains solvent.

Bank insurance schemes, especially government-backed ones, involve a danger of their own called “moral hazard,” causing some extreme conservatives to oppose them. These reactionaries point out that as long as banks and their depositors fear runs, the bank managers are under pressure to season their profit hunger with a certain amount of caution. In a world without effective deposit insurance, bank customers before depositing their savings with a bank have an incentive to choose one that at least has the reputation of being “sound and conservative.” More knowledgeable bank depositors may even examine the banks’ balance sheets themselves and do a little research of their own.

But once the state through the central bank or government deposit insurance “guarantees” deposits, both the management of banks and depositors become less cautious. Now that we have central government deposit insurance, bank managers figure there is little danger they will ever face a run. Therefore, they will pay less attention to maintaining reserves and take more risks to maximize profits for their shareholders, which of course include the bank managers.

Bank managers are paid “bonuses” just like other corporate managers when they earn more profit than expected. Like other corporate managers, they are under constant pressure to “beat their numbers” (advance profit estimates of Wall Street security analysts). Profits above “expectations” are made not by caution but by taking chances. And if things go wrong, the government and central bank are there to bail them out.

Similarly, with deposits insured by the government, depositors are less likely to care about a bank’s reputation for “soundness” when choosing a bank or feel the need to examine the bank’s balance sheet. Instead, they are more likely to simply put their money in whatever bank office is nearest to their home or work. If the bank regulators do their job and promptly shut down banks as soon as they show signs of insolvency, things will work out. Instead of the discipline of panic-stricken depositors forming lines in front of bank offices, there is the discipline of bank inspectors looking over the books.

However, there is constant pressure as explained above for bank inspectors to look the other way. Why seize and liquidate a bank whose troubles are “only temporary.” And there is constant pressure to accelerate the rate of economic growth by “going easy on the banks,” especially if it has been a while since the last big crisis. The banks say they would grant more loans if the bank inspectors would only become less intrusive. To unleash “the full potential of the economy,” the banks and their bought-and-paid-for economists insist, the banks must be free to do business as they see fit. The government should get out of the way.

The result is that while government and central bank insurance schemes make bank runs much less likely in the short run, they cause the solvency of the banking system to erode over time. This is what is meant by moral hazard. The reactionaries are right when they point out that moral hazard gradually undermines the stability and solvency of capitalist banking systems with government-backed deposit insurance.

The crisis of 2008 and banks too big to fail

In retrospect, it is clear that in 2008 many of the largest banks in the U.S. and elsewhere in the capitalist world were in reality insolvent, thanks in no so small part to the working of moral hazard. The normal mechanism that a healthier, younger capitalism had used to prevent the growth of insolvency in the banking system was periodic bank runs. The suppression of bank runs had done its work in destroying the solvency of the banking system.

But in 2008, there was another problem. That was the concentration and centralization of bank capital that is an inevitable result of the normal operations of the capitalist system. Now, it is one thing to close down and liquidate a small bank that has become insolvent. However, liquidating an insolvent mega-bank by the methods I described above is virtually impossible.

Today, the Federal Deposit Insurance Corporation holds $107 billion, which covers only 1.4 percent of insured — not all — deposits. The deposits of the five largest U.S. banks, with 40 percent of all U.S. bank deposits, alone exceeds $5.6 trillion. So five banks have about $5.6 trillion more or less in deposit liabilities. At the end of fiscal 2017 — September 30 — the U.S. Treasury, in contrast, had $507.5 billion — not trillion on hand. In other words, the cash that would be necessary to repay the enormous deposit liabilities of the mega-banks simply does not exist.

Bank regulators cannot liquidate an insolvent mega-bank the way they can liquidate a traditional bank that has become insolvent. To allow the problem of insolvent mega-banks to be solved the “old-fashioned” way through bank runs in today’s credit-run world where even petty transactions like purchasing morning coffee are settled through debit cards, credit cards, and smartphones, would mean an almost unimaginable global economic, social and political cataclysm.

Old-fashioned bank runs compared to modern crises

In old-fashioned banking crises such as the British banking crises of 1847, 1857 and 1866, periodic bank runs weeded out insolvent banks while the Bank of England rescued through its discounts the solvent banks merely experiencing liquidity crises. In the healthy days of British-centered industrial capitalism, banks proved their solvency by surviving general runs, perhaps with a little help from the Bank of England.

All that was necessary to break the general runs of 1847, 1857 and 1866 was for the Bank Act of 1844, which severely limited the amount of Bank of England notes that could be issued in excess of the gold reserves of the Bank, to be suspended, and the banking crisis went away. But these storms, which Marx observed in mid-19th century England and wrote about in Volume III of “Capital,” were mere tempests in a teapot compared to the storm that descended on the capitalist world in 2008.

Indeed, when it came to the basic insolvency of the banking system — as opposed to the liquidity crises-caused bank runs of 1931-33 — the crisis of 2008 even dwarfed the super-crisis of 1929-33. If the crises of Marx’s day were tempests in a teapot compared to 2008, then the super-crisis itself was a storm in a bathtub. No really large U.S. bank — the U.S. had by then replaced Britain as the center of the capitalist world — failed. The U.S. banking crisis of 1933 was a crisis of small mostly country banks. The big Wall Street banks remained solvent even if they too experienced liquidity problems during the run of 1933 just before Roosevelt assumed office.

If in 2008 a general bank run, defined as a massive sudden run on the mega-banks — and of course smaller banks — had developed, the financial system would have suddenly shifted the capitalist world from a credit system back into a cash system. If the age of debit and credit cards and the “cashless society” had suddenly reverted to payments in old-fashioned green dollar bills and pocket change, an unprecedented economic, social and political disaster would have descended across the world. (Payments using smartphones were still in the future in 2008 but will be a factor in all future crises.) If the crisis of 2008 had ended in a massive bank run, there would not have been a mere 1930s-style Great Depression, it would have been something far, far worse.

In a modern crisis, such as 2008 and the one that will follow in the future, a few mega-banks hold the state and entire society hostage. Either do everything and anything to bail us out, the bankers explain, or we will take you down with us. In a modern crisis, as long as society remains capitalist, bankers are not lying when they say this — it is simply the way things are.

Many progressives such as Bernie Sanders say the answer is to break up the mega-banks that have accumulated such monstrous power. Let’s go back to the good old days of small “friendly” banking when no banks were too big to fail. However, the emergence of mega-banks is no accident. Nor is it the result of political corruption. Rather it is the inevitable result of the laws that govern the capitalist system we have been exploring throughout this blog.

There is no road back to the past of small local banks in the days of free competition and classical industrial capitalism. (4) We either go forward to socialism or modern society collapses. This is true whether we look at things from the angle of money and banking or global warming.

In a future 2008-like crisis — and such crises will occur in the future — there is only one answer to the bankers when they say either bail us out or we will take the rest of you down with us. The answer has to be the expropriation of the capitalist class that the bankers head and represent as part of a transition to a socialist society. The banks being too big to fail means that capitalism itself has become “too big” to continue.

How did the U.S. banking system get out of the crisis of 2008?

What happens when the government and society knuckle under to the banks’ blackmail? We had an example of that in 2008. With no way to liquidate insolvent mega-banks in any way that did not involve total economic, financial, social and political disaster, the U.S. government — both the outgoing George W. Bush administration and incoming Obama administration — followed the only road open to capitalist politicians. That was— in addition to the Federal Reserve providing trillions in “liquidity” through quantitative easing— to “re-capitalize” the insolvent banks at taxpayer expense. The government spent hundreds of billions of dollars of its money in exchange for non-voting preferred stock.

Why preferred stock rather than common stock? Preferred stocks and long-term bonds are in practice similar in that the owners of both are paid dividends in preference to the owners of common stock. Hence the term “preferred stocks.” However — and this is crucial — only the owners of common stocks elect boards of directors that hire the corporate managers who run the corporations — in this case, the banks — on a day-to-day basis.

The U.S. government — both Bush and Obama — said to the banks: We are giving you $200 plus billion in additional capital to do with as you please. Now you are solvent again — or at least our bank inspectors say you are — because once we reckon in your newly required assets, your total assets now once again exceed your total liabilities. However, we as the representatives of “the people” will play no role whatsoever in managing the banks — we are not socialists after all.

As the immediate crisis passed, to show its good faith when it came to staying out of the business of managing the banks — which is after all under the capitalist system, not the business of “the people” but of the bankers — the Obama administration sold off the preferred stock it had acquired in the banks to wealthy capitalist investors. Everything was exactly the way it was before except the banks were more centralized and bigger than ever, and more than ever “too big to fail.”

Bank liquidity and the Federal Reserve System

The current “repo crisis” does not involve a crisis of bank insolvency, at least in the immediate sense, but rather a shortage of bank reserves. Let’s examine exactly what is meant by “bank reserves.” Bank reserves are a subset of total bank assets that consist of cash and can be divided into two portions: One part is actual legal-tender cash, green U.S. dollars — or its local satellite currencies — and fractional coins made of base metals that are kept on the premises to pay depositors who wish to withdraw all or a portion of their deposits from the bank. In the banking business, cash that is kept on the premises is called “vault cash.” Vault cash consists of what the lay public thinks of as money. It is what you get when you withdraw money from your account at the bank.

The second part of bank reserves consists of what the economists call “central bank money.” Under today’s monetary system, central bank money consists of the deposits of commercial banks at the central bank — in the U.S., one of the 12 Federal Reserve Banks that make up the Federal Reserve System. If all or most of the depositors of even an extremely solvent commercial bank were to demand their deposits in the form of cash all at once, the bank will simply not have either cash on hand in the form of vault cash or that it can draw from its accounts at the central bank to meet the demands for payment.

Commercial banks are above all profit-making businesses engaged in M — M’ operations. A commercial bank borrows M — money — from its depositors and pays them interest on their deposits. It then lends out the money at a higher rate of interest with the expectation of ending up with more money — M’. The difference between the rate of interest a commercial bank earns on its loans and the rate it pays its depositors represents the gross profit of the bank.

For the commercial bank holding assets in the form of vault cash, which earns no interest at all, or in the form of central bank deposits, which earn at most a very low rate of interest, the bank incurs what the economists call an “opportunity cost.” All other things remaining equal, the greater the portion of a bank’s assets held in the form of vault cash and deposits at the central bank the lower will be the rate of profit on the capital of the bank’s stockholders.

Leaving aside bank regulations that require the banks to maintain a certain reserve in cash, there are always those testy depositors who on any given day will withdraw money from the bank in the form of cash to meet everyday expenses of living — and sometimes in the case of wealthy depositors to engage in illegal activities. Today, depositors withdraw far less cash from the banks than they used to because even trivial retail transactions like buying a morning cup of coffee are often made electronically through debit or credit cards, and most recently smartphones.

This development has been very bad for bank robbers because banks hold much less vault cash — the target of bank robbers — than they used to. Potentially, however, if in some future super-crisis merchants were to refuse to exchange their commodities for debit or credit card or smartphone payments and instead demand payment in cash, the effects on the economy in terms of production and employment would make the banking crisis of 1931-33 seem like little more than an inconvenience by comparison.

Besides, commercial bankers have to worry about non-cash withdrawals from the bank — by the traditional check or electronic means — that are not offset by additional deposits. As checks and electronic withdrawals are made against bank A and deposited in bank B, bank A has to pay bank B. At the same time, check and electronic withdrawals are occurring against B and being deposited in bank A. Most of these payments offset one another. Only those that do not are settled in the bank clearinghouse. In the modern banking system, these payments are settled in central bank money and no paper money has to be transferred.

However, if a bank has to make clearinghouse payments that push its total cash — central bank money and vault cash — below the legal requirement, and it cannot borrow enough money to make up the difference, the commercial bank fails. Therefore, to prevent a sudden “liquidity crisis” leading to failure, commercial banks have to maintain sufficient cash reserves — either vault cash or central bank money. There is therefore always a tension between the need of banks to maintain a certain cash reserve against customer withdrawals and unfavorable balances in the clearinghouse and the need to maximize profits for the stockholders.

As we saw above, the banks in order to maximize their profits have to keep their reserves as low as economic caution and legal reserve requirements allow, but they do have to maintain some cash reserves. On any given day, individual banks often find themselves short of cash reserves while other banks have surplus reserves above the minimum levels set by bank regulation and the need to meet withdrawal requests and settle unfavorable clearing-house balances. Like all capitalists, bankers hate keeping capital idle when it could be “put to work” appropriating surplus value.

Therefore, banks with surplus cash eager to appropriate some interest — surplus value — on their “excess” reserves loan it to banks that are short of cash. Sometimes these are actual loans, called federal funds in the U.S., and sometimes repurchase agreements or repos. In a repurchase agreement, a bank that is short of cash reserves sells a short-term government security to another bank for cash. It agrees that it will buy back the treasury note the next day at a slightly higher price than it sold it. The difference between the price the bank with a cash shortage sells the treasury security and the slightly higher price it buys it back for is the repo rate of interest.

As a general rule, the repo rate is more or less in line with the federal funds rate but on Sept. 16-17, 2019, some bank or banks were so in need of ready cash they were willing to pay a rate of 10 percent, far above the federal funds rate of around 2.25 percent and due within days to be lowered to around 2.00 percent.

The Fed responded by purchasing large quantities of short-term U.S. securities pumping $75 billion in cash (“liquidity”) into the U.S. banking system. It didn’t add $75 billion in capital — the banks already had the capital in the form of U.S. Treasuries — but rather it exchanged the $75 billion in the form of the electronic equivalent of freshly printed green dollar bills for short-term Treasury bills.

What the banking system needed and the Federal Reserve System provided was not capital as such but liquidity in the form of ready cash. As we have seen throughout this blog, a sudden demand for cash is a classic symptom of a capitalist economic crisis. The Fed promised to continue to provide cash in exchange for Treasury bills in this way through at least Oct. 10, 2019. On Oct. 4, it announced that it would continue to use repo operations to pump cash into the banking system through at least Nov. 4. It then announced its intention to extend the repo operation to Nov. 26 (the Nov. 12 two-week term repo matures on the 26th). What if anything it will do beyond this date remains to be seen.

Behind the cash shortage

What in this case caused the cash squeeze? The immediate cause is the Federal Reserve System’s policy of “monetary normalization.” As we explained before the September repo crisis, the Federal Reserve has reduced the U.S. dollar-denominated monetary base by 20 percent since October 2015. That means fewer U.S. Federal Reserve-created dollars are floating around the world than there were four years ago when the Fed ended its unprecedented “dollar-printing” spree embarked on following the failure of the Lehman Brother investment bank in September 2008.

When business increases, which it generally has since October 2015, and more workers are employed, the newly employed workers cash in their paychecks for cash. (Many are low paid and still make their payments in old-fashioned cash.) When the banks cash these paychecks — or when workers make withdrawals on their deposited paychecks — the bank must pay these withdrawals out of vault cash, thus reducing its cash reserve. If the monetary base is increasing fast enough, there is no problem, but as we have seen, since October 2015 the monetary base has been falling not increasing.

The combination of a 20 percent drop in the U.S. monetary base — again, defined as total bank reserves plus U.S. dollar bills and fractional coin held outside the banking system — and the increasing demand for cash for retail trade as the number of employed workers has risen means a fall in total bank reserves. Sooner or later, this has to result in a shortage of bank reserves. This shortage manifested itself on Sept. 16, 2019.

The shortage of cash reserves in the U.S. banking system is the strongest indication yet that we have reached a turning point in the industrial cycle. If a global and a U.S. recession has not already begun — and many economic indicators have weakened or turned down both in the U.S. and in other countries over the last few months — the repo crisis is telling us that a recession is not far off. Whether the recession will be an “ordinary recession” or a 2008-type crisis is, of course, another matter.

Can the Federal Reserve System stave off the crisis by creating more bank reserves?

But can’t the U.S. Federal Reserve stave off the recession by moving to increase bank reserves by simply increasing the quantity of Federal Reserve-created dollars? Trump has been demanding that the Fed do exactly that, hoping that the next recession will be postponed to some time after November 2020.

Technically and legally under the current “fiat money” system, as the supporters of Modern Monetary Theory correctly point out, the Fed can create any amount of dollars it wants to. We have come a long way since the Banking Act of 1844, which required that the Bank of England have enough gold in its vault to mint into five gold sovereigns coins before it issued an additional five-pound banknote. U.S. policymakers — the Federal Reserve is facing an unusual split over what to do next — and above all Donald Trump are urging the Federal Reserve and its Open Market Committee to create enough new dollars to flood the U.S. commercial bank system with fresh reserves and end the current cash squeeze in the system. So maybe a recession is not imminent after all?

However, any regular reader of this blog knows that behind the Federal Reserve System shrinking the dollar-denominated monetary base beginning in October 2015 was the need to keep the dollar gold value more or less stable or risk the end of the dollar system and U.S. world empire. Under the dollar system, the “price” of the money commodity gold is quoted in terms of U.S. dollars. The dollar price of gold establishes the amount of gold bullion — real money — that the U.S. dollar represents at any given moment in time.

Under the various forms of the international gold standard that preceded the dollar system, the currency price of gold was held constant. Today, the dollar and through the dollar other currency prices of gold rather than a mathematical constant is a mathematical variable. However, the continued existence of the dollar standard — and the U.S. world empire — requires this variable to not vary too much. This is true because all internationally traded commodities — oil, nickel, copper, sugar, cotton, and so on — are quoted in terms of U.S. dollars. As a result, international debts — and national debts denominated in local currencies often are dependent on international debts — are quoted in dollars. This establishes the dollar as the chief means of payment on the world market.

Bloomberg News on the Sept. 16 crisis

“After the chaos this week in short-term funding markets,” Emily Barrett wrote in the Sept. 18 online edition of Bloomberg News, “the Federal Reserve faces yet another tough task: how to shore up the multi-trillion-dollar network that keeps funds flowing through the U.S. financial system without stoking fears of a systemic problem or fueling talk of a recession.” In other words, they have to pump massive amounts of what in effect are newly printed green paper dollars into the banking system to combat a crisis they have to pretend doesn’t exist! Naturally, this deception is in the interests of the big capitalists and the Federal Reserve System and, if in a somewhat different way, Donald Trump.

But the developing crisis does exist. After 10 years of the rising phase of the industrial cycle, the production of commodities — measured in terms of the amount of gold their price tags represent — has increased faster than the actual amount of new gold bullion that has been produced by the miners and refiners over the same period. (5)

Eventually, such a situation — and experience indicates that this occurs about every 10 years — leads to what Marx and Engels called a general crisis of the relative overproduction of commodities. One of the Fed’s “duties” as a crisis approaches is to pull the wool over the eyes of the public and pretend that symptoms of the approaching crisis — today the slowdown in growth and the repo crisis — are merely technical problems being “contained” by the Federal Reserve System.

Back in 2007 when the initial freeze-up occurred in global credit markets, the Fed claimed that it was a local crisis in the sub-prime mortgage market and it had been contained. Later on, of course, Ben Bernanke claimed that he and his fellow members of the Fed leadership were taken completely by surprise when the crisis erupted in full force the following year. Today, too, it is being “explained” that the repo crisis is contained and is not spreading thanks to the Fed’s timely action.

The exact timing of the approaching recession is also uncertain, though the repo crisis indicates that it is not far off. Still, the timing will depend partially on the policies that the Federal Reserve System follows over the coming weeks and months. If the Fed floods the banking system with freshly printed dollar reserves, the chances increase that the crisis will develop more slowly than if they “hang tough” — as Bernanke did in 2007-08, when he failed to accelerate the growth of the monetary base and create additional bank reserves until September 2008. The Fed retains some maneuver room as long as there is not a full-scale “run on gold” in the open markets — like there was in 1979-80 during the “Volcker shock” — or a massive liquidity panic threatening to turn into a general run on the banks like in 2008.

As long as these conditions hold — no run on gold and no general liquidity panic threatening to turn into a mega-bank run like in 2008 — the Fed retains some room to maneuver, though it cannot prevent a recession once conditions for a recession have fully matured. However — again absent a gold run or threatened bank run — it can still influence the timing of the recession. (6) Perhaps it will become clear within a couple of months that we are in a recession — recent economic statistics are trending in that direction, though not yet decisively — or perhaps the recession won’t hit with full force until after the November 2020 election. Trump, of course, is hoping against hope that that will be the case.

As the recession or more serious crisis develops, the Fed will be able to once again raise the size of the total U.S. dollar-denominated monetary base without an immediate new massive devaluation of the U.S. dollar. As in all crises, the dollar’s role as a means of payment will once again grow at the expense of its role as a means of circulation. The extent to which this occurs will depend ultimately on the intensity of the crisis. Will it be a normal recession or something worse? But — and this is a far bigger problem for the Fed than its need to pull the wool over the eyes of the general public — it must not increase the quantity of Federal Reserve-created dollars too fast and too soon.

If it does, a new run on gold, already threatening to develop, will erupt, which could bring the entire U.S. dollar system down and with it the U.S. world empire. On the other hand, if the Federal Reserve waits too long for the signs of recession to become unmistakable in the form of sharply falling industrial production, declining overall GDP (not merely a reduction in the rate of GDP growth), falling global trade, and above all falling employment, then the Fed will be able to create extra dollars, interest rates will fall while the dollar price of gold falls from the present level of around $1,500 toward $1,000 an ounce or maybe a little lower. (In the current unstable atmosphere, the dollar price of gold has been varying sharply day-to-day, so it may already be quite different by the time you read this.) Indeed, it is likely — and indeed a virtual certainty — especially in the event of a severe recession that the dollar price of gold will fall below $1,000 an ounce for the first time since 2008.

In that case, the dollar system will be saved for a while but at the price of massive squandering of the productive forces, above all the most important productive force the living labor power of tens of millions of workers around the world. The worst result from the viewpoint of the class the Federal Reserve System serves would be a massive dollar crisis ending with the collapse of the dollar system and the U.S. world empire.

The best result that the Powell-led Federal Reserve can hope to achieve at this point is to avoid a disastrous dollar crisis at the price of a downturn the media will call “mild” that is a more or less normal recession over the next few years. This, to paraphrase Volume III of “Capital,” is one of the “beauties” of the capitalist system in general and the U.S. world empire in particular.

Recession and trade war

The Party of Order [link to posts that explain this] blames the slowdown on Trump’s tariffs, while Donald Trump blames the Federal Reserve System for following a “too tight” monetary policy. Neither the Party of Order or Trump is pointing to the real cause of the looming recession, the general relative overproduction of commodities. By failing to point out the real cause of the approaching economic crisis, the entire capitalist media — both pro- and anti-Trump — are as they always do on such occasions pulling the wool over our eyes to defend the capitalist system that both Trump and the Party of Order defend in their different ways.

Trump, however, cannot fail to notice that each time he moves to escalate the trade war, the stock market sells off. But when there is any hint that the trade war might ease, the market rallies. And like the rich and their media, both pro- and anti-Trump Trump, see the stock market as the “real story” while the actual economy is a sideshow, important only as it affects the stock market. In September 2019, as the election drew ever nearer, the Trump administration moved to de-escalate the trade war. Trump announced that he was postponing some tariffs that were due to kick in on Oct. 1, which happens to be the 70th anniversary of the proclamation of the People’s Republic of China, to Oct. 15.

China for its part has apparently cleared some purchases of U.S. farm commodities, and the two nations are scheduled to resume negotiations in October (2019). Similar moves since the trade talks broke down, however, were followed by further escalation of the trade war. And the economic contradiction between a rapidly industrializing China and the decaying capitalist economies of the United States and its Western European and Japanese satellites is very real. At present, the world market isn’t large enough to support a fully industrialized China, United States, Europe and Japan. Whatever temporary agreements are reached — or not reached — the laws that govern the capitalist system will keep China and the U.S. — and even the U.S. and its European and Japanese satellites and any other country that seeks to industrialize on a capitalist basis — on a collision course.

A new global equilibrium among the leading trading countries, though theoretically possible, is nowhere in sight. In the past when major disequilibrium developed, only world wars could establish a new equilibrium. The last time that happened was World War II.

Past trade wars, gold production, and cyclical economic crises

Trade wars only complicate and intensify economic crises. The classical example is the super-crisis of 1929-33. The roots of the super-crisis can be traced back to the mid-1890s. Two big events at that time sharply lowered the value of money — gold bullion — not only absolutely but also relative to the value of commodities that gold in terms of its use value measures. One factor that lowered the value of gold was the [newly invented] cyanide process, which uses the poisonous and extremely environmentally harmful chemical compound cyanide to extract gold from gold-bearing ores that contain only tiny amounts of the metal.

The second factor was the geographical discoveries of rich gold-bearing land in Alaska and Canada leading to the gold rush of the 1890s. Marx describes the earlier discovery of gold in California in 1848 and Australia in 1851 as a “second 16th century.” In the 16th century, the “discovery” of the “New World” by Europeans with its rich gold and silver deposits led to the birth of the world market and the rise of the capitalist mode of production. In the mid-19th century, capital discovered rich gold deposits in California and Australia, which greatly extended capitalist production while ending the youthful hopes of Marx and Engels that an early socialist revolution [was possible]. The process was repeated in the late 19th century with yet another “16th century” sending the value of gold downward.

What happens when the value of gold both relatively and absolutely falls sharply over a short period like it did in the mid-1890s? First, the golden prices of production (prices measured in ounces of gold) will rise sharply because these prices, like all “real” prices, must be expressed in terms of the use value of the money commodity. Starting in the 1890s, a given weight of gold measured in some unit of weight represented less abstract human labor measured in some unit of time than it did in the early 1890s and earlier. However, a rise in the golden prices of production does not mean that the market prices of commodities rise instantly. A process occurs that causes market prices to rise toward the new higher prices of production. What is this process and how does it work?

First, those who “struck it rich” suddenly had a lot of money to spend on commodities. Under the monetary system that prevailed at that time, newly mined bullion could be presented to the U.S. mint and minted into new legal-tender dollars in the form of gold coins. These coins inevitably found their way into the banking system, swelling the reserves of the commercial banks. The U.S. had no central bank at the time, so each commercial bank maintained its own reserves of gold bullion and coins. In countries that had central banks, such as Great Britain, Germany, France, and Russia, for example, the central bank bought the newly mined and refined gold bullion at fixed currency prices.

The central bank paid for the gold by issuing banknotes in exchange for the gold or writing checks that would be deposited in a commercial bank, expanding the reserves of the commercial bank system. This led to a global rise in bank reserves and the creation of additional bank-created credit money through increased bank loans. All this caused a sudden expansion in the size of the world market. The Long Depression of the late 19th century was over and a new era of capitalist prosperity had begun.

As demand increased, the supply of commodities at existing prices was less than the demand. As a result, competition among the industrial capitalists declined and market prices rose sharply towards the new higher prices of production. As the cost of living rose, workers found that their existing wages had been devalued. This became apparent as the cost of living began to rise at about 3 percent a year, a high rate of inflation in a situation where the currency prices of gold are fixed but the value of real money — gold bullion — is not. This led to a devaluation of money wages.

However, the devaluation of money wages coincided with a situation where the growth in the demand for labor power was strong. This is the ideal situation for trade union organization. With the demand for labor power rising, competition among the capitalists for labor power increased while the competition among the workers for jobs declined. Both the need for and the possibilities of trade union organization were increasing.

The unusually favorable conditions for union organization were also the ideal conditions for the growth of the socialist parties of the Second International. But there was a downside to this process. A temporary very favorable situation for the workers’ movement was increasingly taken as the “new normal.” The “revisionist” tendencies within the Second International gained influence within the Socialist Parties. The revisionists claimed the growth in the credit system and the increased “organization” of capitalism meant that capitalism was not only becoming more prosperous but more stable. They claimed the crises of overproduction that had swept capitalism in the 19th century were unlikely to recur. The outlook, the revisionists claimed, was not for a political and social revolution but rather for a social evolution where the power of the workers’ movement — the Social Democratic Parties, the trade unions, and the workers’ cooperatives — would [gradually] grow stronger and the living standards and working conditions of the working class would improve year by year as far the eye could see. (7)

But by the beginning of the second decade of the 20th century, conditions were already reversing. The new goldfields were being rapidly depleted and there was no follow-up technical breakthrough on the scale of the cyanide process in the refining of mined gold. The relative value of commodities stopped rising against gold, and the profits of the gold industry leveled off and then fell. And so did the rate of growth in global gold production.

The relationship between market prices and prices of production were now reversed. Market prices exceeded the prices of production of commodities. A period of major depression loomed during which the supply of commodities exceeded the demand for commodities at existing prices. Now market prices would have to be adjusted downward toward the new lower prices of production. This could only occur through increased competition between not only the individual industrial capitalists and between the workers as sellers as labor power but also between the capitalist nation-states. The extraordinarily favorable conditions under which the workers’ movement centered on the Second International grew were over as soon was the International itself.

But the 17 years of exceptional economic growth between 1896 and 1913 had transformed the relationship between the major capitalist powers of Great Britain, the United States, Germany, France, as well as newly industrializing Japan and the Russian Empire. The most important change was the emergence of the United States as the leading industrial power, replacing Britain. Germany was also hard on Britain’s tail. What turned out to a rather brief era of sharply accelerated capitalist growth as capitalist production responded to a temporary relative devaluation of money had greatly increased the uneven development of capitalism.

With Britain sinking from first place as an industrial power to second or even third place, the leading role that it had enjoyed holding the post-1815 “world order” together was no longer possible. However, as long as the world market was in the throes of a sudden expansion, the various capitalist “powers” could reach agreements to divide up a growing pie, much like the increasingly powerful trade unions could come to agreements with capitalists who were experiencing an unusual surge in profits. But as soon as the growth of the world market began to slow, relationships among the “Great Powers” — Britain, the United States, Germany, France, Japan and Russia — rapidly deteriorated. Japan and Russia already had fought a war in 1904-05, where Japan defeated the Czar’s once-mighty empire, leading to the Russian Revolution of 1905.

Then, in 1914, the competition among the rival European nation-states exploded into World War I. The United States did not directly enter the war until 1917 but emerged strengthened as against a declining Great Britain and was France’s financier in the war against dynamic Germany and its central power allies. However the U.S. lent to Europe not to develop its productive forces like Britain had previously done with the United States, or later the United States did with post-World War II Europe and then with China. Rather, it financed the transformation of Europe’s productive forces into means of destruction. As a result, the U.S. was the only real victor in the war.

Therefore, instead of depression that would adjust market prices downward towards the now lower prices of production, the 1910s saw a highly destructive war economy that dramatically increased the golden prices of production. During the period of the war economy, expanded capitalist reproduction gave way to contracted reproduction, especially in Europe. Wartime shortages caused prices in terms of gold — not just in terms of depreciated currencies, though that happened too — to rise. Not even gold can buy what is not produced.

In the early 1920s with the war now over, normal production was more or less quickly restored. The surprising speed at which Europe’s productive forces recovered is a testament to the power that these productive forces had already reached a earlier. As this happened, inflated market prices plunged back towards the prices of production. Among the victors, above all the United States, this deflation of prices occurred in the form of the deflation of 1920-21. In the defeated countries, above all Germany, the lowering of inflated golden market prices down toward the golden prices of production was accomplished through massive currency devaluations that triggered currency devaluation inflations.

The 1920-21 recession — which did not occur in the countries experiencing mass currency devaluations such as Germany — was unusual because it was not caused by the overproduction of commodities but rather the extreme inflation of golden commodity prices relative to golden prices of production brought about by wartime shortages. The recession was quickly overcome. But there was a problem that virtually no one at the time and few people even today was/are aware of.

The problem was that before golden market prices could fall back to the prices of production, inventories had run out. The price declines halted with market prices still above the prices production. This set a time bomb under the world capitalist economy. We know that world market prices were still above the golden prices of production because though gold production recovered from the lows of 1920-21 it remained below the levels that prevailed before the war until the super-crisis of the early 1930s. Only the super-crisis, by lowering market prices below the prices of production, created the conditions for a new rise in gold production and in time a new “sudden expansion” of the world market. But the new period of capitalist prosperity could not unfold until the relationship between the U.S. and Germany and the lesser imperialist powers was settled on the battlefields.

Depressed prosperity of the 1920s fuels trade wars

In the United States during the 1920s, the agricultural sector was in depression as soon as the European soldiers returned from the trenches and normal agricultural production was restored in Europe. In the U.S., as agricultural prices fell many country banks failed. Key branches of industry in the U.S. were also bogged down in stagnation, especially the textile and coal industries. The introduction of mass-produced automobiles and appliances made possible by technological revolutions such as the widespread adoption of the internal combustion engine, electricity, and radio masked the fact that the boom of the 1920s, even in the U.S., was far more modest compared the booms of 1896 to 1913 and indeed earlier booms.

Just as was the case with the sluggish boom that followed the 2007-08 Great Recession, these conditions led to a global growth of protectionism, economic and political nationalism, and racism in all its various forms. Then in 1929-30, the global recession that was the first stage of the super-crisis dramatically further increased protectionist pressures. Hoover signed the Smoot-Hawley tariff law hoping that by further increasing the already large share of the world market held by U.S. capitalists the U.S. recession would quickly end and ensure his reelection in 1932. But as everybody today knows, it did not quite turn out that way

Instead, Smoot-Hawley made clear that Germany would not be able to pay off the huge debts that it owed U.S. banks through the growth of exports to the United States. This contributed to the banking crisis that began in earnest in the second quarter of 1931 just as the recovery from the 1929-30 recession that Hoover had been hoping for seemed to be getting underway. The banking crisis spread to Germany, Austria and Poland and forced Britain to devalue the pound. What had first seemed to be a “normal” recession turned into the super-crisis not only in the U.S. but with far graver consequences in Germany as well.

Could something similar, though the details would be quite different, happen today? The leaders of the Party of Order fear that it might.

As Trump imposes more and more tariffs on Chinese, German and other foreign-produced commodities — and other commodities — entering the United States, U.S. merchants have to either eat these tariffs or raise prices. To the extent that they raise prices, their sales fall. As their sales fall, it becomes harder for them to repay their bank loans that are “backed” by their unsold inventories. The more their sales slow down the greater the number of bank loans that become “non-performing,” eating into bank capital. The greater, therefore, is a new near-term bank crisis and the greater the chance of the approaching recession being transformed into a new “Great Recession” or worse.

Therefore, if Trump wants to postpone the onset of full-scale recession until after the 2020 election, he would be well advised to come to at least a temporary compromise with the Chinese in the trade talks scheduled for October (2019). A lowering or removal of the current tariffs and a postponement of additional tariffs would increase consumer purchasing power — or at least would not reduce it — ahead of approaching 2019 Christmas holiday season and thereby increase the chances that the U.S. and world economy will avoid a full-scale recession until sometime after the 2020 elections.

Therefore, the Trump tariffs — designed just as the Smoot-Hawley tariffs were in its day to ease the effect of a developing global recession on U.S. capitalists by increasing the share of capitalist production carried out in the U.S. at the expense of capitalist production carried out elsewhere — could backfire. Protectionism not only undermines the efficiency of global capitalist production by reducing the international division of labor and encouraging duplication of production in the long run. In the short run, it increases the chances of a global credit, banking, economic, and employment collapse.

To be continued.

_______

1 Though the U.S. Constitution doesn’t require it, both the Democrats and Republicans agree that impeachment of the president and other federal officeholders such as federal judges should not occur unless there is actual evidence of lawbreaking. The law that Trump appears to have broken is a law that makes it illegal to accept aid — whether in money or kind — of (monetary) value from a foreign government. In today’s world, the law is actually a reactionary one that limits democratic rights within the U.S. For example, if a revolutionary workers’ international existed and held state power, such as was the case a century ago following the Russian Revolution, federal prosecutors would likely charge the candidates of a workers’ party running a presidential candidate in a U.S. election with accepting aid from a foreign government.

As is well known, the U.S. government, both Democrats and Republicans, regularly give aid to pro-U. S. imperialist parties and politicians. So while it is illegal for a foreign government to help U.S. politicians, the U.S. government gives itself the right to intervene in the elections of virtually every country in the world!

Trump has given the Democratic Party many reasons to impeach him. For example, he could be impeached for his sexual assaults on women, to name just one example. But instead of doing that, the Democrats are moving to impeach Trump by invoking a law that significantly restricts the democratic rights of the American people. Therefore, if Trump is impeached, and even more so if he were to be removed from office by the U.S. Senate, or like Nixon be forced to resign in the face of certain impeachment and conviction in the Senate, the reactionary law that prohibits accepting the aid of a foreign government will be strengthened. (back)

2 Most large banks today are universal banks engaged in investment banking, stock brokerage, insurance as well as commercial banking. However, it is the commercial side of their operations that we are concerned with here. (back)

3 The balance sheet is a financial statement where a corporation’s assets are listed and added up and balanced against a corporation liabilities, also listed and added up. The difference between the assets and liabilities is the stockholders’ capital. If this number is negative — the liabilities exceed the assets — the corporation is in a state of insolvency. Standard bank regulatory doctrine holds that an insolvent bank should be promptly shut down and liquidated. (back)

4 This why “neo-liberalism” applied to the post-Volcker shock economy is, in my opinion, a poor term. The capitalist class is indeed trying to return to the 18th century as far as concessions that it has been forced to make to the working class over the last several centuries of class struggle and capitalist development. And in a parallel development, the dominant imperialist part of the global capitalist ruling class is seeking to withdraw concessions it made to the oppressed countries during the Cold War.

In that sense, but only in that sense, is the capitalist class trying to return to the days of Adam Smith and David Ricardo. But there is no road back to the small-scale capitalist enterprise of classical liberalism. Above all, no road leads from today’s mega-banks, which have grown up based on the concentration and centralization of capital in the industrial and trading companies, back to small-scale banking. (back)

5 The crisis of 2008 and its associated Great Recession of 2007-09, though it left dollar prices largely unchanged, caused a significant drop in golden prices. This was achieved through a rise in the dollar price of gold from well below $1,000 beforehand to above $1,000 after the crisis. As we have explained elsewhere in this blog, this reversed the fall in gold production caused by the depletion of the South African goldfields that began around the turn of the 21st century. Mining of gold from land that had been considered too poor to commercially mine before the 2008 crisis more than offset the declining gold bullion production in South Africa, causing world gold production to once again rise to record levels.

If gold production had not risen, the Fed would have had to end its quantitative easing program much earlier than it did under pain of the collapse of the dollar system. In that case, we would have had a new recession well before now. If a repeat of 2008 or worse in the current cycle is avoided, it will largely be because of the rise in gold production made possible by the crisis in 2008. (back)

6 The Polish economist Michael Kalecki, who has greatly influenced the “Monthly Review school,” predicted that the economic “business cycle” would give way to a political “business cycle.” Kalecki assumed that fiscal and monetary policies developed during the 1930s under the influence of John Maynard Keynes and to a lesser extent his own writings, gave capitalist governments the tools to control the state of business much like you can control the level of water in a bathtub. Capitalist governments, therefore, would see to it that business was booming before scheduled elections. Between elections, capitalist governments would arrange recessions in order to weaken the position of workers in their struggles with the capitalists.

For the most part, Kalecki’s predictions of a “political business” cycle have not come true. If Kalecki’s analysis had been correct, the largely Republican Bernanke Fed and the Republican Bush administration would not have arranged a “Great Recession” to hit with full force just weeks before the presidential and congressional election of November 2008.

Further back, the Volcker shock, which began in 1979 and extended through the election year of 1980, destroyed the chances of reelection of Democratic Jimmy Carter. Again, if Kalecki had been correct, the Democratic Volcker would have waited until after November 1980 before launching his “shock.”

In 1959-60, much to the anger of Vice President Richard Nixon, Fed “tightening” to combat an outflow of gold led to an election year recession that probably played a decisive role in Nixon losing to Democratic Senator John F. Kennedy of Massachusetts.

However, Nixon did pressure Federal Reserve Board Chair Arthur Burns to follow a very easy monetary policy in 1971-72 and moved to suppress the symptoms of inflation through the 1971-73 wage and price controls. These polices led to an election-year boom in 1972, which contributed to Nixon’s landslide victory over Democrat George McGovern that year. Burns, bowing to Nixon’s demands that he follow an “easy monetary policy,” has in retrospect been widely condemned by capitalist historians.

So in this case, a “political business cycle” played a role. It seems that Trump is attempting to bring about a repeat performance in 2020 through his constant attacks on his handpicked Federal Reserve chairman, Jay Powell, for raising interest rates and now not lowering them fast enough, as well as until very recently following “quantitative tightening” polices. While the U.S. and world economy did boom in 1972, helping Nixon win a landslide victory, inflation dramatically accelerated and the dollar price of gold soared in 1973, forcing the Fed to tighten, leading to the “Great Recession” of 1973-75. Attempts to manipulate the timing of the “business cycle” for electoral advantage only adds to the underlying instability of the capitalist economy. (back)

7 The boom of 1896 to 1913 is only one of the factors that led to the decline of the Second International and its decisive collapse on Aug. 4, 1914. Another factor was the growth of imperialist super-profits, making it possible to bribe the upper layers of the working class. An additional factor was that in Asia, where most of the potential industrial workers — producers of surplus value — were still capitalistically underdeveloped, a considerable further growth of imperialist super-profits became possible, which could be and were used to bribe the upper strata of the workers through various mechanisms in the imperialist countries. (back)


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