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Capitalism: Profits Are Privatized but Losses are Socialized


 Nearly 40% of the total revenue of the companies in the S&P 500, the largest American companies, is generated outside of the U.S. production and service sectors.  By now everyone is aware that there is $2.1 trillion cash sitting on the balance sheets of S&P 500 companies and $1.1 trillion is parked in U.S. companies' bond accounts abroad, which brings the total to $3.2 trillion.  It must be added that the layer of this mountain of cash which is parked by the U.S. capitalist class in overseas accounts absorbs the high interest rates that are wielded by the credit agencies on the bonds issued by countries loaded with high debts and budget deficits.  In 2012 should Europe sink into a deep recession, the U.S. companies will face real headwinds and a combination of reduced demand by the European markets for American goods and a lower value of euro/dollar relationship.
 
Europe can pull the U.S. into another phase of crisis.  The estimated national value of the over-the-counter fixed-income-derivatives market in Europe is approximated to be about 60 TRILLION Euros, almost five times the Gross Domestic Product (GDP) of the U.S.   There are many links tying the U.S. banking system to those in Europe.  After all it was the U.S. that in 2008 sold tens of billions of dollars of the toxic real estate mortgage loans to the European banks.
 
Mario Draghi, President of the European Central Bank, has admitted Europe is already in a recession.  According to Felix Zulauf, President of Zulauf Asset Management of Switzerland, in 2012 and probably in 2013, every European country will be in recession.  To stay afloat, the European Central Bank (ECB) will continue printing money.  The bank's balance sheet has climbed to $3.5 trillion, i.e., 21.5 percent of the GDP of the European Union.  The European Banks are losing deposits because the working class is reaching the bottom of their savings and the EU is requesting help to refinance their operations, given the fact that they can't refinance within the interbank loan market.  Very similar to the situation in the U.S., the banks have lost each other's trust and confidences.  Yet worse, the Bank for the International Settlements is demanding higher capital Adequacy Ratio (CAR), which means the banks have to shrink their balance sheets and countries with much higher balance-of-payments deficit will have a harder time funding their deficits, which gives rise to economic contraction.  It is not an exaggeration to say that the European crisis has global implications.
 
In today's financial world we are at a juncture where money is scarce and credit is superabundant.  In terms of life-style the last 30 years, beginning with the ascension of Ronald Reagan to power, everything was rosy and wonderful, until the banks began overextending their credits.  Let us think of the financial system as one huge global bank that has lent out too much and depositors are demanding their money back.  In this bank $7 TRILLION or so of reserves supports $120 TRILLION of credit.  If we also take the shadow banking deals into account, the conclusion is unavoidable that our global bank is at least 17 times levered, meaning for every single dollar in reserves, $17 is extended as credit.  There is a huge amount of bad debt that has accumulated and is returning to the central banks, where it can be put to rest. 
 
Secondly, there is very little incentive to lend money because there is too little return on it.  During the past three decades the U.S. Federal Reserve Bank decreased interest rates almost ceaselessly in the hopes that expanded credit markets would give impetus to deals in risk assets proportionately.  The model worked for a long period of time, but when out of desperation it descended to near zero interest rates, the situation began turning into its opposite.  It is not hard to comprehend that when money yields infinitesimally small amounts, banks would not risk lending it.  When a bank can keep its customer's money with the Federal Deposit Insurance Corporation at 25 basis points (0.25%) or lend it at 27 basis points, which is the yield on a two-year Treasury, why should the banks take a two-year risk?  The combination of low interest rates and high risk essentially freezes the financial system.
 
Given a sharp income and wealth disparity between opposing and antagonistic classes, it is logical that there is a demand deficit on the part of the great majority.  Under capitalism whose primary motive is extracting higher rates of profit and ever more capital accumulation, the lack of effective demand dampens the enthusiasm of the capitalist class for net capital investment and providing jobs for the unemployed and under-employed labor force.
 
Under the so-called normal production cycle of boom and bust, the tendency of financial and industrial capitals would be delevering and reducing the financial obligations and production capacity.  That obviously translates into higher rates of unemployment and sharper class struggle on a national scale.  But given the general character of economic crisis concentrated in Europe and the U.S., the central banks since 2009 have made every effort to stop this process by quantitative easing (QE) and operation twists to pump trillions of dollars into the financial system that primarily serves a small social class.
 
Mr. Ben Bernanke, Chairman of the U.S. Federal Reserve Bank can dump another $500 billion on the U.S. market by purchasing Treasury bonds and putrid real estate backed securities, but the proliferation of dollars here in the U.S. can only lead to strong economic growth and inflationary pressure in the emerging market countries.  Since the rates of profitability and interest are much higher in Asia, Africa and Latin America, the American financiers receive the dollars with one hand and wire them to the developing countries with the other. Ultimately, the American working class would be forced to pay the national debt and the so-called 'budget deficit'.  Under capitalism, profits are privatized but losses are socialized; heads the capitalists win, tails, the workers lose!
 
To challenge this position some analysts say that there is no freeze on credit and anyone with  a reasonable and sound credit background can borrow money and start a new business or expand existing ones – after all the U.S. is a land of opportunities for all those who have the imagination and are ready to work.  Respectfully, our answer to this viewpoint is that their recommendation only applies to the groups on the peripheries of the circle.  In the middle lies a black hole that sucks in almost all the available credit.  For now this is the final destination that central banks, credit agencies and the Federal Deposit Insurance Corporation (FDIC) didn't foresee.
 
During five years beginning 2007, the GDP (nominal) of the European Union contracted by 4.16 percent from $16,989 billion to $16,282 billion.  If we add the growth of the population to the contraction of EU's economic capacity, the depth and breadth of unemployment, poverty and related social ills could be openly felt.  In five years, the United Kingdom went from $2812 billion to $2247, which meant a king sized contraction of over 20 percent.  But even such shrinkage did not prevent Britain from dropping tons of bombs on the people of Libya.  Ireland, which was paraded before the capitalist economic crisis as a model of free enterprise success, in five years its GDP sank from $259 billion to $204 billion, i.e., more than a 21 percent fall over that period.  
 
Following in the same descending direction, Italy lost over 3% of its economic capacity.  Also, Greece's economy is doing far worse than expected: finance minister Evangelos Venizlos said this week (the week of January 19) gross domestic product probably shrank by more than 6 percent in 2011.  The sovereign debt of Greece is monumental; the European Central Bank's aim is to cut its debt to GDP ratio to 120 percent by 2020, from more than 160 percent today.  In the current economic condition, the U.S., unlike in 1947 when it was ready to expend its military and financial resources to confront and defeat the Greek Communist movement, today it is unwilling to save the Greek working people from their agony.   
 
Let us point out that Europe in 2011 was in a worse condition than in 2010.  This situation could be surmised by the sharpening contradictions between France's Nicolas Sarkozy and Britain's David Cameron.  On Jan. 6, 2012, huffingtonpost.com, under the headlines of European Crisis wrote "the number of unemployed people in the Eurozone reached its highest level since the creation of the Euro in 1999…"
According to Eurostat, the European Commission's statistical office, the number of unemployed in the Eurozone reached a record high of 16.37 million workers.
 
Although the European working classes, in sharp contrast to that of the U.S., enjoy truly socialized healthcare services and relatively more secure employment posts, socially-guaranteed retirement plans and reasonably-priced public housing, the overall character of its mode of production and its corresponding social relations are capitalistic, especially where it is integrated into American monopoly capitalism, with its plan for global domination and a ferocious world imperialist system.  Therefore, as long as monopoly capitalism remains the yardstick to define the value of human activities, mankind cannot be free from periodic and on-going capitalistic crises and wars.
 
What undoubtedly applies to societies in Europe, is doubly true about the U.S., where capital with the backing of all governmental branches runs wild in both economic and political arenas.  Last week, the Financial Times of London ran a series of articles written mainly by the apologists of monopoly capitalism who tried desperately to convince the readers of the paper that the system we are dealing with is not capitalism, or that the capitalist class is a by-gone phenomena, or that the managers with no connection to capital ownership, are in charge.  If it is capitalism, the economic system is not managed according to the prescriptions of Adam Smith.  According to some economists, in the worst case, a series of reforms, including some monetary and fiscal regulations, can bring the necessary balances to the system. 
 
We may add that this patient has been on this medicine far too long and every episode in the capitalist narrative is ridden with ever-more and deeper crisis.  The toll, human cost and tragedy of an unjust social system are unbearable for the great majority of the workforce.
 
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About the Author: Ardeshir Ommani is a writer on issues of war, peace, U.S. foreign policy and economic issues.  He has two Masters Degrees in the fields of Political Economy and Mathematics Education.   Contact Info: Ardeshiromm@optonline.net  
  

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