The American Financial Crisis
Enrique R. Suarez
Master of Education & International Development
Management Consultant, Political Scientist & Professor
In my view, the crisis stems from the 1970's, as a result of a new international division of labor (neoliberal policies also called globalization). Since that time, these policies generated a series structural and socio-political processes at the global and U.S. domestic level which I believe are the forces that would allow us to understand the current crisis and, therefore, to properly address them. Unfortunately, what U.S. policy makers are doing right now are just "putting out fires" that is, all policies of monetary expansion, release of debt, bank bailouts, are issues that will not achieve the necessary results the American economy needs right now. What we need is to do a root cause analysis of the current and past crisis and adopt a system view of how the productive and financial institutions have been operating since financial markets were deregulated starting in the 1970s which are the cause of the problem.
My basic proposition is two-fold: (1) as discussed by Reinhart and Rogoff (2009), excessive debt, public and private, internal and external, has repeatedly led to financial crises in almost all countries throughout the last two centuries. These crises typically end in default and restructuring, although sometimes the default is through currency debasement (inflation). The high levels of debt normally take years to work off, and create a prolonged slump as businesses and consumers rebuild their balance sheets. For example, as Irvin Fisher insightfully pointed out, in the U.S. since the beginning of the 20th century there were two long term cycles of total debt relative to GDP. The first cycle had debt rising until the 1929 crash, after which the total debt-to-GDP spiked to about 260% during the Great Depression. The debt/GDP declined following the depression high and reached a low of less than 140% in the 1950s. The ratio began a sharp rise from 160% in the early 1980s to over 360% during the 2008-9 financial crises. Most European countries have high total debt levels and Japan has a high government debt ratio. (2) There is no basis for the accumulation of capital, that is, for capital to be profitable in America because there are not Schumpeterian technological revolutions, as was the case of the industrial revolution of the early nineteenth century, (the age of steam, railways and heavy engineering, the age of oil, electricity, the automobile and mass production, and the age of information and telecommunications).
Instead, what we have now are long wave cycles, called Kondratieff cycles that last between 50 and 60 years. A Kondratieff cycle is a l ong-wave economic cycle of major capital goods expansion that plays out over a period of about 60 years and underlies the usual boom-bust cycles characteristic of a capitalist economy . It was named after its proponent, the Russian economist Nikolai Dmitrijewitsch Kondratieff (1892-1938).
According to this long wave cycle, we are now in the fifth long wave. In the middle of that cycle economies grow and the rate of profit rises, but on the other half of the cycle, due to the exhaustion of technological innovation, economies begin to enter into a recession process. And in this last phase is when the financial capital (speculation) takes control of the economies. In contrast, in the boom phase is the productive sector that dominates. So the point is that until there is a technological revolution again that can enhance the capacities of the productive sectors of the economy, there will not be an economic recovery in the U.S. or Europe.
The same thing happened with the Internet. In the nineties, there was what we call the "new economy", which would be based on the revolution in telecommunications, computing and robotics. But it failed with the breaking of the technology bubble of the "dot.coms" in 2001. That led to a faulty recovery again by lowering interest rates and giving very cheap mortgage loans, exacerbating the so-called Great Recession of 2008-2009. In other words, what we needed was a revolution to transform the productive apparatus at home instead of doing financial tampering based on greed that also triggered the outsourcing of many productive jobs in America, weakening even further the demand side of the U.S. domestic market. In addition, it is interesting to note that according to economist Melchior Palyi (1892--1970), in the 1960s it took $1.53 of debt to produce $1 of GDP; by 2000 it took $6 of debt to produce $1 of GDP. Therefore, the declining marginal productivity of debt is a result of debt based money expansion flowing into land, including housing and commercial real estate, and financial markets in the second half of the 20th century instead of non-real estate production capital, which is saturated. Real estate also became heavily saturated, but a speculative bubble mitigated the effect.
Furthermore, according to the credit cycle theory, the economic cycle that began in around 1939 is just ending. Although productivity slowed in the 1970s, the structure of the economy changed, with peak per capita oil and steel use in 1973 and with the sharp upturn in debt that began in the 1980s, creating the FIRE (finance, insurance and real estate) economy. Additional support for this cycle timing is that although there were severe recessions in the 1970s and early 1980s, they were nothing like the Great Depression.