Holding the whole world to ransom

Who owns the money?

FRFI received the following letter from subscriber Cilla Dunn concerning the economic crisis, asking to whom or to what, in reality, countries are indebted. Our US correspondent, STEVE PALMER, replies.

I have read many of Steve Palmer’s articles on the economy in FRFI and I thought you might explain to me the one thing I really don’t understand.

These ‘deficits’ that the UK and Europe, the US and many other countries are so worried about paying back – to whom are we indebted? What firm, bank or person has this sort of money?

The papers say ‘the private sector’, no names (except I did read ‘London & Capital’, an investment firm, and ‘Pimco’). Please write and tell me who these people are that are holding the whole world to ransom. It would be so interesting. Or does nobody know?

Yours, Cilla Dunn

You ask a great question: who owns all this money that we talk about when we describe finance capital? You mention London & Capital and Pimco. Both these companies are prominent ‘wealth managers’. But they are not the owners of the wealth they manage – they take money from clients and invest on their behalf, using their contacts, influence, gambling skills and knowledge to try to increase the value of the invested capital. These firms gather together rich people’s money and ‘put it to work’, buying and selling property, stocks, bonds, commodities and other forms of wealth.

Their ‘clients’ are mainly what Marx called ‘money capitalists’. As capitalism develops, the management of capitalist industry becomes increasingly separated from the ownership of capital; what emerges is what Marx called ‘a new financial aristocracy, a new variety of parasites’.1 He noted ‘the growing power of these bandits, who are augmented by financiers and stock-jobbers’.2 The existence of this parasitic stratum of ‘rentiers’ was obvious3 even to bourgeois economists both before Marx wrote Capital (Ramsay4) and after (Wicksell,5 Keynes6).

Who are the bandits?

According to Merrill Lynch (another ‘wealth management’ company), there are about 8.6 million ‘High Net Worth’ individuals, worldwide.7 Ignoring residence, cars and so on, these people have at least $1 million of investable assets. These are the customers of Pimco, Merrill Lynch, London & Capital etc. Let’s call such people ‘the rich’. They include wealthy lawyers, doctors, accountants, business owners, film stars and so on. These are a small proportion of the world’s population: if we took Wembley stadium as the world’s population, of 90,000 spectators, only a tiny handful would be rich – 110 or so. Altogether, this 0.13% of the world’s population owns about $32.8 trillion of assets – that’s $32,800,000,000,000. This is more than twice the entire annual income of the 5.6 billion people – over 80% of the world’s population – who live in what the United Nations defines as low and middle-income countries.

The ‘wealth managers’ are much more interested in what they call ‘Ultra High Net Worth’ individuals – the very rich, who have $30m or more of investable assets. These will be top executives of large companies, the famous bonus-receiving bankers, perhaps a few rock stars, sports people, prime ministers and others. Merrill believes there are about 78,000 of these. Although these are 0.9% of the rich (just one person in Wembley), they account for 34.7% of rich people’s wealth, about $11.4 trillion. The annual income of the United States is about $14 trillion.

Yet the very rich pale into insignificance compared to the ultra-rich: the billionaires. This year, there are 1,011 billionaires in the world who between them own $3.6 trillion8 – 0.01% of the rich own 10% of rich people’s wealth. The richest man in the world is estimated to be Mexican tycoon Carlos Slim Helu, who has a fortune of $53.5 billion. That’s more than the entire annual income of Ecuador (population 13 million) or Sudan (41 million). He is closely followed by Microsoft founder Bill Gates, with $53 billion. In third place, with $47 billion, is investor Warren Buffett, who recently bought himself the Burlington Northern Santa Fe railroad.

So we see that a tiny number of people are the main investors who are ‘owed’ money. According to UN estimates,9 the richest 2% of the world’s population own more than half of all global wealth. 99.87% of the world’s population do not get as far as being millionaires, never mind billionaires – indeed, most get nowhere near that. The bottom half of the world’s population has barely 1% of the world’s wealth. Even within rich countries, most of the population have little wealth: in Britain, the bottom half has 5%; in the United States, 2.8%.

What about other entities such as foreign governments? The US total Federal government debt at the end of 2009 was $7.8 trillion, almost all of it in US Treasury securities of various kinds. Of these, some $3.7 trillion was held overseas; domestically $795 billion was held by households; about $500 billion by State and local governments.10 The rest was divided up amongst a range of financial institutions, especially mutual funds, pension funds and insurance companies, who in turn are conduits for the private investors mentioned earlier. Of overseas holdings of $3.7 trillion at the end of February, $878 billion was held by China; $769 billion by Japan; $234 billion by the UK. So these three account for about half of all overseas holdings of US Federal debt, or a quarter of the total debt. They are followed by the ‘Oil Exporters’ – $219bn; Brazil – $171bn; Hong Kong – $152bn, and then various other countries.11

Central banks often hold these as part of their reserves, and US Treasury debt is generally treated as a ‘safe haven’ from the turbulence of other markets. Investors buy Treasury bonds not to get rich but to have a secure investment. How long it will stay secure is debatable: the US is in a very vulnerable position, where it is dependent on foreign lending from states and foreign finance capital, and this cannot continue for ever. At some point, holders of Treasuries will be forced either to unload their holdings or watch them collapse in value – an event which will be spectacular. Although these holdings are much smaller than those of private investors, and not nearly as volatile, they are strategically important and brittle.

Sovereign wealth funds have also been in the news.12 These are large government-sponsored funds which invest to preserve the wealth of states which have large surpluses from commodity sales, such as oil. They have total portfolios of around $3.8 trillion, some of which includes US government securities. Most of their investments are made abroad: about half in equities, a quarter in bonds and some 15% in bank deposits. Some $60 billion of their money went into the financial sector in 2007-8, including Citigroup, UBS, Merrill Lynch and Morgan Stanley. A further $6.5 trillion is held in other sovereign investment vehicles, such as pension reserve funds and development funds, whose composition is not known with any certainty. The $10.3 trillion in these funds plays an important role and represents the collective wealth of ruling groups and states in a few countries.

So much for the rich and their governments. What about you and me? Are we responsible for this mess in any way? Are we helping ourselves when we help out the banks? What about workers’ savings? What role do they play in this mess? In the 21st century these savings by or on behalf of the better-off workers, the labour aristocracy and the middle class have grown to colossal proportions, mainly in the shape of pension funds. Morgan Stanley estimates13 that pension funds worldwide hold over $20 trillion in assets, the largest for any single category of investor, much larger than those favourite targets of opportunist criticism, the hedge funds and private equity capitalists.

A good example is CalPERS –  the California Public Employees Retirement System – which has assets of over $200 billion under management – about four times the fortune of the wealthiest billionaire – covering about 1.6 million people. In order to deliver retirement benefits, these pension funds are driven to engage in the same aggressive speculation and exploitation strategies as the financial aristocracy: by 2007, ‘for the fourth straight year, CalPERS recorded another double-digit investment return, closing 2006 with a 15.4% gain and $230.3 billion in assets... “It was a strong equity market year. We beat our benchmark,” said Russell Read, CalPERS chief investment officer. “What we are focused on right now is how to achieve that type of outperformance going forward.”14

It is important to remember where this money is coming from in the first place. Read said the fund plans to pursue more public and private market opportunities overseas, especially in fast-growing emerging markets in Asia and Africa. In the past year, Read has touted private equity investments in natural resources, especially energy. A lot of that growth is being driven by increasing demands by China. ‘We are seeing some opportunities in Africa come across our desk for the first time ever,’ he said.15 Somewhere in Africa impoverished peasant families are going to be helping a California employee enjoy a comfortable retirement.

Pension funds have lashed themselves firmly to the fate of capitalism. In 2006, of the $10.3 trillion of US pension fund assets, 53% was invested in company equities.16 Indeed, State and local government pension funds’ share was even higher, at 65%. Of $19.4 trillion of total US equities, pension funds owned $5.5 trillion – 28.5%. The top 25 pension funds had an average of 13.5% of their assets in foreign equities, and in some cases over 20%, tying them tightly to the fate of US imperialism.

So worried have the labour aristocracy and middle class become about their savings that they are demanding, through the opportunist left, ‘democratic control’ over what happens to their share of the loot: ‘The left should stress that ordinary people are entitled to a more rational organisation of financial affairs that takes their own interests to heart. They also have a democratic right to exercise scrutiny and control over credit and monetary policy.’17 In other words, ‘ordinary people’ – better-off workers and the middle class – should have a right to decide how to go about exploiting the rest of the working class and the rest of the world – just like real rich people. Go down this ‘democratic’ path and you will end up trying to preserve this wealth by justifying the division of the world into exploiting and exploited nations and by defending imperialist wars.

These, then, are the people who, as you rightly say, are holding the whole world to ransom: the rich, the very rich, the almost unbelievably rich – and even sections of the working class in a handful of countries – profiting to a greater or lesser extent from the maintenance of this system. We are poor so they can be rich. And when their wealth is under threat, they expect us to bail them out. The call for cutbacks, economising, belt-tightening, sacrifice, rationalisation, streamlining, austerity measures and the rest of the hypocritical nonsense spouted by the ruling class and their hangers-on, is a demand that we keep sacrificing to preserve and increase the wealth of these robbers, parasites and their accomplices.

1. Marx, Capital, Vol 3, Chapter 27, Collected Works (MECW) 37, p436.

2. Marx, Ibid, Chapter 33, MECW 37, p542.

3. But its existence is denied by revisionist Marxists, such as Costas Lapavitsas – see ‘Two Approaches to the Concept of Interest-Bearing Capital’, International Journal of Political Economy, Spring 1997, pp85-106.

4. Thus Ramsay, An Essay on the Distribution of Wealth, 1836, quoted by Marx in Theories of Surplus Value MECW 33, pp278-9; also Capital, Vol 3, Chapter 22, MECW 37, p359

5. Knut Wicksell wrote an entire book, Interest and Prices, 1898, devoted to the effect of rising prices on money-capitalists, whom he saw as a distinct group, op cit, p1.

6. J M Keynes, A Tract on Monetary Reform, London, 1924, p13.

7. World Wealth Report 2009, Merrill Lynch/Cap Gemini, 2009. Figures are for 2008.

8. Matthew Miller and Luisa Kroll, ‘Bill Gates no longer world’s richest man’, Forbes Magazine, 10 March 2010.

9. Davies, Sandstrom, Shorrocks and Wolff, ‘The World Distribution of Household Wealth’, United Nations University World Institute for Development Economics Research, Discussion Paper 2008/03, February 2008, p7.

10. From Table L.209 Treasury Securities, Flow of Funds Report Z1, US Federal Reserve, March 2010.

11. US Treasury, Major Foreign Holders of Treasury Securities, 30 April 2010, from: www.ustreas.gov/tic/mfh.txt.

12. See IFSL Research, Sovereign Wealth Funds 2010. March 2010, from: www.ifsl.org.uk/

13. The Economist, 17 January 2008

14. Gilbert Chan, Sacramento Bee, ‘Banner Year for CalPERS’, 17 March 2007.

15. Ibid.

16. Carolyn Brancato and Stephan Rabimov, The 2008 Institutional Investor Report, The Conference Board, New York, 2008, p15.

17. This appears, without rebuttal by the SWP interviewer, in Costas Lapavitsas, International Socialism 117, ‘Interview: the credit crunch’, see: www.isj.org.uk/?id=395. See also, for example, the touching appeal by various European celebrity ‘radicals’ and ‘Marxists’ begging for reforms to control the international flows of capital in the interests of ‘the people’. ‘Speculation and Collapse: Enough’, l’Humanité, March 27 2008: www.humaniteinenglish.com/article877.html

FRFI 215 June/July 2010