Crisis and the manipulations of high finance

Pin It

Tricontinental 50

Members and supporters of the Revolutionary Communist Group attended the conference celebrating 50 years since the First Tricontinental held in Havana, Cuba in 1966. The event, ‘Legacies of the Tricontinental: imperialism, resistance, law’, was held at the University of Coimbra, Portugal, on 22-24 September 2016. The 1966 Conference of the Peoples of Africa, Asia and Latin America, or Tricontinental, was attended by over 500 representatives from national liberation movements and governments from some 82 countries. Among the delegates in 1966 were Fidel Castro, Salvador Allende and Amilcar Cabral.

The First Tricontinental condemned imperialism, colonialism and neo-colonialism and pledged solidarity with the Vietnamese people’s struggle against US imperialism. Che Guevara sent a message of solidarity before leaving for Bolivia saying ‘Create two, three…many Vietnams, that is the watchword.’

In 2016, workers and oppressed peoples of the world face many of the issues that were addressed in 1966. We print here two of the contributions made to the Coimbra conference by David Yaffe and Trevor Rayne.

Crisis and the manipulations of high finance

Speech by Trevor Rayne

By the beginning of September 2016, the world’s top ten investment banks had paid out almost as much in fines and penalties in 2016 as they did in the twelve months of 2015. Together they paid $9.8bn, far below the 2014 figure, when the top ten paid out $58.2bn in penalties and fines. The top ten banking cheats are HSBC, Barclays, Deutsche Bank, UBS and Credit Suisse plus five Wall Street banks. Goldman Sachs tops the penalty list so far in 2016; for mis-selling mortgage backed securities.

Profit increasingly takes a parasitic form: interest, currency exchange deals, speculation and the manipulation of financial assets. Fraud is an extension of these methods of securing a share of surplus value and is invaluable to the capitalist ruling classes. Cheating has become necessary. The City of London, one of the world’s three main financial centres, is at the heart of the world’s biggest network of tax avoidance, money laundering and market rigging. These are the means by which capitalists retain their profits. Pension funds, insurance companies and stock markets are beneficiaries.

In the 19th century the steam engine, railways and electricity were celebrated, seized upon and developed by capitalists as means of enhancing profits. Today, capitalism’s genius for invention conjures up hedge funds and derivatives, transfer pricing and tax evasion; these are the wonders of the modern world. We are dealing with a usurious and parasitic system that promotes and rewards pathological behaviour; this is the only way that capitalism can survive.

Writing of globalisation in 2003 in FRFI we said: ‘Far from being something dynamic and new, the frenetic international expansion of capital underlying neo-liberal globalisation is the product of the overproduction of capital in the heartlands of capitalism. Globalisation is a sign of economic decay and increasing instability in a world of obscene and growing inequality. It is a return to those unstable features of capitalism, which characterised imperialism before the First (Imperialist) World War, producing those dramatic shocks to the international economy, which led to the Russian revolution.’1 There is a vast over-supply of commodities in the world, a glut in savings and limited opportunities for profitable investment – capitalist commentators call this ‘secular stagnation’. The prospects for the usual way of making profits out of productive investment are diminishing. Labour productivity growth in the main capitalist countries has fallen from around 2% a year at the end of the 20th century to well under 1% a year now. This is a structural crisis for capitalism.

Multinational corporations are building up huge cash piles. ‘In the third quarter of 2014, the largest non-financial corporations in the world had amassed some $3.5 trillion in cash reserves, up from $1.8 trillion in 2005;’2 they had almost doubled. For US companies, some 64% of more than $1.7 trillion cash was held abroad to avoid taxes on profits made in other countries.

The scandal of tax havens has surfaced in the media; there were the PwC (Price Waterhouse Coopers) Luxembourg tax agreements disclosed by journalists in 2014 and the Panama Papers, published earlier this year. Tax havens provide the secrecy sought by organised crime and money laundering and for bribes and embezzlement (think of Mobutu, Marcos, the drug cartels and oligarchs of today), but to consider tax havens to be the product of greedy people and crooks is a mistake; they serve them, but that is not their primary purpose. They derive from and flourish with the crisis of capitalist accumulation. ‘Taxation is seen by the individual capitalist as a cost. If profits are sufficient, taxation can be paid, but if the rate of return is inadequate or profits decline, the burden of taxation becomes unbearable to the capitalist. Most state spending, for example on health and education, does not add to surplus value and is a deduction from the mass of profits. In so far as it is paid for out of taxation, or government borrowing resulting in future taxation, state spending becomes an unacceptable burden to the capitalists. The current stagnation in productivity growth exacerbates this problem. Giant corporate and individual cash piles, flourishing tax havens and the attacks on state spending are all manifestations of the capitalist crisis and its descent into parasitism and decay.’3

Eighty-three of the 100 largest US corporations and 99 of Europe’s 100 biggest companies use offshore subsidiaries. More than half the world’s trade in goods passes, on paper, through tax havens. The United Nations Conference on Trade and Development (UNCTAD) reports that some 30% of cross-border corporate investment is routed through offshore ‘conduits’. ‘In 2012, the British Virgin Islands was the fifth largest recipient of foreign direct investment in the world, with inflows at $72bn, higher than those of the UK with an economy almost 3,000 times larger’ (Financial Times 8 April 2016). UNCTAD estimated that $100bn of tax revenues were lost in 2015 because of tax havens.

In his book, Treasure Islands, Nicholas Shaxson notes that one third of British companies pay no taxes at all. Throughout the major capitalist countries the burden of taxation is being forced onto the working classes as taxes on companies are pushed down. In 1982 UK corporation tax on company profits was 52%. Today it is 20% and by 2020 the former Chancellor of the Exchequer George Osborne said it will be 17%. Ireland’s corporation tax is 12.5% and just 6.25% if firms show their earnings derive from research and development conducted in Ireland. Demands to reform tax havens, making them transparent, miss the point that this will only accelerate the reduction in corporation tax, which is the necessary reaction to declining global profitability.

Inter-imperialist rivalry

Competition over the use of tax havens is becoming an arena of inter-imperialist rivalry. On 30 August 2016 the European Union Competition Commissioner accused Ireland of breaking EU rules by giving state aid to Apple from 2003 to 2014. Ireland was accused of allowing Apple to use a shell company, based in Ireland, to avoid paying taxes. Apple paid 0.005% tax, that is, €5 in every €1,000 made in profits. The European Commission demands that Apple pays a tax bill of $14.6bn or €13bn. The Irish state, which has debts of $232bn, says it does not want the money from Apple. Meanwhile, Apple is sitting on a cash pile of $231bn. Apple boss, Tim Cook, called the EU decision ‘political crap’. 185 US corporate chief executives appealed to EU heads of states to overturn the ruling. The US Treasury Secretary threatened the EU with retaliation. One US Democratic Party Senator said the EU penalty was a ‘cheap money grab’ and threatened Europe with a trade war. Other US companies that have set up bases in Ireland include Google, Facebook, Microsoft and Pfizer.

According to the Wall Street Journal (15 September 2016) Deutsche Bank has been threatened by the US Department of Justice with a $14bn penalty for mis-selling bonds. The German government responded saying that it expected a ‘fair’ result from negotiations between the Bank and the Department of Justice. The Royal Bank of Scotland (RBS) is next up for a bout of negotiations over what fine it will pay to US Department of Justice. There is plenty of fuel for tit-for-tat retaliation across the Atlantic; now McDonald’s is under investigation by the European Commission for paying an average tax rate of just 1.49% on $1.8bn profit made by its Luxembourg-based European headquarters; again, the accusation is state aid through tax avoidance.

For the benefit of companies set up in Luxembourg, former Chancellor Osborne reduced taxes on their profits to no more than 5%. This was to attract multinational corporations to Britain. The Luxembourg tax agreement leaks showed companies such as Ikea, Amazon, Heinz, Pepsi, Dyson, Fiat, Vodafone and so on paying tax rates of 1% on profits shuffled through Luxembourg. For every police officer in Luxembourg there are four accountants; they have an awful lot of money to count! Some $4 trillion is invested in Luxembourg. Harvard Professor Stephen Shay, testifying to the US Senate on tax avoidance, described the Grand Duchy as being ‘like a magical fairyland’. A magical fairyland, indeed: ‘a society that has conjured up such gigantic means of production and exchange, is like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells’.4

The world’s main traded commodities by value are oil, weapons and drugs. The Italian economist and former Executive Director of the United Nations Office on Drugs and Crime Antonio Maria Costa said that the four pillars of the international banking system are: drug money laundering, sanctions busting, tax evasion and arms trafficking. British banks play pivotal roles in each and must do so in order to make profits. ‘The total assets of the UK banking system amount to around 450% of nominal GDP.’5 In 2012 HSBC was facing criminal charges in the US for laundering drug money and breaking sanctions on Iran. Chancellor Osborne came to the rescue and wrote to the US Federal Reserve Chair Ben Bernanke and US Treasury Secretary Timothy Geithner, saying that criminal charges against HSBC ‘would risk destabilising the bank globally, with very serious implications for financial and economic stability, particularly in Europe and Asia’. Three months later HSBC agreed to pay the US Department of Justice $1.26bn and a further $665m to other US regulators in a five-year deferred prosecution agreement. HSBC admitted it had allowed itself to be used by money launderers: too big to fail and too big to jail.

Asia, Africa and Latin America suffer particularly from the mechanisms of tax evasion, money laundering and other financial crimes. According to the Washington-based Global Financial Integrity’s December 2015 report, developing and emerging economies lost $7.8 trillion in illicit financial flows from 2004 through to 2013. It estimates that illicit financial outflows increased at an average rate of 6.5% a year, nearly twice the global GDP growth rate over the same period. Development is impossible under such plunder. Global Financial Integrity says that fraudulent transfer pricing accounts for about two thirds of these illicit flows. This is multinational corporations manipulating prices to avoid paying taxes. 60% of the world’s trade consists of such intra-firm trade. The profits appear in the Cayman Islands, Bermuda, the Channel Islands Guernsey and Jersey, Panama, Luxembourg and so on and are then recycled through the City of London – they don’t surface in Indonesia, Uganda, Chile and the rest of the underdeveloped countries of the world.

Al Capone is reputed to have said, ‘You call me a criminal? Look at the banks!’ In the City of London we have seen exchange rates and the London Interbank lending rate – Libor – rigged by bankers who formed criminal cartels. ‘Traders were involved in a criminal conspiracy to defraud their clients. They were said to have colluded in secret online chatrooms to time the buying and selling of huge amounts of foreign currency. One Barclays trader wrote in a chatroom in November 2010: “if you ain’t cheatin, you ain’t trying”. This could be the mantra of a capitalist system that has long outlived its historical mission.’6

  1. David Yaffe ‘The world economy – facing war and recession’ FRFI 171 February/ March 2003.
  2. David Yaffe ‘Capitalism in crisis: stagnant, predatory and corrupt’ FRFI 245 June/July 2015.
  3. Trevor Rayne ‘Panama Papers: when cheating becomes necessary’ FRFI 251 June/July 2016.
  4. Karl Marx and Frederick Engels The Communist Manifesto 1848.
  5. David Yaffe ‘Brexit intensifies Britain’s crisis’, FRFI 252 August/September 2016.
  6. David Yaffe ‘Capitalism in crisis’ op cit.

Fight Racism! Fight Imperialism! 253 October/November 2016