‘The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner – and this gang knows nothing about production and has nothing to do with it.’ (Karl Marx, Marx and Engels Collected Works, 37, 541-2)
On 10 July, Henry Paulson was sworn in as the United States’ 74th Treasury Secretary. At the ceremony, Bush emphasized that ‘Hank Paulson will be my leading policy advisor on a broad range of domestic and international economic issues, and he will be the principal spokesman for my administration’s economic policies’.
Although there are divisions within the US ruling class over foreign policy and the war, Paulson’s nomination won unanimous consent in the US Senate. Despite the tensions, there is fundamental unity within the US ruling class over the direction of US imperialist economic policy. This is unsurprising: under the Bush regime, the US ruling class has been raking in enormous profits. On 4 June the Financial Times reported that:
‘US companies have increased their share of the economic pie at a faster rate over the past five years than at any time since the second world war…profits from current production as a share of national income have risen from 7 per cent in mid-2001 to 12.2 per cent at the start of this year. This rate of growth is unprecedented since collection of these figures began in 1947.’
This is the kind of performance the bourgeoisie wants.
Profits have climbed by 123% over this period, an extraordinary development . Even during the heady years of the late nineties, nothing happened like this.
All these profits with nowhere to go
Why change Treasury Secretary and why at this time? New York Democratic Senator Charles Schumer explained: ‘His experience, intelligence, and deep understanding of national and global economic issues make him the best pick America could have hoped for to deal with the difficult economic problems the country faces.’
Problems? First, there’s the debt: households are now in debt to 126% of their annual income – some $11.8 trillion, largely mortgages secured against overvalued houses. Federal debt is at $4.9 trillion which increases by a trillion every year; the US states and cities owe $1.9 trillion. This debt is financed by sucking in dollars from all over the world – the net external debt of the US is now $2.7 trillion, about 21.5% of US GDP. Nobody knows how long that will continue. The financial sector is carrying $13.2 trillion of debt, ‘secured’ by increasingly risky and speculative ‘assets’.
Second, industrial capitalists are supposed to use profits to expand productive capital. But they’re not: utilization of manufacturing capacity is 81.1%, only slightly above the average for the last 30 years. Generally, capitalists already have the plant and equipment needed to expand production if there is a rise in demand. Why increase it further? Instead, they’re throwing some of the profits to the shareholders as dividends to keep them quiet: $486.1bn at an annual rate in the first quarter of 2006.
This still leaves a lot of cash: after paying tax, they still have a huge dollop of ‘undistributed profits’ or ‘retained earnings’ left over. These have risen from 26% of profits in 2001 to almost 50% in 2005, some $643bn. Lacking sufficient profitable opportunities to expand their existing capital directly, they’re finding other ways to do it, using this cash. They can try to grow by acquiring other capitals; they can lend it out to someone else to make some money for them; they can use it to manipulate their share price or they can export it.
One way of expanding capital is to get hold of someone else’s, to merge or acquire other companies, an attractive way of expanding capital without increasing production. US mergers and acquisitions completed in the first half of 2006 had a total value of $646.8bn compared with $377.7bn in the same period last year.
Companies can also invest this spare cash in the financial markets to make a profit. Companies’ ‘interest income’ – their profit on undistributed cash profits – grew by 37.9% in 2005 and is estimated to grow by a further 64% this year. As a share of earnings, it has grown from 2.0% in 2004 and 2.3% in 2005 to an estimated 3.6% this year, large enough to have a significant impact on company earnings.
The cash can be used to help pump up the share price. Despite huge increases in earnings, stock prices have remained stubbornly low over the last five years. Yet the stock market is supposed to pay the pensions of the middle class.
Increasing earnings per share (EPS) is supposed to make stocks more attractive for investment, increasing prices. In an attempt to boost EPS, companies have been buying back their own stock, so the same earnings are measured over fewer shares. Companies in the S&P 500 index spent $100.2bn on buybacks in the first quarter, only slightly less than
the record $104.3bn in the last quarter of 2005. Total withdrawal of shares reached an annual rate of $586.8bn in the first quarter of 2006. Thanks to what is little more than an accounting trick, Exxon Mobil’s first quarter net income increase of 6.9% became an increase of 12.3% earnings per share.
Or the money can be sent abroad in search of profits. Compared to annual US private non-residential fixed investment, US private investment in international assets has grown from 27.3% in 2002 through 52.2% in 2004-2005, to reach 93% in the first quarter of 2006. Between 2002 and 2005, the net worth of US non-farm, non-financial companies has grown by 30%, from $9,535.3 trillion in 2002 to $12,418.5 trillion in 2005, while US private international assets have grown by 64%, from $6,563.9 trillion to $10,813.6. Direct investment is only about 1/3 of these assets – most are financial in some form.
Paulson has made it clear that further expanding these international assets is one of his priorities:
‘The strength of the US economy is linked to the strength of the global economy…we must work to expand trade and investment, work to reform and modernize international financial markets, and be vigilant in identifying and managing potential financial vulnerability.’
Parasitism runs wild
We’ve seen that industrial capitalists are being forced to invest their profits outside production. So are the institutional investors who used to invest conservatively in their shares. Pension funds need to turn an annual growth of, say, 8-9% to finance pension plans. With share prices flat, they have to become more adventurous.
Instead of shares, capital is flowing into risky and speculative markets which swell to enormous, in some cases almost unimaginable, proportions. The entire annual income of the United States is about $12 trillion. The notional value of ‘Interest-rate Swaps’ has grown from $48.8 trillion in 2000 to $147.4 trillion in 2004, although dealers insist that the amount ‘really’ at risk is ‘only’ about $2 trillion – about 17% of the net worth of US non-financial corporations.
What’s going on here is not an expansion of capital but an expansion of parasitism: capital is ‘expanded’, ‘profits’ made, not through the direct exploitation of the working class, but by swindling, dealing and gambling of all kinds – trying to grab profit from other capitals. Since the 2000 crisis, itself brought to a head by speculative investment, parasitism has gone wild. With the fall in share prices, but still lusting for the huge profits made by speculation in the nineties, capital has moved into other markets.
Low interest rates enabled the housing market to grow at a formidable rate. Household mortgages have grown from $4,770bn in 2000 to $8,945bn this year (1st quarter, annualized). Between the first quarter of 1999 and first quarter of 2006, the Housing Price Index rose by 81%, much faster than the population, the number of new owners or the prices of construction materials. Despite the obviously fictitious growth, valuations on these prices have been used to justify the explosion in mortgage lending.
Even though the mortgages are backed by overvalued assets, the ‘ABS’ market, so called ‘Asset-Backed Securities’, has arisen, betting on the mortgages. While the total debt of the financial sector grew by 163% between 2000 and 2006, ABS issuers’ debt grew by 216%, to $3.2 trillion. Despite their solid-sounding name, the underlying ‘asset’ is risky: mortgages could be paid off early or defaulted on. But they offer higher than average returns in return for greater risk.
So-called ‘emerging markets’ – imperialist-speak for the more developed oppressed nations – have become another target for speculative investment. Capitalists in countries like Turkey, Brazil and China are developing stock markets, trying to imitate the professional imperialists. Imperialist financiers have begun speculating in these markets too. But they are notoriously risky: the iShares MSCI Emerging Markets exchange-traded fund, which rose by 22% in 2004 and 32% in 2005, has fallen 16% from its peak in May as the Indian and Russian stock markets have slid by 20%.
Commodities, gold, foreign exchange, pork bellies, orange juice – every possible market has been raided and squeezed for its profit potential. Sooner or later we hear the pips squeak, as with emerging markets, and it’s time to move on to more reckless gambles.
The so-staid and secure sounding pension funds and institutional investors are increasingly handing over their funds to some very dubious players. ‘Hedge funds’ take money from rich individuals and institutions and play fast and loose with it in every market. They are unregulated. Their total size is estimated at somewhere in the $1-2 trillion range. According to Republican Senator Oren Hatch: ‘Hedge funds are the Wild West of our financial markets’.
So-called ‘Private Equity’ (PE) funds, which are even more shadowy than hedge funds, make piranhas look almost like cuddly toys. They snap up companies, chew them over, suck out all the juice then spit them out again. They specialize in ‘LBOs’ – so-called leveraged buyouts, where a fund raises debt – typically $4 for every $1 of its own money – to buy out companies. Claiming returns of 50% or more, they attracted $106bn in 2005, twice the 2004 figure, and are expected to draw in even more this year to a total of half a trillion dollars. This will bankroll them to spend $2.5 trillion in dealing and raiding.
Investment banks pocket fees and commissions of all kinds. They broker bids, advise on tenders, get commission for selling target assets and then collect again when the target company goes public again. They pocketed $11.8bn in 2005 from PE business and some $25bn in 2004 from hedge funds. Goldman Sachs, the largest of the investment banks, reported a staggering $2.6bn profit on $10bn of revenue for the first three months of 2006. Not content with just skimming off the cream, they are increasingly trying to milk the cow themselves, engaging in trading activities of their own on a massive scale, which now exceed even the hedge funds.
This is the world Henry Paulson comes from: his predecessors were representatives of industrial capital – Paul O’Neill ran Alcoa aluminum and John Snow ran the CSX railroad. Before taking the job, Paulson was chief executive of Goldman Sachs. Paulson’s appointment represents the full ascendancy of US finance capital over industrial capital. With a personal fortune of over $700m, he’s obviously got the vital interests of US finance capital at heart. How completely appropriate to put a professional parasite in charge of US parasitism!
Steve Palmer
US correspondent
FRFI 192 August / September 2006
