CLUELESS: Bernanke’s desperate gambit
I stopped my examination of Bernanke’s approach to this crisis and the problem of deflation after looking at his 1991 paper and his speech in 2002. I now want to return to that series, examining two of his speeches this to discuss the problems confronting bourgeois monetary policy in the crisis that began in 2007-8.
Crises in Marx’s labor theory of value
Key to understanding Bernanke’s approach to this crisis is how crises are explained by Marx’s labor theory of value. As Ross Wolfe mentions in a recent post there are actually several different interpretations of Marx’s crisis theory circulating among Marxists, each of which proposes subtle and not so subtle alternative explanations for crises — among these are the immiseration thesis, the falling rate of profit thesis, the overproduction thesis and the underconsumption thesis.
But which interpretation of Marx’s theory is correct? I am not particularly enamored of any of these interpretations of Marx’s argument and prefer to refer directly to Marx’s own argument in Chapter 15 of Capital volume 3, where he offers his argument on absolute overaccumulation of capital. The idea of absolute overaccumulation is not well favored among Marxist academics precisely because it predicts the breakdown and inevitable collapse of capitalism, independent of the action of the working class. This argument is pooh-poohed, because many Marxist academics consider it overly deterministic since it gives no role to conscious action by the working class. Many Marxists argue it was never meant to be anything more than a thought experiment carried to its extreme end.
But if Marx’s argument on absolute overaccumulation is taken literally, at a certain point capitalism can no longer create profits. As everyone knows, profit is the driving force of capitalist production — absolutely nothing is produced unless it creates profit. To say at a certain point capitalism will no longer be able to create profit is essentially to state at that point capitalist production comes to a standstill as a result of its own development.
Marx fully understood the consequences of his prediction, and devoted a great deal of time explaining why, in the interim, capitalism did not collapse. His explanation was that the tendency toward collapse was offset by countervailing tendencies that interrupted the primary tendency toward collapse. An example of a countervailing tendency would be the export of capital to new markets — geographical expansion of the market for goods. There are any number of these countervailing tendencies, but they are not of interest here. We just need to remember the tendency toward collapse can be offset by countervailing tendencies.
What has to be understood is that despite these countervailing tendencies capitalism has a definite and irreversible tendency toward collapse that is essential to it as a mode of production. Unless there were countervailing forces to this collapse, capitalism would have never survived the 19th century. The fundamental tendency toward collapse is to be found in the fact that capitalism is an explosively productive mode; it does not, as some argue, have any tendency toward stagnation or decay — rather the reverse is true: if left to its own devices capitalism would have abolished itself in a matter of decades.
What kills capitalism is that it simultaneously rests on necessary labor and abolishes this necessary labor. Capitalism, in other words, kills itself by making labor unnecessary, by creating abundance. Marx called this an inherent tendency toward the absolute development of the productivity of labor. The flip side of the tendency toward absolute development of the productivity of labor is the absolute overaccumulation of capital: capital continuously runs into a limits on the expansion of production by producing “too much” capital to continue functioning as capital. This leads to the periodic eruption of capitalist crises and, eventually, to the death of capitalism.
There is no “agency” in this argument — no assumption people even know what is happening or set out to make it happen. The tendency toward self-destruction arises directly from the stupendous improvement in the productivity of labor. Once capitalism has entered the stage of absolute overaccumulation of capital, the mode of production has finally entered the stage of collapse.
Absolute overaccumulation and fascism
As I noted above, this interpretation of the labor theory of value is controversial. Marxists are split between two schools, one of which holds to the idea of absolute overaccumulation more or less as I outlined it above, and a school that holds to the idea that capitalism can only be overcome by a political effort. See this essay by the economist Michael Roberts who compares the arguments of the two schools of thought. However, the issue is not so cut and dried since even among the former (sometimes pejoratively called “catastrophists”) it was always assumed that the final crisis would trigger a socialist uprising among the working class owing to massive unemployment and poverty. As we all know it did not — when the crisis of absolute overaccumulation finally materialized in the Great Depression it triggered fascism, not a socialist revolution. An alternative outcome predicted also predicted by Marx’s theory.
The question we need to answer is how the emergence of the fascist state compensated for the breakdown of capitalism — how does fascism work? And, surprisingly, this is the very question Bernanke is trying to answer in his 1991 paper — although he has no idea he is doing this.
To frame the answer in everyday language: what happens when the available supply of commodities chronically exceeds demand for those commodities? Prices fall, right? This is the commonsense version of what Marx was discussing in his theory of absolute overaccumulation of capital. However Marx pointed out that capitalism is not just, or even primarily, about the production of commodities — capitalism is about the production of profit. Once capitalism experiences a chronic and absolute glut of capital in all forms — a glut of commodities that are also the capital of the capitalist, but also a glut of means to produce these commodities and a glut of labor power to employ these means — this glut will compel commodities to sell below their capitalist values; essentially squeezing the profit rate to zero.
In other words, the problem wasn’t deflation — a generalized fall in prices — but that prices were now falling below the level necessary to maintain a sufficient mass of capitalist profits. As I pointed out in the previous posts in this series, falling prices had always accompanied the improvement in the productivity of labor brought about by capitalist production, only now deflation threatened the capitalist mode of production itself by compressing profits as well as prices. To prevent the collapse of capitalism, therefore, a means had to be found to prevent prices from falling even as the productivity of labor increased. And this was accomplished through fascist state economic and monetary policies — the methods for which Bernanke discusses in his 2002 speech.
Based on the above we can explain how fascism compensated for the capitalist breakdown that occurred during the Great Depression. The fascist state was not just a political structure of coercion, militarism and political repression as some imagine, it was a structure of accumulation of surplus value made necessary by the breakdown that emerged full-blown during the Great Depression produced by absolute overaccumulation of capital. A structure designed to prevent prices from falling and, therefore, to prevent a fall in the rate and mass of profits. Which is to say, fascism is the means by which labor power is continuously forced below its value by political means to subsidize profits during a phase of capitalism marked by breakdown. This now failing structure is presently the subject of a massive salvage effort by Washington.
Breakdown, or the limits of capitalist expansion
The argument the Marxist academy usually give against Marx’s theory of absolute overaccumulation is that this sort of capitalist deflation cannot happen to the entire economy at once. Capitalism, these skeptics say, is also described by Marx as a mode of production capable of adjusting to excess capital. This is true and goes a long way toward explaining how capitalism survived the Great Depression. One of the effects of overaccumulation produced by the growing productivity of labor is that the scale of capitalist production changes to compensate for lower prices and profits. Larger capitals with larger markets become necessary to continue accumulation; for instance, capital is exported in the form of commodities or even means of production, etc. to new markets in a vain attempts to offset falling prices in the home market.
But, sooner or later, even this adjustment of the scale of capitalist production to the improvement in the productivity of labor reaches its limit and a breakdown must occur. This results in a process Robert Kurz explained in his 1995 paper: when capitalism reaches the limits of its expansion, the total mass of productively employed capital begins to shrink. From this point forward, capitalism compensates for increasing productivity of labor by reducing the total mass of productively employed capital, and rendering ever larger quantities of capital, as well as workers, not simply idle for a period of time, but entirely materially superfluous to production altogether. The size and scale of the average productively employed capital continues to grow but, even with this growth, the total quantity of productively employed capital falls.
This is very stressful since this is a period of intense competition where which capital can function productively and which capitals must effectively stand idle is deadly serious. On the other hand, those capitals and even workers rendered materially superfluous to production scramble to engage in the wildest speculation and hare-brained schemes to keep their places in the social act of production — from financial Ponzi debt schemes to calling on the state to deport immigrant workers en masse — and much worse, as was proven at Auschwitz.
The quantity of productively employed capital, as a percentage of the total capital employed, contracts, while the percentage of capital now rendered superfluous constantly increases. The difference between the total quantity employed and the quantity of capital productively employed is the mass of materially superfluous capital described by both Postone in 1991 and Kurz in 1995. This is capital that is materially superfluous to the mode of production in either the form of variable capital (wages) or as constant capital (means of production) — which is to say this capital and labor power cannot be combined in the production process to produce surplus value.
I want to be completely clear on this: materially superfluous capital cannot become real capital, i.e., it cannot produce surplus value — it is completely and absolutely superfluous to material production entirely. This category continues to exists for one reason only: without an ever growing mass of superfluous economic activity capitalism would collapse immediately. I also want to go overboard emphasizing this, and to specifically identify this accumulated mass of materially superfluous capital, because this capital is expressed, in money form, as the growing mass of fictitious public and private debt that has accumulated since World War II. The massive and growing debt burden on society that we now experience is only the tip of the iceberg, beneath it is this proportionally great mass of materially superfluous physical capital and labor power.
This was the iceberg toward which the economy was moving in 2002 when Bernanke gave his famous deflation speech, and even then nothing could be done to avoid a catastrophic event. Which is to say, the so-called Great Financial Crisis of 2008 was only the superficial monetary expression of a fundamental breakdown of fascist state economic policy that had facilitated the accumulation of a massive quantity of superfluous labor and an equally massive quantity of entirely fictitious debt. With this breakdown, beginning in 2008, the entire structure of accumulation is now collapsing — and no alternative appears on the horizon.
It goes without saying, most Marxists have no clue this is happening, so it appears nowhere in any of the useless essays and books on the crisis by Marxists academics. The severity of the problem confronting capital can, however, be seen in the two speeches Bernanke gave this summer when he tried to put the best face on what is really a quite pessimistic state of affairs. Few folks even realize how desperate Bernanke’s gambit of continuous money printing is right now. It means he is willing to risk hyperinflation on the order of the Weimar Republic to contain this crisis. He does this knowing full well the risks posed by his policy and having made an extensive calculation of those risks. This implies that without this insane effort that threatens the very existence of the dollar a far worse outcome is waiting for capitalism. In that outcome it won’t matter that the dollar is reduced to a worthless scrip.
The failure of the first phase of Bernanke’s “non-traditional” monetary policy
Bernanke gave two speeches this year covering his assessment of Federal Reserve Banks efforts to manage “full employment” and “price stability” in the aftermath of the collapse of monetary policy. The first speech, an address at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, was titled, “Monetary Policy since the Onset of the Crisis”; the second speech was delivered to the audience of a seminar sponsored by Bank of Japan and the International Monetary Fund, Tokyo, Japan, titled “U.S. Monetary Policy and International Implications”.
It should be noted that monetary policy has indeed collapsed — this is what is meant by the term “non-traditional monetary policy”. Since there was no such thing as “traditional monetary policy” but only monetary policy itself, the collapse of this policy does not in the least suggest the Federal Reserve can now move to “non-traditional monetary policy”. Instead, it suggests the Fed is trying to revive monetary policy through the use of blunt economic force.
As will be recalled, Bernanke argued the Federal Reserve had two advantages not enjoyed by Japan when it suffer a financial crisis and the subsequent slide into deflation. First, Japan suffered a massive financial catastrophe in addition to deflation, which the US did not face in 2002. Second, Japan faced a political crisis resulting from intense internal bickering among the elite over how best to address economic problems, while the US faced no such political crisis in 2002.
Events beginning in 2007-8 proved Bernanke’s argument for American exceptionalism woefully inadequate. Beginning in 2007, the US experienced a credit market crash that was unprecedented in the history of capitalism, and this was quickly followed by a political crisis in Washington over how the collapse of fascist state economic policy could be revived.
Monetary policy proved incapable of stemming the collapse of the economy and soon Bernanke and the Fed encountered the much dreaded zero lower bound, even as the fiscal deficits run by the fascist state soared to level not seen since World War II. Both factors subsequently proved illusory: The US financial system was rocked by a massive credit crisis that effectively broke the mechanism Washington employed to facilitate the accumulation of debt in the economy. And, subsequent to this financial crisis, Washington is wracked by a political crisis over how it should be addressed, effectively paralyzing a bipartisan political consensus that had operated more or less over six decades since World War II. The monetarist policies of this consensus has failed on both counts; as critics warned well in advance, it had proved incapable of achieving either “financial stability” or “full employment”.
The situation is unprecedented: never before has the world market faced global overaccumulation of capital, with a value-less currency as the world reserve, and a near complete breakdown of the debt accumulation that, alone, gives this currency more than a merely notional value. This is basically the situation as it stood in August of this year, as Bernanke tried to put the best spin on what the Fed has done so far to restart the debt cycle in the face of growing potential for deflation. In his Speech a decade earlier, Bernanke has stated confidently,
“The logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”
Well, things had not turned out so sunny after all. In his August speech at Jackson Hole, Bernanke explained the Fed had rapidly pushed the policy rate to near zero in the face of the financial crisis; it had intervened in what remained of the financial markets, providing “liquidity” to Wall Street banks on the edge of collapse, and numerous central banks in dire financial difficulties; it had advanced loans to the banks on extremely easy terms, in a covert recapitalization effort. Despite these “heroic” acts, however, the economy continued to sink further into monetary crisis, with employment suffering, in absolute terms — 8.4 million — the worst collapse in the history of capitalism — even exceeding the Great Depression in absolute numbers of jobs lost in a comparable period.
“As the crisis crested, and with the federal funds rate at its effective lower bound, the FOMC turned to nontraditional policy approaches to support the recovery.”
Bernanke identified two categories of tools employed by the Fed: expanding its balance sheet, and communicating a commitment to do whatever it takes to restart the debt cycle through maintaining the lowest possible interest rates. As Bernanke put it, monetarist theory argued,
“Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy.”
So the theory went, at least. Since deflation threatens the prices of all assets, by purchasing federal and agency securities above the market price, Bernanke believed he could influence the market prices of more risky financial assets as well, making them look more attractive as collateral. As people were fooled into believing interest rates were going lower for a period of time, they might take the opportunity to incur debt. Finally, Federal Reserve money creation from nothing would stoke fears of inflation and counter the expectations of deflation of capital assets and commodities on the horizon. If folks think prices of assets and commodities are going up, the argument goes, they will rush out to get in at the bottom of the bubble.
So, in the first attempt at this silly idea, Bernanke explains the Fed purchased $1.7 trillion of worthless treasuries and agency debt; in the second round its added another $600 billion in treasuries; and then it tried swapping shorter term treasuries for longer term treasuries. The three efforts combined, Bernanke argued, seems to have had an effect on treasury yields, reduced mortgage interest rates, and triggered a new speculative bubble on the stock market. Despite the apparent impact, Bernanke admitted, the effects of all this effort can’t be precisely nailed down, because we can’t know how things might have turned out if the effort had not been made.
Still, he was confident it had an effect and may account for 2 million new jobs added to the economy during the period. The number of jobs sound impressive, until you realize the economy should have produced about 4.5 to 6 million jobs during the same period. Moreover, the economy was working off a deficit in jobs creation of 8.4 million jobs lost in the initial phase of the contraction. To return anywhere close to the path of average jobs growth before the crisis, policy would have had to produce at least 13 million jobs. Clearly, even if “the logic of the printing press” was working, it was not anywhere near as effective as was required by the crisis in the aftermath of the collapse of fascist state economic policy. Moreover, the “recovery” is now more than 40 month old, with the average number of months between post war recessions of about 57 months. For all Bernanke’s talk about the effectiveness of his tools for fighting deflation, Federal Reserve action appears no more effective than the Bank of Japan’s actions before it.
The second phase of Bernanke’s “non-traditional” monetary policy
Although he did not state it at Jackson Hole in August of this year, Bernanke and the majority of the Federal Reserve board had already come to the conclusion that quantitative easing in the previous phase had failed. By September it was clear the world market was not recovering and every indication was that neither employment nor any other indicator was responding to “the logic of the printing press”. What is more, far from showing signs of recovery, the global economy was settling into another period of decline as euro-zone kept to its commitment to austerity and “structural labor adjustment”.
Bernanke’s speech before the audience of the IMF seminar in Japan reflected this dire assessment:
The U.S. economy has faced significant headwinds, and, although the economy has been expanding since mid-2009, the pace of our recovery has been frustratingly slow. The headwinds include the effects of deleveraging by households, the still-weak U.S. housing market, tight credit conditions in some sectors, spillovers from the situation in Europe, fiscal contraction at all levels of government, and concerns about the medium-term U.S. fiscal outlook. In this environment, households and businesses have been quite cautious in increasing spending. Accordingly, the pace of economic growth has been insufficient to support significant improvement in the job market; indeed, the unemployment rate, at 7.8 percent, is well above what we judge to be its long-run normal level. With large and persistent margins of resource slack, U.S. inflation has generally been subdued despite periodic fluctuations in commodity prices. Consumer price inflation is running somewhat below the Federal Reserve’s 2 percent longer-run objective, and survey- and market-based measures of longer-term inflation expectations have remained well anchored.
The global economic outlook also presents many challenges, as you know. Fiscal and financial strains have pushed Europe back into recession. Japan’s economy is recovering from last year’s tragic earthquake and tsunami, and it continues to struggle with deflation and persistent weak demand. And in the emerging market economies, the rapid snap-back from the global financial crisis has given way to slower growth in the face of weak export demand from the advanced economies. The soft tone of global activity is yet another headwind for the U.S. economy.
Looking ahead, economic projections of Federal Open Market Committee (FOMC) participants prepared for the Committee’s September meeting called for the economic recovery to proceed at a moderate pace in coming quarters, with the unemployment rate declining only gradually. FOMC participants generally expected that inflation was likely to run at or below the Committee’s inflation goal of 2 percent over the next few years. The Committee also judged that there were significant downside risks to this outlook, importantly including the potential for an intensification of strains in Europe and an associated slowing in global growth.
The response of the world market to Federal Reserve policy four years into the crisis was disappointing to say the least. In response, Bernanke and the Federal Reserve decided to double down on an already failed effort, and, moreover, go all in on an orgy of continuous money printing until the economy shows signs of responding.
The FOMC coupled these changes in forward guidance with additional asset purchases, announcing that it will purchase agency mortgage-backed securities (MBS) at a pace of $40 billion per month, on top of the $45 billion in monthly purchases of long-term Treasury securities planned for the remainder of this year under the MEP. The FOMC also indicated that it would continue to purchase agency MBS, undertake additional asset purchases, and employ other tools as appropriate until the outlook for the labor market improves substantially in a context of price stability.
The announcement is breathtaking, since, as noted before, Bernanke essentially stated the Federal Reserve was willing to risk collapse of the dollar by doubling down without limit on a risky gamble to prevent the collapse of prices. Moreover, he was making this bet without explaining why, in his opinion and the opinion of Federal Reserve scholars, the previous, more limited, attempts at just this sort of policy had not worked thus far. Bernanke was essentially leaving his audience to assume the problem lay in the limited nature of the previous efforts, not the basic fallacy underlying Federal Reserve monetary policy.
The argument of the monetarist school rests on the quantity theory of money fallacy, which states prices are proportional to the quantity of money in circulation. The argument essentially assumes commodities enter circulation without any value, and only acquire value by being exchanged for money. Monetarism is a remarkably primitive theory that seriously argues money can give value to products of labor itself simply by being exchange for them. To call it a theory in fact is to grant more respectability than it deserves — it is to economic theory, what creationism is to evolution.In 2002, Bernanke, for instance, told his audience, “Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply.” Yet, in the same breath, Bernanke also argued this “value”, which in monetarist theory arises solely from the scarcity of money, can be imparted to commodities simply by printing more money.
The problem with Bernanke’s monetarist argument in 2002 is that in an inconvertible paper currency regime the values of commodities are only represented symbolically by a given quantity of currency in circulation. The currency does not, of itself, have any independent value of its own and therefore has no value to impart to commodities. If this were not true, hyperinflation would be impossible, since the reason hyperinflation bursts occur is that the quantity of fiat currency in circulation (and, therefore, prices denominated in this valueless currency) have nothing to do with the value of commodities in circulation.
So, as I stated in the previous post on this subject, fiat money already treats commodities as if they have no prices. It is the recognition within commodity production that commodity production has already outlived it usefulness to society. This problem cannot be solved by creating more money from nothing anymore than real scarcity can be overcome by printing pictures of commodities.
This suggests to me that Ben Bernanke may just have another target in his sights by with his insane money printing scheme. I will look at this idea in my next post.