1 Introduction

PALGRAVE INSIGHTS INTO APOCALYPSE ECONOMICS

SERIES EDITOR: RICHARD WESTRA

Financing the Apocalypse

Drivers for Economic and Political Instability

Palgrave Insights into Apocalypse Economics

Series Editor Richard Westra Graduate School of Law Nagoya University Nagoya-shi, Aichi, Japan

Tis series is set to become the lodestone for critical Marxist and related Left scholarship on the raft of apocalyptic tendencies enveloping the global economy and society. Its working premise is that neoliberal policies from the 1980s not only failed to rejuvenate capitalist prosperity lost with the demise of the post-Second World War ‘golden age’ economy but in fact have generated a widening spectrum of pathologies that threaten humanity itself. At the most fundamental level the series cultivates state of the art critical political economic analysis of the crises, recessionary, defationary and austerity conditions that have beset the world economy since the global meltdown of 2008–2009. However, though centered on work that critically explores global propensities for devastating fnancial convulsions, ever-widening inequalities and economic marginalisation due to information technologies, robotised production and low wage outsourcing, it seeks to draw on exacerbating factors such as climate change and global environmental despoliation, corrupted food systems and land-grabbing, rampant militarism, cyber crime and terrorism, all together which defy mainstream economics and conventional political policy solutions.

For critical Marxist and related Left scholars the series ofers a non-sectarian outlet for academic work that is hard-hitting, inter/transdisciplinary and multiperspectival. Its readership draws in academics, researchers, students, progressive governmental and non-governmental actors and the academically-informed public.

More information about this series at http://www.palgrave.com/gp/series/15867

Joel Magnuson Financing the Apocalypse

Drivers for Economic and Political Instability

Joel Magnuson Independent Researcher Tualatin, OR, USA

ISSN 2523-8108 ISSN 2523-8116 (electronic) Palgrave Insights into Apocalypse Economics ISBN 978-3-030-04719-1 ISBN 978-3-030-04720-7 (eBook) https://doi.org/10.1007/978-3-030-04720-7

Library of Congress Control Number: 2018962763

© Te Editor(s) (if applicable) and Te Author(s), under exclusive license to Springer Nature Switzerland AG, part of Springer Nature 2018 Tis work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifcally the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microflms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Te use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specifc statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Te publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Te publisher remains neutral with regard to jurisdictional claims in published maps and institutional afliations.

Cover image: © Dina Belenko/Alamy Stock Photo

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List of Figures

Fig. 4.1 Efective and statutory tax rates in G20 Countries, 2012 (Source Congressional Budget Ofce, the Organization for Economic Co-operation and Development, and the Oxford University Centre for Business Taxation) 97 Fig. 6.1 Gini Index for the United States, 1967–2015 (Source Federal Reserve District Bank of St. Louis, https://fred.stlouisfed.org/graph/?graph_id=212325& updated=2000 and Luxembourg income study, https://www.lisdatacenter.org/our-data/lis-database/) 155 Fig. 7.1 Federal debt as a percentage of GDP, 1980–2018 (Source Federal Reserve Bank St. Louis, https://fred. stlouisfed.org/data/GFDEGDQ188S.txt) 172 Fig. 7.2 Stocks traded in total value as a percentage of global GDP (Source Te World Bank: World Federation of Exchanges database. https://data.worldbank.org/indicator/CM.MKT. TRAD.GD.ZS?view=chart) 174 Fig. 9.1 S&P Case-Shiller US National Home Price Index, 1987–2018 (Source Federal Reserve Bank of St. Louis and Standard and Poors, S&P/Case-Shiller U.S. National Home Price Index, https://fred.stlouisfed.org/series/ CSUSHPINSA) 225

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Fig. 9.2 Te upside-down pyramid Fig. A.1 S&P 500 Index, 1980–2018 (Source S&P 500 Historical data, https://www.google.com/ search?q=s%26p500+historical+chart&rlz=1C1CHBF_ enUS798US798&oq=s%26P500+hi&aqs=chrome. 3.0j69i57j0l4.10349j0j8&sourceid=chrome&ie=UTF-8. Google and the Google logo are registered trademarks of Google Inc., used with permission) Fig. A.2 S&P Case-Shiller U.S. National Home Price Index, 1987–2018 (Source Federal Reserve Bank of St. Louis and Standard and Poors, S&P/Case-Shiller U.S.National Home Price Index, https://fred.stlouisfed.org/series/ CSUSHPINSA) 228

318

319

Fig. A.3 Federal Reserve Total Assets (x trillion) (Source St. Louis Federal Reserve, https://fred.stlouisfed.org/graph/?id= WALCL,TLAACBW027SBOG,#0) 319

Fig. A.4 Atmospheric carbon dioxide, 1975–2018 (parts per million) (Source National Oceanic and Atmospheric Administration, Climate Change: CO2 Breaks Record in 2017, https://www.climate.gov/newsfeatures/understanding-climate/ climate-change-atmospheric-carbon-dioxide) 320

Fig. A.5 Gini Index for the United States, 1967–2015 (Source Federal Reserve District Bank of St. Louis, https://fred.stlouisfed.org/graph/?graph_id=212325& updated=2000 and Luxembourg income study, https://www.lisadatacenter.org/our-data/lis-database/) 321

List of Tables

Table 3.1 Top 15 companies compared to ten national GDPs by country Table 3.2 Dollar value of merger deals in 2017 and 2018 (x billions) 45

66 Table 4.1 Corporate tax rate schedule, 2016 97 Table 4.2 Congressional budget ofce projected defcits, 2018–2028 99 Table 12.1 Energy, drawdown, costs, and savings 300

ix

1

Introduction

As we tour the four-hundred-year history of capitalism through its various phases of development, we see that fnancial system instability is always there lurking in the shadows. For at least four centuries the historical record is littered with periodic events of wild swings in fnancial markets, massive debt defaults, bank failures, and general economic instability. Historically, booms, busts, crises, and bailouts have run through familiar patterns of repetition, though they are becoming more frequent now and more severe. Te major stock market crash and banking crisis that occurred in 1929 seemed to be a once-in-a-lifetime event, but similar patterns of instability are occurring at least once every decade now and are happening simultaneously around the world with growing magnitude. Tis is particularly noticeable in the last thirtyplus, or what we will be referring to as the Greenspan Era: from 1987 when the stock market took a serious tumble and Alan Greenspan assumed the chair position at the Federal Reserve to the Banking Crisis of 2007–2009 and on.

Like all fnancial crises, the ones that have occurred during this period have multiple causes. Arguably the most signifcant during the Greenspan Era is the phenomenon of fnancialization. Since the

© Te Author(s) 2018 J. Magnuson, Financing the Apocalypse, Palgrave Insights into Apocalypse Economics, https://doi.org/10.1007/978-3-030-04720-7_1

1

banking crisis, there has been much discussion in heterodox circles about the economics of fnancialization, though it is largely ignored in the mainstream. Financialization is a process in which fnancial institutions and markets systematically gain infuence and control over increasingly large segments of the economy. Te process has roots that go back to the beginning of capitalism, but has risen to a very high profle during the Greenspan Era. It is a refection of a broader systemic crisis that has been erupting in this period in which companies in signifcant numbers are fnding it increasingly difcult to generate profts through traditional means of actual producing things for sale in markets.

Built into the core logic of capitalism is the need to generate returns for investors and to plow back a portion of those returns to fuel expansion. Te imperative to generate investor income drives businesses to continuously seek out or fabricate markets and opportunities for investment. Eventually, this exploration reaches limitations, sales slow to a trickle, and economic activity gets stuck in the mud. Authors John Bellamy Foster and Robert McChesney describe this process as capitalism’s long-run tendency toward an “endless crisis,” which relies on injections of “external stimuli” to keep it going such as government spending programs or new technological innovations or the discovery of new markets.1

Te fnancial system has served to extend this process of innovation. As the hunt for proftable opportunities becomes more desperate, companies are scurrying into proftable opportunities as quickly as possible and jump out just as quickly when profts disappear. Tis requires a facile investment ecosystem in which capital is liquid enough to be moved anywhere swiftly, then settles in an investment fund, then briskly turn to cash and move to yet another location, like bees going from one fower to another searching for nectar. Te more rapidly this takes place, the more pressure there is on the fnancial system to mobilize investment funds, and to underwrite and continually recreate new instruments: securities, commodities, derivatives. Tis drives the securitization, commodifcation, and fnancialization of every possible thing imaginable. Financial services are indeed becoming an increasingly signifcant sector. In the mid-twentieth century, fnancial services constituted about 2.5% of national output, then it grew to about

4% in 1980, then soared to 8.3% by 2006 right before the banking crisis began.2 Tis goes a long way to explaining how and why our economies are becoming increasingly unstable; for in the historical view, there is always boom-bust instability that follows.

Tere are other causes of economic undulations during the Greenspan Era including the policies of the Federal Reserve. Among the most outstanding characteristics of the Greenspan Fed is its commitment to fooding the fnancial system with generous amounts of cheap credit, which stimulated a massive debt bubble. Household debt was 56% of national output in 1987, then it steadily rose to reach 63% in 2000, and then soared to 98% by the frst quarter of 2008 on the eve of the banking crisis.3 Household debt has been trimmed back to 78.7% yet remains persistently high by historical comparison.4

Public debt as a percentage of GDP has also increased during the Greenspan Era. It was 48% in 1987, hit a 65% peak in 1995, then tapered of temporarily. When the George W. Bush tax cuts for the wealthy were put into efect in 2001, public debt resumed its upward climb, and then soared during the Great Recession and continued to climb after the recession was over to hit 105% of GDP by 2016.5 Te Trump tax cuts have pushed public defcits and debts to new highs. Cheap and abundant credit fowing out of the Fed also served to keep interest rates on Treasury bonds at rock bottom. Pension fund managers could not meet the expectation of their retirees’ fnancial plans and became compelled to seek out other securities for investment. As they did, they and other fund managers ventured further and further into the higher risk territories of corporate bonds that are rated in a range from sterling triple A to junk.

Among the biggest concerns regarding the debt bubble is the high amount of corporate debt and the concern that the low-interest rates on this debt do not accurately refect risk. To give some perspective on this, the total dollar amount of capital traded in the US stock markets sums to about $30 trillion the ups and downs of which we hear about throughout each working day. Te corporate bond market is much larger—about $41 trillion as of this writing. To help facilitate this expansion of debt, the Federal Reserve has jumped from holding about $800 billion in bonds, to over $4 trillion, which is about a

400% increase (see Appendix). Incentivized by low rates and available credit, corporations have charged up their debt over the last decade from 16% of national output to about 25%.6 As the profle of corporate debt increases, so does the element of risk making the fnancial system increasingly vulnerable.

Another aspect is technology and the constant push for fnancial innovation. As the fnancial sector grew to be the glistening centerpiece of the economy during the Greenspan Era, Wall Street was the most seductive place to pursue a career in ways that traditional banking could never be. People with real talent, particularly those gifted with skills in creating mathematical algorithms, gravitated toward the steel and glass towers in the fnancial district of New York. Math models and computer models for trading became more complex and sophisticated and the cult of technological wizardry gave the illusion that the more complex the instruments created by investment banks, the more investors could speculate without risk. Innovation thus became the justifcation for the creation of new generations of securities and derivatives and new markets for trading. Tis combined with a growing digital infrastructure heightened the process of fnancialization. Financial engineers on Wall Street have been continuously contriving new ways to aggregate massive amounts of cash for multinational corporations and to make speculative trades in staggering amounts on computer screens. Wall Street corporations were at the center of fnancial world and the people there knew it. Teir careers have been centered on a mandate to score profts for themselves and for their clients, even if this meant running the risk of destabilizing economies everywhere, which is precisely what they did. All of this carries on under the banner of anti-government, pro-market neoliberal propaganda. But there is a deeper institutional aspect to both the phenomenon of fnancialization and the instabilities it has engendered.

Te aim of Financing the Apocalypse is to add this dimension to the discourse. Te core narrative in the story presented here is that fnancialization and the fragilities that come with it are the outward manifestations of deep institutional pathologies that have been building in the system for over a century. Specifcally, we are referring to system conditions that are associated with the ascent of corporate hegemony that came into its full maturity during the Greenspan Era.

Several decades before the Greenspan Era began this institutional perspective on the evolution of corporate hegemony originated with the long-term vision held by economist and grandfather of institutional economics, Torstein Veblen.

Veblen’s Secular Trend

A century ago, Torstein Veblen looked to the future and didn’t like what he saw. In one of the very last pieces of writing toward the end of his life, he outlined what he called “Te Secular Trend.”7 He examined past trends, present conditions, and extrapolated to the future of economic society in America that seems certain to tear itself apart into an almost biblical state of antagonistic dichotomy among economic institutions. For Veblen economic institutions are simply habituated ways that humans behave in society economically or “action-patterns induced by the run of past habituation.”8 What he saw for our future was a deep schism opening between healthy, well-adjusted institutions and those that are pathological and maladjusted.

On the well-adjusted side, Veblen identifed habitual ways of behaving that are grounded in science, problem-solving, creativity, and are useful to the human life process. Tey guide our work in ways that are more useful to people, not because there are fortunes to be made, but because of the historically rich craft traditions in which humans are fascinated with the idea of doing things better. Tese stand on the side of progress, appropriately implemented technology, stability, and the provision for the general wellbeing of the population.

On the other side are maladjusted institutions that exist to accumulate ostentatious fortunes, status, and conquests for a small class of the wealthy and powerful “absentee owners.” Rather than contribute to progress, they smother the economy with greed, corruption, and stagnation. Tey do not create, they own and extract it. For Veblen, the large publicly traded corporation emerged on this side of the rift and came to dominate the economic scene completely. Veblen attested to the rise of the corporation, not as a business model, but as a dominant institution that he called, “the Interests.” By its own mandate, it is fashioned to be

indiferent to social provisioning, and is governed by the narrowest of objectives—to make money for vested owners, “Te efective control of the economic situation, in business, industry, and civil life, rests on the on the control of credit. Terefore, the efectual exercise of initiative, discretion, and authority is perforce vested in those massive aggregations of absentee ownership that make the Interests.”9 What was most troubling for Veblen was that he saw a future in which the corporate world would push all else aside and the entire economic system would cease to be concerned about providing for the needs of people and only about fnancial gain—a pathological end game.

A century before they became household names, Torstein Veblen warned of the formidable power of Wall Street and giant corporations. He looked to the future and saw that if our society allows corporate entities to become the size of Jupiter, all else will become its moons and satellites, with a gravitational bind among them that is so strong that, “the rest of the community, the industrial system and the underlying population are at the disposal of the Interests.”10 For Veblen, the Interests represents the principal shareholders and the corporate class of professionals that work at the top of the hierarchy. He sees the members of this class positioning themselves to take control of the economy with a patent indiference to economic stability, industrial progress, or anything else that might contribute to social wellbeing beyond fnancial gain. In his view, the corporation is a legal-fnancial institution that is structured around securities trades for capitalization and commodity trades for profts. It is an institution that is programmed such that its stakeholders are not required to accomplish anything, or even care what the business does, except generate returns for owners. Rather the “ways and means of business, to be managed in a temperate spirit of usufruct for the continued and cumulative beneft of the major Interests and their absentee owners.”11

Usufruct, in Veblen’s somewhat arcane terminology, means to exploit the economic system for the aggrandizement of individuals who are already wealthy and powerful. To that end, the corporate sector became “the main controlling factor in the established order of things” (ibid., 4).12 He attested to an evolutionary drift toward corporate hegemony in which all other major institutions were becoming increasingly rendered under