Manual Dominion of Interest Rates: Credit and Debt, U.S. Federal Budget, Global Arena

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The OECD has downgraded growth and employment expectations while calling on the Morrison government to lift spending. Credit: Gabriele Charotte. The decision followed calls from the Reserve Bank of Australia RBA , which has sliced official interest rates to a record low 0.

But economists have warned the new spending will equate to less than 0. It also expects private consumption, which accounts for about 60 per cent of total economic activity, to barely grow faster than inflation over the next two years. It has now lifted its forecasts, tipping unemployment to average 5. While the government has argued its recent tax cuts will help households offset slow wages growth, the OECD and other organisations such as the RBA have noted overall tax levels are increasing as the budget returns to surplus.

And it came at a pivotal time. While the plan was still in research and drafting stages in late , the Plaza agreement brought about the precipitate expansion in value of the yen—which, at one stage, almost doubled against the dollar. But a look at the background against which the currency realignment took place helps to explain why it too contributed to triggering the Tokyo land boom. Large Japanese corporations did not raise capital in equities markets but borrowed it, usually from banks or insurance companies within their own industrial groups, keiretsu.

These institutions dispensed the high private savings of the nation more or less at the informal direction of the Ministry of Finance, acting through the Bank of Japan. That began to change from the late s. These strong earnings, in turn, began to make it unnecessary for many big Japanese companies to rely on heavy borrowings to finance their continued growth. And the Ministry of Finance began to feel a threat to the considerable measure of informal power it had long held over these companies through credit controls.

To reinforce its influence in the industrial sphere, the Ministry of Finance switched to a policy of encouraging continued corporate borrowing, not on the basis of actual capital needs but on the basis of supporting the banks—which then had no other customer base as strong as the major companies, inside or outside Japan.

And it encouraged the banks to spread their liberal lending activities downward and outward through the economy, to medium- and small-size companies, opening up a second tier of liquidity circulation and another arena for land speculations with borrowed cash. In turn, the companies applied much of this cheap money not to operations but to speculation in the capital market, or zaiteku.

Rather than give up market share, the corporations and their suppliers kept price hikes to a minimum and swallowed consequent losses. At the same time, they scrambled to find new ways to lower their production costs and regain some balance through the diminished yen prices of imported raw materials and component parts. The Finance Ministry also responded admirably: first, it conveniently yielded to foreign pressure to lower national interest rates to the lowest in the developed world; second, it pursued deregulation and domestic stimulation in the ways that flooded the national economy with extra cash.

The government was thereby setting the stage for borrowed money to finance the domestic demand surge, the production cost reduction, and the absorption of out-and-out losses that would help Japanese companies survive the high yen. Once these companies got through the hard year of , when GNP growth slowed to 2. Residential, industrial, commercial: the increases spread all across the real estate landscape.

Corporations suddenly found the asset value of the land on their books going up by multiples. The 13 most important Japanese city banks and other big lenders such as insurance companies were transformed into fountainheads of corporate credit that grew along with the speculative value of the land—whether sold or unsold. Mitsubishi Estate, for example, which made such a dramatic appearance in the U. That is an amount equal to half the value of the entire Tokyo Stock Exchange as it stood at the end of But even these hidden—and therefore untaxed—profits were not the full value that Japanese corporations derived from the land boom.

And that company is, in turn, a holder of a large number of their shares. Because of tight government regulation of the domestic financial industry and because of low prevailing interest rates, funds raised for zaiteku investment during this period had no truly inviting domestic targets other than the Tokyo stock market or else, overseas financial markets.

Fueled by speculative borrowings against the land values held by businesses and private landlords even home owners , the Tokyo stock market swung into its now famous skyward climb. Shares held by corporations became another asset with rapid rates of growth in value and in value as collateral for borrowings. And, of course, the more capital acquired by corporations in the stock market, the more available to them for further nonoperating investment—such as more land.

And then a third kind of leveraging of the land began. As corporations watched the values of their shares rise, they have increasingly turned to the equities markets for something rather novel in Japan: major capital increases. In other words, they expect their lenders and family members to keep the proportions of total corporate shareholding stable by absorbing the appropriate percentage of the new issue.

These shareholders do so on the strength of two considerations. First, as long as share prices are rising, the value of their own portfolios, which serve as a primary collateral for still more borrowing at the bank, grow with each acquisition of shares. Second, they can each in turn ask all the other creditors and family members to buy similar proportions of their new issues when they make them. In effect, these purchases can thus be made close to cost-neutral: what cash a corporation gives to a family member to buy its new shares comes back more or less, sooner or later, when it sells its new shares to the same family member.

And, of course, the companies can collateralize the resulting rise in the values of both portfolios for further borrowing. They also use these accelerated share values as collateral in other ways: by issuing large amounts of warrants and convertible bonds, at home and overseas, at very low issuing costs. If all of this seems dizzying, consider the larger implications. Land is the ultimate security for a vast portion of all of this debt and much of the new capitalization. Other creditors active in the real estate and corporate and household lending markets, such as insurance companies, leasing companies, and financial services firms, presumably add heavily to the volume.

If those land prices were to decrease sharply, so also would the abilities of many of the landowners who are not first-rank corporations to service the debts they collateralize—especially those companies in the real estate industry itself.

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If there were defaults, the business results of the lenders would also decrease sharply. The lenders would, in turn, find the value of much, if not all, of their real estate collateral declining drastically—and with it the stability of their vast loan portfolios. And if stock assets had to be liquidated on any large scale to meet loan payment schedules, the stock market would certainly be affected as well. Under democratic capitalism, governments are theoretically required to honour both principles simultaneously, although substantively the two almost never align.

In practice they may for a time neglect one in favour of the other, until they are punished by the consequences: governments that fail to attend to democratic claims for protection and redistribution risk losing their majority, while those that disregard the claims for compensation from the owners of productive resources, as expressed in the language of marginal productivity, cause economic dysfunctions that will become increasingly unsustainable and thereby also undermine political support. In the liberal utopia of standard economic theory, the tension in democratic capitalism between its two principles of allocation is overcome by turning the theory into what Marx would have called a material force.


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To date, non-market notions of social justice have resisted efforts at economic rationalization, forceful as the latter may have become in the leaden age of advancing neoliberalism. People stubbornly refused to give up on the idea of a moral economy under which they have rights that take precedence over the outcomes of market exchanges.

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For the economic mainstream, disorders like inflation, public deficits and excessive private or public debt result from insufficient knowledge of the laws governing the economy as a wealth-creation machine, or from disregard of such laws in selfish pursuit of political power. By contrast, theories of political economy — to the extent that they take the political seriously and are not just functionalist efficiency theories—recognize market allocation as just one type of political-economic regime, governed by the interests of those owning scarce productive resources and thus in a strong market position.

An alternative regime, political allocation, is preferred by those with little economic weight but potentially extensive political power. From this perspective, standard economics is basically the theoretical exaltation of a political-economic social order serving those well-endowed with market power, in that it equates their interests with the general interest. It represents the distributional claims of the owners of productive capital as technical imperatives of good, in the sense of scientifically sound, economic management.

In the language of mainstream economics, crises appear as punishment for governments failing to respect the natural laws that are the true governors of the economy. The only politics such a theory can envisage involves opportunistic or, at best, incompetent attempts to bend economic laws. Good economic policy is non-political by definition. The problem is that this view is not shared by the many for whom politics is a much-needed recourse against markets, whose unfettered operation interferes with what they happen to feel is right. Unless they are somehow persuaded to adopt neoclassical economics as a self-evident model of what social life is and should be, their political demands as democratically expressed will differ from the prescriptions of standard economic theory.

The implication is that while an economy , if sufficiently conceptually disembedded, may be modelled as tending toward equilibrium, a political economy may not, unless it is devoid of democracy and run by a Platonic dictatorship of economist-kings. Capitalist politics, as will be seen, has done its best to lead us out of the desert of corrupt democratic opportunism into the promised land of self-regulating markets. Up to now, however, democratic resistance continues, and with it the dislocations in our market economies to which it continuously gives rise.

Post-war democratic capitalism underwent its first crisis in the decade following the late s, when inflation began to rise rapidly throughout the Western world as declining economic growth made it difficult to sustain the political-economic peace formula between capital and labour that had ended domestic strife after the devastations of the Second World War.

Essentially that formula entailed the organized working classes accepting capitalist markets and property rights in exchange for political democracy, which enabled them to achieve social security and a steadily rising standard of living. More than two decades of uninterrupted growth resulted in deeply rooted popular perceptions of continuous economic progress as a right of democratic citizenship—perceptions that translated into political expectations, which governments felt constrained to honour but were less and less able to, as growth began to slow.

The structure of the post-war settlement between labour and capital was fundamentally the same across the otherwise widely different countries where democratic capitalism had come to be instituted.


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It included an expanding welfare state, the right of workers to free collective bargaining and a political guarantee of full employment, underwritten by governments making extensive use of the Keynesian economic toolkit. When growth began to falter in the late s, however, this combination became difficult to maintain. Government policy thus leveraged the bargaining power of trade unions beyond what a free labour market would have sustained.

In the late s this found expression in a worldwide wave of labour militancy, fuelled by a strong sense of political entitlement to a rising standard of living and unchecked by fear of unemployment. Their only way out was an accommodating monetary policy which, while allowing free collective bargaining and full employment to continue to coexist, did so at the expense of raising the rate of inflation to levels that accelerated over time.

In its early stages, inflation was not much of a problem for workers represented by strong trade unions and politically powerful enough to achieve de facto wage indexation. Inflation comes primarily at the expense of creditors and holders of financial assets, groups that do not as a rule include workers, or at least did not do so in the s and s. As the two sides act on mutually incompatible ideas of what is theirs by right, one emphasizing the entitlements of citizenship and the other those of property and market power, inflation may also be considered an expression of anomie in a society which, for structural reasons, cannot agree on common criteria of social justice.

It was in this sense that the British sociologist, John Goldthorpe, suggested in the late s that high inflation was ineradicable in a democratic-capitalist market economy that allowed workers and citizens to correct market outcomes through collective political action.

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For governments facing conflicting demands from workers and capital in a world of declining growth rates, an accommodating monetary policy was a convenient ersatz method for avoiding zero-sum social conflict. In the immediate post-war years, economic growth had provided governments struggling with incompatible concepts of economic justice with additional goods and services by which to defuse class antagonisms. Now governments had to make do with additional money, as yet uncovered by the real economy, as a way of pulling forward future resources into present consumption and distribution.

This mode of conflict pacification, effective as it at first was, could not continue indefinitely. In the end, by calling forth Kaleckian reactions from increasingly suspicious capital owners, inflation will produce unemployment, punishing the very workers whose interests it may initially have served.