Thursday, September 1, 2011

Can Karl Marx save capitalism?

The spirit of Karl Marx has risen from the grave amid the financial crisis and subsequent economic slump.

Policy makers struggling to understand the barrage of financial panics, protests and other ills afflicting the world would do well to study the works of a long-dead economist: Karl Marx.

The sooner they recognise we're facing a once-in-a-lifetime crisis of capitalism, the better equipped they will be to manage a way out of it.

The spirit of Marx, who is buried in a cemetery close to where I live in north London, has risen from the grave amid the financial crisis and subsequent economic slump. The wily philosopher's analysis of capitalism had a lot of flaws, but today's global economy bears some uncanny resemblances to the conditions he foresaw.

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Consider, for example, Marx's prediction of how the inherent conflict between capital and labour would manifest itself.

As he wrote in Das Kapital, companies' pursuit of profits and productivity would naturally lead them to need fewer and fewer workers, creating an "industrial reserve army" of the poor and unemployed: "Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery."

The process he describes is visible throughout the developed world, particularly in the US companies' efforts to cut costs and avoid hiring have boosted US corporate profits as a share of total economic output to the highest level in more than six decades, while the unemployment rate stands at 9.1 per cent and real wages are stagnant.

US income inequality, meanwhile, is by some measures close to its highest level since the 1920s. Before 2008, the income disparity was obscured by factors such as easy credit, which allowed poor households to enjoy a more affluent lifestyle. Now the problem is coming home to roost.

Over-production paradox

Marx also pointed out the paradox of over-production and under-consumption: The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce. When one company cuts costs to boost earnings, it's smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits.

This problem, too, is evident in today's developed world. We have a substantial capacity to produce, but in the middle- and lower-income cohorts, we find widespread financial insecurity and low consumption rates.

The result is visible in the US, where new housing construction and automobile sales remain about 75 per cent and 30 per cent below their 2006 peaks, respectively.

As Marx put it in Kapital: "The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses."

Addressing the crisis

So how do we address this crisis? To put Marx's spirit back in the box, policy makers have to place jobs at the top of the economic agenda, and consider other unorthodox measures. The crisis isn't temporary, and it certainly won't be cured by the ideological passion for government austerity.

Here are five major planks of a strategy whose time, sadly, has not yet come.

1. We have to sustain aggregate demand and income growth, or else we could fall into a debt trap along with serious social consequences. Governments that don't face an imminent debt crisis - including the US, Germany and the U.K. - must make employment creation the litmus test of policy. In the US, the employment-to-population ratio is now as low as in the 1980s. Measures of underemployment almost everywhere are at record highs. Cutting employer payroll taxes and creating fiscal incentives to encourage companies to hire people and invest would do for a start.

2. To lighten the household debt burden, new steps should allow eligible households to restructure mortgage debt, or swap some debt forgiveness for future payments to lenders out of any home price appreciation.

3. To improve the functionality of the credit system, well-capitalised and well-structured banks should be allowed some temporary capital adequacy relief to try to get new credit flowing to small companies, especially. Governments and central banks could engage in direct spending on or indirect financing of national investment or infrastructure programs.

4. To ease the sovereign debt burden in the euro zone, European creditors have to extend the lower interest rates and longer payment terms recently proposed for Greece. If jointly guaranteed euro bonds are a bridge too far, Germany has to champion an urgent recapitalisation of banks to help absorb inevitable losses through a vastly enlarged European Financial Stability Facility - a sine qua non to solve the bond market crisis at least.

5. To build defences against the risk of falling into deflation and stagnation, central banks should look beyond bond- buying programs, and instead target a growth rate of nominal economic output. This would allow a temporary period of moderately higher inflation that could push inflation-adjusted interest rates well below zero and facilitate a lowering of debt burdens.

We can't know how these proposals might work out, or what their unintended consequences might be. But the policy status quo isn't acceptable, either. It could turn the US into a more unstable version of Japan, and fracture the euro zone with unknowable political consequences. By 2013, the crisis of Western capitalism could easily spill over to China, but that's another subject.

George Magnus is senior economic adviser at UBS and author of Uprising: Will Emerging Markets Shape or Shake the World Economy? The opinions expressed are his own.


*Global stocks at 2-week high on upbeat U.S. signals*

The DAX board is pictured at the Frankfurt stock exchange August 19, 2011. REUTERS-Alex Domanski

Women using parasols walk past a stock quotation board outside a brokerage in Tokyo August 30, 2011. REUTERS-Toru Hanai

*(Reuters)* - Global stocks rose to their highest in nearly two weeks on Tuesday, while safe haven assets like the Swiss franc and German Bunds were subdued, encouraged by signs that the U.S. economy was not headed toward a recession as yet.

With big-ticket data like U.S. job numbers due later this week, many investors remain uncertain about a recovery in the world's largest economy, leaving risk for a correction in markets still trading at low holiday volumes.

But European shares rose 1.6 percent, tracking gains on Wall Street and in Asia, while London shares advanced 2 percent in early trade, catching up with the broader market after a holiday on Monday.

World stock markets, as measured by MSCI, rose 0.5 percent to their highest since August 18. The index is still down nearly 15 percent from a May high, however, after taking a hammering at the start of August due to growing pessimism about the U.S. economy as well as worries over Europe's sovereign debt crisis and banks.

"With consumer confidence, the (U.S) ADP jobs report, ISM Manufacturing, jobless claims and nonfarm payrolls report all due in the coming days, there is going to be a lot of nervousness around," said Ben Potter, strategist at IG Markets.

"The market could also be seen as vulnerable given it has rallied ahead of these big economic reports. We think a lot of participants will be employing a 'wait and see' approach as we navigate through the next few days."

Investors would also await the minutes from the Federal Reserve's last committee meeting on Aug 9 which could offer more clues on divisions among board members over further stimulus measures.

Still, the latest gains in stock markets encouraged some investors to switch out of safe-haven assets like the Swiss franc and core government bonds into higher-yielding currencies such as the New Zealand dollar.

An Italian bond auction later in the day will serve as a barometer of investor demand -- and give more hints how much further the euro zone's debt crisis has to run -- after recent bond purchases by the European Central Bank.


The Italian tender is likely to sail through smoothly and could give a temporary boost to risk appetite, but it is unlikely to lift broader concerns that the risk of contagion could still engulf larger economies like Italy, Spain and France.

These concerns have made investors such as U.S. money market funds reduce exposure to European banks and pushed their credit default swap spreads higher.

The Itraxx European senior financials index has pushed beyond the peaks seen during the last crisis, and at 247 basis points the spread is starting to reflect credit ratings that are not in line with their current ones.

The euro was down 0.2 percent against the dollar at $1.4484, and also eased against the Swiss franc.

The franc, hit by Switzerland's efforts to weaken it in the past month, traded slightly down against the dollar, at 0.8160 francs, hovering near a five-week low touched on Monday.

Spot gold stabilized around $1,797 per ounce levels after falling by nearly seven percent in about a week. It hit a record $1,911 last week.

"In terms of fundamentals, (gold) still looks good. The only risk to the downside is if the CME raises margin requirements again," said Natalie Robertson, a commodities strategist at ANZ.

The CME Group raised margins on gold futures by about 27 percent last week.

German Bunds reversed early gains as European equity markets opened higher. German Bund futures briefly dipped into negative territory and were last 9 ticks higher at 134.48.

Jorganizer Hamdani
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