America in decline?

It is a common view that the great growth of financialization, the growth of financial capital in relation to total capital (particularly US capital), has been a sign of decay and weakness of the US and of US imperialism. (Something close to this view is to be found in the essays by Foster and Holleman and by Balakrishnanan posted here recently.) The following, by Panitch and Gindin, argues for just the opposite: that financialization is an “integral part of the strength of the American empire.”

This is an excerpt from an article which appeared in New Left Review 35, Sept-Oct 2005. A pdf of the entire essay is made available at the conclusion of this excerpt.

Benign financialization

by Leo Panitch and Sam Gindin

American multinational corporations now employ almost ten million workers overseas. [21] This outward flow of capital is supported by inflows of short-term loans, such as corporate bonds, as well as foreign direct investment. Between 1980 and 1988, the value of fdi [foreign direct investment] in the us had doubled; it had doubled again by 1997, and yet again by 2004. [22] The contrast with the British empire is striking. Between 1870 and 1914, Britain exported some 4 per cent of its gdp to the rest of the world, starving its own economy of productive investment and ultimately paying the price in the relative decline of its share in global production. [23] The us, on the other hand, has been receiving large inward flows and channelling these not only into consumption but also domestic investment, including the development and dissemination of new technologies. Again, this capacity to capture and employ so much of the world’s savings, some of which is also recycled as American investment abroad, reflects the structural strength of the empire, not its weakness.

Overarching all this is the dollar. Had there been a run on the us currency over the past few years, this might have signalled the exhaustion of the American empire’s privileged asymmetries. But the fact that a very substantial devaluation of the dollar has already occurred (especially vis-à-vis the euro) without disrupting financial markets points to something quite different.

Though some central bank diversification of reserves away from the dollar may continue, any dramatic shift towards an alternative global currency remains most unlikely because there is neither the willingness nor the capacity for any other currency, including the euro, to play this role. The last thing the European Central Bank currently wants—both for immediate reasons and in terms of long-term responsibilities—is for the euro to be further inflated relative to the dollar. Moreover, all central banks want to avoid the global financial instability that a shift away from the dollar would risk, given the greenback’s role not only as the global reserve currency, but also as the main store of value for financial assets and chief vehicle currency for international commerce, through which goods and services are generally invoiced and other currencies exchanged.

To imagine that shifts in currency values determine, or are even an adequate measure of, the rise and fall of empires is a version of the monetary illusion. Lurking behind such notions, however, is the more substantive claim that the financialization of the economy, which we have identified as an integral part of the strength of the American empire, is actually a symptom of American imperial decline. For most Marxists, the theoretical argument usually runs from an overaccumulation crisis in the productive economy through to the shift of profits and savings into unproductive financial assets. We agree that overaccumulation is an inherent condition of capitalism. It is the mechanism through which units of capital compete for market share: even with perfect knowledge of the plans of others, corporations will collectively produce more than the expected total market—as they must do, if any one of them is to succeed in capturing an increased share of that market. As some capital is devalued overaccumulation is eased, but the problem will always be repeated. Yet this does not itself amount to a structural crisis, such as the sustained and self-reinforcing disruption in accumulation that occurred in the 1930s. And while this did also occur to a lesser extent in the 1970s, the crisis of that decade led to the acceleration of capitalist globalization rather than its interruption as in the 1930s.

This had much to do, we have argued, with the role of the American state in introducing neoliberalism and the role of finance within that regime. [24] Since the 1970s, finance has intensified quotidian pressures for the closure of unprofitable businesses, and the explosion of mergers and acquisitions has expanded capital’s ability to exit. This has led to the loss of jobs and the disruption of whole communities; but partly because of the role finance played in providing credit to sustain consumption, it did not amount to such serious interruptions to accumulation as may properly be designated a structural crisis.

Some see the very strength of finance in the us as the source of new problems: with finance’s large claims on the surplus, less is retained for reinvestment. [25] But even if we accept that the surplus is only created within a narrowly defined productive sphere, it would be wrong to ignore the dynamic supplemental role financial markets have played. The total surplus may be increased if finance disciplines firms to reorganize production, reallocates capital away from less profitable companies, helps to disseminate technology across sectors and generates the liquidity to supply venture capital to new businesses. These are not just ‘add-ons’ to the process of surplus creation; they represent some of the most dynamic aspects of the recent growth of the American economy at home and abroad. So even if the share claimed by finance increases, the net amount left for reinvestment may be higher than it would otherwise be. Moreover, in response to competitive pressures and opportunities within the productive sector, financial institutions have come to take on tasks that tend to blur (though not erase) the lines between production and finance. This includes functions such as payroll, accounting and planning that were formerly included in the ‘productive’ sector and then outsourced; similarly, many productive-sector firms have become significantly involved in financial activities.

To this should be added the crucial role played by financial institutions in the management of risk, a central condition for the continued expansion of global accumulation. While the role of finance has often been written off as speculative and therefore wasteful (which much of it of course is), this misses the distinction between what is useful from a perspective outside of capitalism and what is essential within capitalism; the derivatives revolution in financial markets shows that what is speculative is not necessarily wasteful, insofar as it contributes to managing risk. Just as transportation adds costs to production but is a prerequisite of global accumulation, financial markets bring new risks and costs yet are fundamental to capital’s expanded reproduction.

A further prerequisite for global accumulation has been the Federal Reserve’s central role in the provision of overall global liquidity. By throwing liquidity at every financial tremor and hint of recession in the us since the early 1990s, it has not only sustained American demand, but has kept liquidity high around the world; and this in turn has contributed to bringing vast pools of Asian labour into production—for export to an American market, sustained by the Fed’s policy. To be sure, the Fed’s ability to continue to do this on its own has increasingly been constrained since the turn of the century; nevertheless, it continues to secure a remarkable degree of cooperation from other central banks and finance ministries, above all the Japanese, who pumped 35 trillion yen’s worth of liquidity into the world system in 2003 and 2004 to buy us Treasury bonds. To what extent this was an explicitly co-ordinated monetary policy has not been revealed, but as Richard Duncan has recently asked:

Was it merely a coincidence that the really large scale boj/mof intervention began during May 2003, while [Federal Reserve] Governor Bernanke was visiting Japan? Was the boj simply serving as a branch of the Fed, as the Federal Reserve Bank of Tokyo, if you will? . . . If this was a globally co-ordinated monetary policy (unorthodox or otherwise) it worked beautifully. The Bush tax cuts and boj money creation that helped finance them at very low interest rates were the two most important elements driving the strong global expansion during 2003 and 2004. Combined, they produced a very powerful global reflation . . . Whatever its motivation, Japan was well rewarded for creating money and buying us Treasury bonds with it. Whereas the boj had failed to reflate the Japanese economy directly by expanding the domestic money supply, it appears to have succeeded in reflating it indirectly by expanding the global money supply . . . If some central bank had not stepped in and financed the private sector capital flight out of the dollar, then sharply higher interest rates most likely would have thrown the world into a severe recession. It is quite likely that this consideration also played a role in influencing the actions of the Japanese monetary authorities during this episode. [26]

Here we see clearly how the internationalization of the state operates within the framework of us empire. It allows for the implicit co-operation—if not explicit co-ordination—necessary for the us to continue to act as the importer of last resort and the global ‘macro-stabilizer’; and it leads to the financial burdens of empire being shared internationally. Financial capital, and the political institutions which protect and manage it, consequently contribute both to increasing the global surplus and to the subsequent distribution of the surplus in a way that supports the management and reproduction of empire. This is what makes the argument that the us is displacing its crisis through its privileged claims on global savings unconvincing. In fact, the us has acted as a stimulus to growth elsewhere through its massive imports and trade deficits. And if, for instance, German growth is lagging, it is not for a lack of global liquidity; rather, it means that the pressures on the German working class will be intensified, in order to retain domestic investment and attract foreign investment. Consequently, what is being ‘exported’ is not so much a displaced us crisis but the weakness of American labour.

[21] bea, Survey of Current Business, July 2004, p. 23.

[22] bea, us International Transactions Accounts, 15 March 2005.

[23] A. G. Kenwood and A. L. Lougheed, The Growth of the International Economy 1820–2000, London 1999, p. 28.

[24] See our ‘Finance and American Empire’, esp. pp. 60–6.

[25] See Arrighi, ‘Hegemony Unravelling’ and Harvey, New Imperialism; and, although on the basis of a different argument, Gérard Duménil and Dominique Lévy, ‘The Economics of us Imperialism at the Turn of the 21st Century’, Review of International Political Economy, vol. 11, no. 4, 2004.

[26] Richard Duncan, ‘How Japan financed global reflation’, FinanceAsia, 10 March 2005.

A pdf of the entire article from which the above is excerpted can be found here: NLR26907

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