Dick Bryan, professor at the University of Sydney and co-author of Capitalism With Derivatives, spoke to Martin Thomas about the trends behind current US economic difficulties.
For 70 years we have existed with the idea that the US dollar is some sort of quasi world money, even when, with the end of the Bretton Woods Agreement in 1971, it stopped being officially so deemed. Especially over the last year, the international consensus on the US dollar has come under threat.
It is notable that when there was extreme volatility in markets after the recent dollar credit rating downgrade and great fear of a global recession, there wasn’t a rush of asset-selling to get back into dollars. The move was to assets like the Swiss franc and even, to a lesser extent, the Australian dollar. These are not serious safe-haven currencies. These are bits of evidence that US dollar is in decline as a safe haven.
But if there is indeed decline, it is not an instant process.
First, if the US dollar is now in decline as a safe-haven, it carries forward much status from the past. No-one holding US Treasury Bonds (especially the Chinese state) wants to see them crash, so the accumulated history of the US dollar as an asset-holding currency counts for much. But even the Chinese state said recently in the context of the credit rating downgrade of the dollar that there should be some international supervision of the dollar, and perhaps a new global currency. Neither of these possibilities should be taken seriously — there is no political momentum for either, and besides it is unclear what exactly they would mean. But the proposals see the Chinese state giving a rhetorical public slap to the US state — and that’s significant. Will the Chinese state act on the belief that they are already holding too many US treasury bonds? The future status of the US dollar may well be changing.
Second, we need to distinguish between the dollar as a trading currency and as an asset-holding currency. For historical reasons, the US dollar remains the major currency of transactions in international trade and investment. That role will not change quickly, for there is no obvious alternative to take its place. While asset holdings can be readily diversified across a range of currencies, trade needs an agreed unit of measure. There is no real alternative to the US dollar here. It guarantees significant on-going demand for dollars so that in foreign exchange markets, the US dollar is on one side or the other of over 84 percent of contracts. This figure has hardly declined in the past few years. But the growth of foreign exchange transaction volumes on the dollar is a clear sign that even though trade and investment occurs predominantly in dollars, market participants are desperate to hedge their exposure to dollars.
Something has to give here: it is hard to see how a currency can stay trusted as a means of exchange, but not as a store of value.
We cannot underestimate the significance of a loss of safe-haven status for, in the absence of another nation’s currency assuming the mantle (and nothing presents itself here), it means that there is no anchor in global financial markets. If you were holding US treasury bonds for safety, they are now worth less since the downgrade. Hold cash, and the exchange rate drops. There is no benign way to hold wealth.
The implications are enormous. It means that in calculation, there are no absolute measures; only relative ones. It is as if we were acknowledging that our standard measurement anchors — yards, kilos, degrees — are no longer standardised. How would the world work if these units of measure became volatile? “How long is a piece of string?” would also be “how long is a yard of string?”.
But this is the situation in financial markets. Has the price of oil gone up or down? There is no absolute answer — it all depends what currency you measure it in. In US dollars it has gone up; in Swiss Francs it has gone down. It means that there is no wealth-holding that is immune from market variability: all you can do is position yourself inside the market. The only security to be found, if we can use that word, is not in a quantum of wealth but in a rate of return. You must try and keep up with or beat “the market” (some index of asset values) in order to preserve value.
The attachment of a conception of “stability” to a rate of return rather than a quantum of wealth should not be surprising. It is the way capital measures itself (it measures its value in terms of the rate of profit), and our incorporation into the calculative logic of finance universalises that conception.
I think this is the most likely, and the most scary, scenario of the future of financial markets. The music never stops. Financiers will never get out of the market. They have got to keep playing and trying to beat the market, because there is nowhere safe to hide. The circumstances of us all will be tied up with the successes and failures of market trades.
What will follow from that, I think, is the ongoing massive growth of more and more sorts of financial products, more and more ways of holding wealth in a liquid (tradable) form. If financial market trading is everything, more and more diversity of things to trade will become the order of the day. We have seen derivative markets, condemned so widely in the midst of crisis, again surge in growth. In particular more and more facets of subsistence, and of daily life, will be re-configured as financial products and play out this calculative logic.
The person on the political right who has understood this is Robert Shiller, at Yale. He explains that most of the world’s wealth is tied up in households, rather than in factories or infrastructure. Capital is developing ways to reconfigure the ordinary mundane parts of household life as financial assets. Shiller is behind the development of products to trade indices of house prices, where you and I could effectively insure our house price or the cost of rent increases, but his point goes further, to developing markets around many more things that look like insurance or contracts for the regular purchase of services.
Mortgage-backed securities were one well-known version of it. But the process of securitisation takes this process beyond mortgages. The securitisation of student loans, health and house insurance payments, telephone contract payments and electricity bill payments are other illustrations. This is a remarkable change, because it is bringing things of labour’s subsistence into the domain of financial assets.
House, health, heat are all now financialised. Every month you and I pay a telephone bill, power bills and health insurance. Some pay interest on mortgages and student loans, car loans, credit card payments. Securitisation sees these regular payments sold into the market in return for a cash payment. Someone out there buys a security backed by mortgages or a bundle of household ‘assets’ (asset-backed securities) and, in return for a payment now, they receive ownership of those future streams of household payment.
This process of securitisation is seeing workers being reconfigured as an asset class — not an asset-holding class, though people do have pension fund stakes and so on, but an asset class. Capital wants to invest in households and get access to workers’ income streams to convert them into financial assets.
Workers start to take on a new role in this new financial world. It is no longer just that workers are borrowing and lending, as they long have done, but that they are being linked directly into global securities markets. And in a world where there is no longer an anchor unit of measure, these financial contracts based on household payments come into the mix as part of the commensuration of capital.
Notice some parallels with our understanding of labour in production. There, we know labour’s role as the source of value, appropriate via a process of commodity exchange (labour power for wages) In finance, we need to see wages as a foundation of financial valuations, via purchase of commodity exchange (contractual payments for loans/services). Both versions tell us that labour is the foundation of value. Therein lies a working class political potential in finance.
That potential is not devoid of an emphasis on regulatory reform – just as labour in the workplace has benefitted from some restrictions on the capacities of capital. But regulatory reform, in finance as in the workplace, presents a limited political vision. It is important too that Marxists do not get diverted by an emphasis on regulatory reform of finance.
Many on the left have advocated a turnover tax on financial transactions, in the belief that this would discourage speculation and help to tame finance. This is an idea that seems to arise when no-one knows what to do, on the left and the right of politics.
Sarkozy and Merkel have just called for a turnover tax on financial markets. My guess is it will never be implemented, because individual heads of state can call for it, but it could only be implemented if all nation states were in agreement. It’s an easy nation state response because no nation state can be expected to implement it. Sarkozy has been advocating it since 2008, but it never advances beyond being a one-liner: nothing ever gets to detail. But the problem is that markets are already so complex and unbounded it will be impossible to define what gets taxed and what doesn’t. How is a “financial” transaction different from a “non-financial” transaction (indeed what is a non-financial transaction?).
It is all too complex, and I think that complexity is king — these markets are not about some notion of efficiency in resource allocation, and reforms to make them more transparent or efficient really miss the point. We have no means to verify whether they become more or less efficient. What is the meaning of efficiency in relation to finance? They are what they are because capital needs and wants them as they are; not because of arguments about “efficiency”. Greenspan said as much earlier this year. A couple of years after his famous “flaw in the market model” confession, he was saying in April this year in a Financial Times opinion piece that, and the fact that markets appear opaque and incoherent, is just the cost of their increasing complexity, and we have to live with it as part of their development. For him, that’s just the cost of having this wonderful capitalist system. I think he’s right, not in the sense that the system is wonderful, but in the sense that increasing complexity is the projected path and any notion that these markets can be made transparent or efficient and thereby acquire some form of renewed legitimacy misunderstands the role they play.
Another development I think we need to consider associated with this scenario is that monetary measures are showing signs of detaching from states.
Throughout the 20th century, money has been in nation-state denominations, where states take responsibility for the stability of the unit of measure. We are seeing states coming into disrepute as overseers of the value of money — not the currencies of failed states like Zimbabwe, but states at the centre of capitalism. A once-taboo issue is now being discussed: do people trust the state’s money? Would they treat sovereign bonds as a “safe” investment? The downgrading of the US credit rating was a sign in the negative — it was purely symbolic (the US is not broke, and the downgrade is minor) but money is all about symbolism. And of course the sovereign debts of southern European states (and others) points in a similar direction. They are tied up in the supra-national Euro, so it is not reducible to a national currency issue, but the evidence here points in the same direction: nation states are currently not securing the value of money, but undermining it. That is a significant change of perceptions.
And of course the working class gets drawn into this process for the state’s perceived path to redemption is fiscal austerity — cutting back on state expenditure and thereby reducing the requirements of state borrowing, to be seen to be financially “responsible”.
People talked about something called neo-liberalism in relation to Thatcher and Reagan and an ideological assault on the working class. This time it takes the form of an imperative as states grasp for financial reputation. Here, ideological “critiques of neo-liberalism”are ineffective in setting political agendas. The answer is not to rally behind the state as opposed to markets, for states have been central to the problem.
Perhaps we have the monetary crisis of the state — not exactly parallel with the “fiscal crisis of the state” which James O’Connor wrote about in the 1970s, but something related. It suggests that where the state’s priority is to verify its own monetary integrity, it will cut living standards to do it. It will have to subordinate all economic and social policy to secure the unit of measure. You cannot look to the US government or the Federal Reserve to guarantee the value and purchasing power of the US dollar. It can’t guarantee the exchange rate or the inflation rate, or the credit risk on the dollar. The only thing it can guarantee is the prime interest rate — the rate paid by the central bank, and last week we saw the Federal Reserve locking in the prime rate for two years. The Fed will forego the tool of monetary policy in order to demonstrate that it can guarantee something — anything!
In aggregate, the formal financial anchors are loosening their hold. The US dollar is under challenge as the flagship, and nation states do not have money in harness. Yet at exactly this time where liberal, fluid capital is ascendant, it looks to labour as its source of security and stability. The effect is that labour, not capital, carries the risks of finance, and thereby underwrites capital markets. Capital has manoeuvred well to get to this position from the midst of the global financial crisis. But it is not a safe place to stand.