by Tim Di Muzio
The big question is: what is being capitalised by these government debt instruments? Marx put his finger on it in his most famous volume:
National debts, i.e., the alienation of the state [by sale] – whether despotic, constitutional or republican – marked with its stamp the capitalistic era … As the national debt finds its support in the public revenue, which must cover the yearly payments for interest, &c., the modern system of taxation was the necessary complement of the system of national loans. The loans enable the government to meet extraordinary expenses, without the tax-payers feeling it immediately, but they necessitate, as a consequence, increased taxes. On the other hand, the raising of taxation caused by the accumulation of debts contracted one after another, compels the government always to have recourse to new loans for new extraordinary expenses. Modern fiscality, whose pivot is formed by taxes on the most necessary means of subsistence (thereby increasing their price), thus contains within itself the germ of automatic progression. Overtaxation is not an incident, but rather a principle (Marx 1996: 529–30).
What this passage suggests is that when the state borrows money from private individuals or financial institutions, it is effectively alienating or privatising a portion of its revenues. A small minority of creditors now have a claim on a future flow of income from state taxation. For Nitzan and Bichler, the government bond marked:
the first systematic capitalization of power, namely, the power of government to tax. And since this power is backed by institutionalized force, the government bond represents a share in the organized violence of society. This capitalization of power marked the beginning of the end of the feudal mode of power. Instead of a rigid structure of multiple personal ‘protections’ and endless ‘exceptions’, there emerged the anonymous and highly flexible capitalist ‘bond’ of private owners and public governments. For the first time in history, organized power, although still qualitatively multifaceted, assumed a universal quantity (Nitzan and Bichler 2009: 294–5, their emphasis).
But dominant owners and their financial advisers are not just after a share of government taxation. They will ruthlessly capitalise any public asset that generates an income stream. For example, in order to help Greece mask some of its public debt, Goldman Sachs organised debt instruments that capitalised Greece’s future airport fees and lottery system. In return for short-term cash, the annual returns of these public assets would be turned over to Goldman Sachs and its owners (Story et al. 2010). What is interesting about these deals is that they are not exactly the privatisation of government assets but of government revenue. However, under the weight of mounting public debt in Western governments, the Economist has called for another rash wave of privatisations. Using figures from the International Monetary Fund (IMF), the bastion of economic liberalism reckons that there are US$35 trillion worth of public assets across the 34 states that make up the Organisation for Economic Co-operation and Development (OECD). The Economist argues that at least US$9 trillion of these assets should be sold to wealthy investors so that governments can raise cash to service the interest on their public debts. Interestingly, the Economist is partly owned by the Rothschild family of England, a family whose wealth largely originates from indebting warring governments and trading and manipulating government securities (Ferguson 1998). In return, a portion of European tax revenue went into Rothschild pockets. Whether we will witness another fire sale of public property in the coming decades is uncertain. What is certain is that previous governments in the Global South have been forced to sell public assets to service debt. For example, strongly encouraged by creditors fronted by the IMF, ‘between 1990 and 2003, 120 developing countries carried out nearly 8,000 privatization transactions and raised $410 billion in privatization revenues’ (Kikeri and Kolo 2005). In the Global North, Reagan and Thatcher began the drive in the 1980s but other members of the OECD soon followed:
Over the past two decades, privatization has become a key ingredient in economic reform in many countries. In the last decade alone, close to one trillion US dollars worth of state-owned enterprises have been transferred to the private sector in the world as a whole. The bulk of privatization proceeds have come from the sale of assets in the OECD member countries. Privatizations have affected a range of sectors such as manufacturing, banking, defence, energy, transportation and public utilities. The privatization drive in the 1990s was fuelled by the need to reduce budgetary deficits, attract investment, improve corporate efficiency and liberalizing markets in sectors such as energy and telecommunications. The second half of the 1990s brought an acceleration of privatization activity especially among the members of the European Monetary Union (EMU), as they started to meet the requirements of the convergence criteria of the Maastricht Treaty (OECD 2001: 43).
The takeaway point here is that mounting debt and interest weaken public institutions and undermine social programmes that workers have struggled hard to achieve. Weakening these institutional barriers to the market and accumulation by advocating privatisation empowers corporations and their owners. Moreover, the global financial crisis added trillions of dollars to public debts in many OECD countries – debts that have to be serviced by ever more taxes, social spending cutbacks and privatisations. Back in 2006, a prescient Ann Pettifor suggested that we may be entering the era of a first world debt crisis. The signs all point in this direction and the worst may be yet to come. The only way out of this situation is to change our system of private credit creation. As we will see in Chapter 3, there are no philosophical or technical reasons why our governments have to be in debt to private social forces.
The stock market The market in tradable government debt was the first symbolic capitalisation of power. The money extended to monarchs and governments from private financial forces was largely used to pay for war while ever greater taxes from the public were redistributed to bondholders and traders (Webber and Wildavsky 1986). This market was so important that by 1840:
the estimated value of securities outstanding on the London market was £1.3 billion. Of this figure, 89 per cent of securities traded were accounted for by the public debts of governments in Britain and abroad. In other words, the largest financial game in the world was the capitalization of the state’s power to employ the organized violence of society and to tax its citizens to pay for the bill (Di Muzio 2014: 25).
Yet emerging alongside the market in government debt instruments were capitalised entities called joint-stock corporations. Originally these companies were given government charters to operate as a monopoly for a definite period of time. Once their specified activities were carried out – for example, building a canal for transportation infrastructure – they would be liquidated and disbanded. Today, however, the modern corporation can exist in perpetuity (Bakan 2005; Korten 2001).
When most people think of the stock market, they think that businesses list on an exchange to find the value of their firm in the marketplace (price discovery) as well as to raise money for future operations. This does indeed occur from time to time, but, as Henwood suggests, ‘the stock market plays a very minor role in raising investment finance’ for productive activity (Henwood 1997: 12). So if the stock markets are not primarily tools for raising finance, what purpose do they serve? The stock exchanges of the world largely serve as the state-protected markets by which dominant owners organise and redistribute ownership claims to money and power.
The first modern stock market emerged in Amsterdam around the Verenigde Oostindische Compagnie (VOC), or, translated, the Dutch East India Company. Originally the firm was given a 21-year charter by the States General of the Dutch Republic to ‘send a fleet of ships regularly to the Far East for trading purposes, returning with goods for resale in Europe’ (Michie 2008: 25). This is the sanitised way to put it. A more accurate way of stating it is to say that ‘the principal goal of the organization was to establish an early and complete dominance over the production and distribution of spices’ in Asia (Wolf 2010: 237). To do this, the company was give
n the complete monopoly of trade in the region, the right to make war and peace, the right to build fortifications and the right to administer the indigenous population for profit. As noted by Wolf, cornering the spice trade meant the destruction of local markets, the defeat or submission of local sultanates, the defeat of Portuguese traders operating in the region, the murder of indigenous social forces, forced labour and relocation, and the destruction of crops to ensure that locals would not infringe on company profits (ibid.: 238–9). In essence, the 1,143 investors who subscribed to the Dutch East India Company were capitalising the organised power of the company to wage war against adversaries in an effort to commodify local spices and exclude others from their trade. A share in the profits also meant a share in the imperial violence perpetrated on Portuguese competitors and local communities.
From these humble beginnings, more stock exchanges started to emerge:
During the eighteenth century the global securities market grew in size and importance, with stock exchanges being established in several major European financial centres and in the 1780s extending overseas to the newly independent United States. The basis of this market remained government debt created for military purposes, whether for the incessant conflicts within Europe or the expenses incurred in gaining independence from colonial masters, as in the case of the United States (Michie 2008: 38, my emphasis).
From 1850 to 1900, ‘stock exchanges evolved into central institutions of the capitalist world’ (ibid.: 117). At the time of its report, McKinsey Global Institute found that of all global financial assets, US$50 trillion was held in stock markets around the world, or 22% of the US$225 trillion in capitalised assets. At the time of writing there are over 100 exchanges with the largest 57 accounting for US$62 trillion in market capitalisation – up US$12 trillion from when McKinsey performed its study in early 2013. Depending on the year, HNWIs hold about one-quarter of their financial assets in equities.
Real estate The market for real estate is another key component in the architecture of capital as power. HNWIs hold about 20% of their wealth this way. HNWIs can further enrich themselves by buying property low and selling high, borrowing on their existing properties to invest in other income-generating assets, renting out their property to non-home owners or vacationers, or collecting rents from leases on commercial real estate. For high-net-worth clients who desire more liquidity than sinking their capital into physical structures, there are real estate investment trusts that offer saleable securities that invest directly in the real estate market. There are no figures known to me on how large the world’s commercial real estate market is, but McKinsey has estimated a value of US$90 trillion for global residential real estate (McKinsey 2009: 12).
The commodity and derivatives market HNWIs and their financial planners also capitalise commodities and derivatives. Commodities are considered primary products, as distinct from manufactured goods. There are two types: soft commodities, which typically represent things that are grown, such as sugar, coffee and fruit; and hard commodities, which tends to refer to things that are mined or extracted from the earth, such as crude oil, gold, silver, tin and copper.19 Two indexes – the S&P Goldman Sachs Commodity Index (GSCI) and the Dow Jones-UBS Commodity Index (DJ-UBSCI) – provide investors in the commodity markets with a benchmark to assess returns. Investing in commodities makes up a relatively small portion of an HNWI’s portfolio but commodities can still be quite lucrative. One example is gold. For centuries, if not longer, capitalists, kings and traders have been fascinated with gold due to its unique properties as a metal (Bernstein 2000). For a time, the advanced capitalist nations tied their fate to the import and export of gold, until gold was abandoned as a form of currency able to lubricate an emerging global economy. In the early 1970s, fiat currency was normalised, backed by nothing other than a government’s ability to enforce paper (and later digital) money as legal tender. But despite the rise of fiat money, HNWIs and their portfolio managers prefer to hold some gold – particularly in times of political and/or economic uncertainty. When gold prices rise, this is typically (but not always) an indication that investors are losing confidence in the stewardship of the global economy. And judging by the climb in gold prices since 2001, the loss in confidence seems to have been tremendous since the turn to more corporate-friendly policies that go under the broad banner of disciplinary neoliberalism (Gill 2008). It seems strange to ponder, but if the price of gold is anything to go by, what this suggests is that, at the same time as markets and financial actors gained more power, confidence and certainty in the economy eroded enormously.
Under the Bretton Woods system of fixed exchange rates, a country could theoretically take 35 paper US dollars and trade them for 1 troy ounce of gold. At the time of writing, 1 ounce of gold was trading at US$1,280. In other words, since 1971, when Nixon closed the gold window, the price of gold has increased by 3,557%. Had you invested US$140 in the 1970s, the same 4 ounces would now be worth US$5,120. Now imagine if you invested US$1 million at the time. The investment would now be worth US$36,571,428. But here is what is interesting. The price for an ounce of gold was only US$272 just before 9/11. After the War on Terror was announced, gold skyrocketed to US$1,770 per ounce at its height in 2011. Whatever other factors influenced its price, clearly the War on Terror and the uncertainty it generated was excellent for owners and traders of gold. Those who understood the relationship between war, uncertainty and gold stood to make a killing.
Derivatives represent another nodal point in the architecture of the capitalist mode of power. A derivative is an asset whose value or price is derived (hence the term derivative) from one or more additional assets. Derivatives are popular with traders, and their notional – perhaps it is better to say theoretical – value relative to global gross domestic product (GDP) is enormous. Some analysts place their value at just over a quadrillion dollars, or just over 1 trillion multiplied by a thousand. The actual price of outstanding derivatives is impressive and they still have the ability to crash the economy, as the credit default swap debacle demonstrated during the opening stages of the global financial crisis. Still, whether they are simple or more complex, derivatives make up only a small percentage of an HNWI’s portfolio.
The foreign exchange market The gradual emergence of a foreign exchange market has facilitated the transnationalisation of dominant ownership and the capitalist mode of power. Without it, corporations and their owners would have to be content with local or national markets as well as local or national resources (unless acquisition was acquired by force or the trading of equivalently valued products was permitted). Ownership and profits would be confined to one territorial space. But the fact that money is not only a unit of account and a store of value but also a commodity that can be bought and sold has allowed groups of organised power we call corporations to operate transnationally. As we saw earlier, the 1% mostly invest in firms from their home territory, but if they want to own a part or all of a foreign firm, the foreign exchange market facilitates their power to transact globally. Of course, the foreign exchange market also facilitates transactions for ordinary people. Yet the most important participants in this market are international banks; according to the Bank for International Settlements, the daily turnover by the first quarter of 2013 was US$5.3 trillion a day (BIS 2013: 4). Given the transnationalisation of production chains, the diversity of trade and a global tourist culture for the affluent, the magnitude of these transactions should not come as a great surprise. But the exchange does not simply facilitate the transfer of ownership titles, the movement of goods and services and travel and tourism. Since money is a commodity, it can also be traded for profit. Perhaps the most famous case was when billionaire financier George Soros bet against the British pound in 1992. Soros was able to borrow heavily for months and converted his borrowed pounds into French francs and German Deutschmarks. With currency speculators selling the pound for other currencies, the British Treasury tried to defend the value of sterling by using its res
erves to buy back pounds – to no avail. Soros became known as the man who broke the Bank of England. The move cost British taxpayers just over £3 billion. Soros walked away with £1 billion, having added no value to human society whatsoever (Litterick 2002). The question of value was also addressed by a former hedge fund trader:
I’d always looked enviously at the people who earned more than I did; now, for the first time, I was embarrassed for them, and for me. I made in a single year more than my mom made her whole life. I knew that wasn’t fair; that wasn’t right. Yes, I was sharp, good with numbers. I had marketable talents. But in the end I didn’t really do anything. I was a derivatives trader, and it occurred to me the world would hardly change at all if credit derivatives ceased to exist. Not so nurse practitioners. What had seemed normal now seemed deeply distorted (Polk 2014).
In the wake of a string of financial crises and protests in both the Global North and the Global South in the 1990s, Soros has since become critical of capitalist excesses and market fundamentalism. He is also a prominent philanthro-capitalist.
The money and spot markets Although their names can lead to confusion, the money market differs from the foreign exchange market in that it provides short-term debt instruments in a variety of forms such as US Treasury bills. These instruments typically have a maturity that lasts a year or less. The market largely exists to lubricate the wheels of capitalism by providing a market for those with excess cash to meet institutions’ or individuals’ need for short-term liquidity or cash. The money market is primarily used by governments, financial institutions and non-financial corporations, but HNWIs do hold a proportion of their portfolios in these instruments. They are typically low yield because they are viewed as less risky investments than equities and other assets. The last of the important financial markets that make up the architecture of the capitalist mode of power is the spot market. This allows owners of commodities and financial instruments to sell their goods for cash, with the buyer receiving these goods if not immediately then as soon as possible.