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December 13, 2010

Perspectives: A Review of 2010

The Slow Agony Of Absurdistan

by Gilles d'Aymery

(Swans - December 13, 2010) Absurdistan, for the purpose of this year-end review, shall be defined as the benighted lands straddling the Atlantic Ocean, the last two bastions of the entrenched religious-like neoliberal ideology, tyrannically controlled by the Masters of the Universe known as the financial markets: namely, the United States of America and the European Union, with emphasis on the Euro Zone. Absurdistan stands for the kingdom of the investors and creditors that have taken hostage the economy and captured the body politic. It is the realm in which a few self-serving operators point a gun at civil society, willing to double down on their casino bets, turning their back on everything from the ecological disasters engendered by our socioeconomic paradigm to the ballooning poverty in the rest of the world, and diverting the attention of hoi polloi toward scapegoats, social networks, video games, and gadgets. It has never been clearer than in 2010. As the Oracle of Omaha, Warren E. Buffett, once put it: "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning." In Absurdistan tragedy is fast becoming a farce, to paraphrase another Oracle -- but it's a farce played on the backs of the masses.

The year began as 2009 ended with two or more wars no one discusses any longer since it's part of normalcy for a majority of people who have never known a time in their lives without a war here or there -- the topic was utterly absent from the US mid-term congressional elections; the economic engines, with the exception of Germany, kept sputtering on two cylinders at best; unemployment was (and remains) in double digits; but the Masters of the Universe, having been made whole through public debts, once again smelled the sweet aroma of the roses and champagne and bonuses. Indeed, 2010 has been a swell year for the financial markets. The too-big-to-fail banks have become bigger. In the U.S., according to Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, "the five largest financial institutions are 20 percent larger than they were before the crisis. They control $8.6 trillion in financial assets -- the equivalent of nearly 60 percent of gross domestic product." Much the same occurred in the core of the Euro Zone. Banks have been able to play on three fronts. First, the huge toxic assets on their balance sheets are no longer marked to market since there is no market for these rotten eggs. Second, courtesy of Basel II, they were able to shun lending to businesses, which requires holding 8 percent in equity and, consequently limiting their capital leverage to a 12.5:1 ratio (and, anyway, why would banks lend to businesses in the midst of production overcapacities?), but could trade in sovereign bonds, which when rated AAA by the rating agencies (the ones famous for giving AAA ratings to rotten eggs!) were deemed only 20 percent as risky as commercial loans. So banks could increase their capital leverage to an astounding 62.5:1 ratio. Prudence was discounted because, thirdly, the financial markets having captured governments and the banks remaining too big to fail, they once again would be "saved" by the public if anything went wrong. Let's pop open the corks!

Since bondholders have priority over labor and social services, whether they are sovereign bonds or state and municipal bonds in the U.S., and that governments are supposedly able to raise taxes in order to avoid any potential default on their debts, investors were eager to purchase bonds -- till, that is, the economies of Absurdistan hit the wall. All of the sudden, after having taken more public debt to save the banks in 2008 and 2009, tax revenues went south and governments' finances deteriorated quickly. Within the Euro Zone, five countries known under the acronym PIIGS -- that is, Portugal, Ireland, Italy, Greece, and Spain -- came under attack from international hedge funds that began betting against the debts and from the three American credit rating agencies (Moody's, Standard & Poor's, and Fitch) that repetitively downgraded their credit ratings. Greece was the first to fall at the beginning of the year. However, instead of threatening to default -- a process that is quite feasible -- in order to restructure the country's debts, thus forcing investors to take a haircut, the Greek government, under pressure from the other members of the Euro Zone, accepted a bailout from the Eurogroup and the International Monetary Fund (IMF) conditioned to a series of deep austerity measures.

At this point, it is worth noting that neoliberalism has been embraced by all major European political elites from the right and the left. Greece, Portugal, and Spain are actually led by socialist governments. Indeed, the managing director of the IMF, Dominique Strauss-Kahn, a French socialist (at least nominally), was selected for the post in September 2007 with the full support of the US government. European socialists are as much captured by investors and creditors as are their conservative counterparts!

So, in May 2010, Greece received a financial rescue of about $150 billion. In exchange, it has had to enact cuts in social services, pay freezes, and increases in taxes. During that same period the mood toward austerity programs invaded all the members of the European Union. Ireland, Portugal, Spain, and the UK enacted serious budgetary cuts as well, all targeted at wage earners and not investors. The second country that is being forced to accept a bailout package is Ireland, which has just passed a four-year austerity plan with social cutbacks and tax increases while its economy remains in recession.

Evidently, cutbacks and tax increases will not help these countries to grow out of debt. The credit rating agencies, which had advocated these austerity measures, seem to have come to the realization that these measures were counterproductive. Accordingly, to add insult to injury, Moody's cut Spain's credit rating at the end of September under the pretext that the growth of the economy has stalled. And in the wake of the austerity plan voted by the Irish parliament, Fitch downgraded its rating three notches to BBB+ on December 9, 2010. Meanwhile, IMF's Dominique Strauss-Kahn is now calling the EU to delay the reimbursement of Greek debts until 2024 (and not 2015 as initially consented).

The question, of course, is why this self-reinforcing dynamic toward insolvency and economic pain is implemented instead of proceeding to orderly restructure of the sovereign debts of these nations? The answer is obvious: the majority of the bonds are held by European banks, in Germany, France, the UK, Belgium, etc. The truth of the matter is the bailouts are not set up to save countries but to keep the banks whole. The capital markets are the ones that are being bailed out once again, not the people. The European chancelleries could care less about the Greeks, for instance, whom they consider irresponsible and lazy anyway. They care about their financial institutions only (and the next political elections).

The situation is as severe in the U.S., even though the country has the distinct advantage of having a homogeneous fiscal policy. However, the federal debt is quickly closing in on 100 percent of GDP (and this does not account for long-term liabilities) but, more troublesome, the states and municipalities hold almost $2.8 trillion of outstanding bonds -- that is, two trillion eight hundred billion dollars! Already, hedge funds are betting that some states (e.g., California and New York) won't be able to meet their obligations. A sign of the looming crisis could be seen in early November when Ambac Financial, the holding company of Ambac Assurance Corp. ($57.6 billion in policies insuring states and localities against the risk of default), filed for bankruptcy with liabilities of about $1.7 billion. Furthermore, one should add the hidden, off-the-books liabilities of states and localities, like health care and pension obligations, which are an estimated paltry 3.5 trillion dollars (again trillion!). All the while tax revenues have plummeted because of the latent economic depression and there is no appetite in Washington and in the state capitols to raise more revenues except on the margin through increased user fees. To the contrary, the Bush tax cuts for the wealthiest two percent of the population are being extended by the Obama administration; the estate tax lowered from a maximum rate of 55 percent over $1 million to 35 percent over 5 million; and a lower payroll tax, which will potentially lead to the dismantlement of Social Security. So, like in Europe, US "public servants" have been captured by the moneyed class, and are implementing drastic cuts in social services. Nurses, teachers, firefighters, police officers, and state employees are being laid off by the hundreds of thousands all over the country, education tuitions drastically increased, public health services and aid to the elderly cut back, public transit curtailed, etc.

In order to divert people's attention from the fact that the burden of the adjustment costs was falling heavily on the working class, wage earners, and retirees leaving the rentier unscathed, on both sides of the ocean, the leaders of Absurdistan or their proxies resorted to age-old deflecting finger-pointing techniques and country-bashing. First, amorphous groups like the Tea Party in the U.S. and similar factions in the EU directed their fury toward immigrants (Latinos and Muslims in the U.S.; Roms, Africans, and Muslims in the EU). Xenophobia and Islamophobia ran rampant for months on end. Then the poor and underprivileged were targeted -- those slothful people who do not want to work and receive undeserved unemployment benefits. Finally, China and Germany became the favorite punching balls of the political class and its supine gatekeepers. For some, China is responsible for Absurdistan's growing economic and financial tribulations because of its currency manipulations (as though the $ and the € were not manipulated...). The Germans are accused of being selfish and not consuming enough. The German chancellor, once considered a solid stateswoman, is now dubbed too prudent (as if prudence, once a virtue, has turned into a weakness or a vice), not creative, and somehow un-European. Her sins? First, she resisted bailing out Greece before relenting eventually. Then she opposed the U.S. at the last G20 meeting. Third, she reluctantly agreed to the Irish bailout. Finally, she dared to suggest that starting in 2013 investors should take a haircut in case of a default or a debt restructuring process. Perhaps Mrs. Merkel came to the realization that piling up public debts in order to bailout insolvent states to save the banks will ultimately lead to the insolvency of all the states and, in the final analysis, the destruction of the banks too. This thought did not stop a pundit to assert that Germany owes a huge debt to Europe in light of WWII, a debt that may last until the next century and beyond -- the height of absurdity indeed! (How long will Germany have to feel guilty for a war whose responsibility lies as much with the European powers and the United States as it does with the Germans? How long?) But for the litany of finger-pointing, not one finger pointed to the rentier class that is taking the polity into a death spiral.

The explosion of the virtual world has also kept young and not-so-young people diverted from the encompassing issues that are taking place in Absurdistan. The sterile social networks such as Facebook, Twitter, Myspace, and countless others, where people take refuge in search of instant gratification on self-centered topics, inexorably lead to the dearth of critical thinking and political awareness. A New York Times article dated November 21, 2010 ("Growing Up Digital, Wired for Distraction" by Matt Richtel) relates the latest social type -- "the texter and gamer, Facebook addict and YouTube potato." Richtel mentions 14-year-old Allison Miller, who "sends and receives 27,000 texts in a month, her fingers clicking at a blistering pace as she carries on as many as seven text conversations at a time" ... "while talking on the phone..." When not using one of the many gadgets in their quiver, they play video games. The virtual reality has become their only reality.

Something else of import happened in 2010, the huge BP Deepwater oil spill in the Gulf of Mexico, an apt metaphor for the ecological disasters reviewed in these pages recently (Part III of "The Economy Is Not Coming Back," Swans, November 15, 2010), and accordingly need not be covered again in this essay. Suffice to say that the acceleration and multiplicity of ecological disasters or, to put it more benignly, mishaps that came to the fore in 2010, do not bode well for the future.

In conclusion, the year 2010 demonstrated to any fair-minded person who is not blinded by constructed outrage and virtual nothingness that the political bodies in Absurdistan have been wholeheartedly taken hostage, captured, by an infinitesimal minority of very, very rich people; that the system is becoming increasingly dysfunctional; and that Nature (the ecosystems) is fast on its way to calling our attention with increasingly recurring disruptions.

Add the growing right-wing prejudices, and you can smell the putrid stench of Brecht's "vile beast." This is not going to end well.

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Gilles d'Aymery on Swans -- with bio. He is Swans' publisher and co-editor. (back)

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