The words of this old song date back to the 1800’s when dominant and rapacious employers in small company towns would require their employees to purchase essentials from a â€˜company store’. And because the employee was so badly paid, inevitably they would run up steep tab simply to keep their family fed and clothed. In the long run of course the debt was un-repayable, so the employees became essentially indentured slaves to the company, unable to leave town because of the debt they owed. It took a major law reform to stop this odious practice.
The graph is taken from the concluding passages of a very recent Steven Keen paper. (I do recommend giving it a close read; don’t be put off by the math, the explanations are clear and instructive in their own right). In it Keen further extends his economic modeling of the business cycle with results that point to a startling political conclusion . that the banks are well on the way to making the whole world their own â€˜company town’.
The remarkable aspect of this model is how well the general pattern of it corresponds to what we have seen over the last 60 odd years since WW2. In the early period the tension between workers and employers interests dominated the dynamics, expressed conventionally in the political battle between left and right. It’s a paradigm people are still very much wedded to, but one with a vital ommission.
Because from a ‘flow of money’ POV, the real economy has three actors, not two. The other party is of course the banks who play a special role in the economy as trusted bookkeepers, enabling ordinary real world transactions to proceed smoothly and efficiently based on the issue of credit. In the early part of the cycle the banks share of GDP, arising from this special function, is normally somewhat less than 10%. As a result the political significance of their role is underplayed and neglected. Flying under the radar as the business cycle matures, their appetite for risk grows and they successfully lobby for looser regulation in order to profit from higher levels of speculation with ever more complex products. As a result the banks begin to assume an undue portion of the economy; growing like a cancer beyond their essential function, until for example in 2005 a full 45% of all US corporate profit was made in the finance sector.
As this process develops something interesting happens the dramatic swings of the early part of the cycle in the labour/employment market begin to smooth out. As the Debt to GDP ratio exceeds 100%, then 200% (or even 300% as it did in the US) it becomes the dominant factor in the economic dynamics, overwhelming and dampening out the worker/employer cycles leading to the illusion, as trumped by many leading neo-liberals in the last decade, of a ‘Great Moderation’. Conventional neo-liberals kept telling us of a brave new world, in which they had mastered the business cycle, assuring us that stable growth could be sustained indefinitely without the damaging cycles of the past.
Which of course was wholly wrong. The ‘Moderation’ of the last 20 years was not a sign of success, but of failure, with the end game yet to be played out. The model points to the pattern of what is now happening, even in this country. Wages share of GDP has steadily declined over that period (from around 65% in the 1970’s to a miserable and falling 44% last year). Business profitability has held up until much later into the cycle, but even that too is predicted to plummet as finally the bankers eat the game, swallowing both workers and business owners share of GDP in one last orgy of compound interest, greed and hubris. Leaving us all in terminal debt to new masters of the universe, and no road out of town.
Ultimately of course the model has its limits:
This is only a model of the process by which a crisis develops; it does not contemplate what might happen in its aftermath to end it–such as bankruptcy and debt moratoria reducing the outstanding debt and allowing economic activity to commence again. The terminal collapse that follows from the runaway growth of debt in this model emphasises the point that Michael Hudson has made so often: “Debts that can’t be repaid, won’t be repaid”.
We have already seen some of this response, the US has just passed a raft of legislation intended to fence in the banking excesses of recent decades, but as MartyG outlines in a very complementary post this morning, unusual uncertainty pervades the global economy. Of course nothing in Keen’s argument above excludes Marty’s equally powerful contention that we also now bumping up against the limits of growth.
Wave after wave of demented avengers marched cheerfully out of obscurity and into the dream.
Updated: Johnny Cash with Sixteen Tons