‘Poverty Reduction’? - Reforming without Reforms

By John Clarke

On June 21, the Ontario Coalition Against Poverty (OCAP) took over a downtown Toronto park for and with the homeless. We were able to create a short lived space where destitute victims of social cutbacks and urban redevelopment could stand together and raise a voice of resistance. Nine years previously, we had done the same thing in the same park. At that time, Mike Harris was in power at Queen's Park and Mel Lastman was the Mayor of the City. This time, we confronted an attack on the homeless that is far more brutal an effective than that of a decade ago. We were also dealing with a 'progressive' municipal regime, under Toronto Mayor David Miller (and supposedly a similar government under Ontario Premier Dalton McGuinty), that took a much more hard-line position on our park takeover than the right wingers on city Council in the late 1990s had done. We held the park in the face of a direct ban by the City on our staying there overnight and a police force that had been given a green light to attack us by City Hall. And attack us they did!

This telling incident points to a striking feature of political life in present day Ontario. The McGuinty Government came to power on the basis of a promise to be different from the Harris Tories, and the City of Toronto has a majority on its Council who cultivate a reputation for social enlightenment. Yet, anti poverty struggles confront a process of social retrogression that continues, if not in fact accelerating. The contradiction, however, exists only on the surface. Neoliberalism, at least in places where it has to reckon with elections, likes to use attack dog regimes like that of Mike Harris only for a minority of the time. Once they have done their work, such operations are generally replaced by political players who will consolidate the neoliberal agenda without as much flourish and confrontation. In Ontario, we are living through such a period now.

The McGuinty Government's Record

If we look at the record of the McGuinty Government on poverty since first elected in 2003, it can be seen as a classic example of quietly consolidating an earlier period of aggressive attack on the poor and broader working class. In opposition, the Liberals denounced the Tories for implementing a ‘Safe Streets Act’ that gave the cops additional powers to clear out destitute people from areas where they are seen as a barrier to redevelopment and commercial investment. McGuinty included the repeal of this legislation in his first election platform. Once in power, the Liberals not only left the legislation intact but actually went to court to fight a constitutional challenge to it. If you look at the present implementation of the Act, you can understand how much developers and big merchants would object to its repeal, as it works on their behalf. From 2004 to 2007 the issuing of Safe Streets tickets by the Toronto police increased by 288%.

In the vital area of housing for low income people, this Government has done nothing to address the acute lack of such shelter and has thrown only token gestures at one of the vilest legacies of the Harris years: the rapid deterioration of public housing stock.

The Liberals have moved slightly on the minimum wage with the greatest reluctance and only in the face of a public pressure that was beginning to translate into an electoral threat. However, when it comes to social assistance rates, which have lost 40% of their spending power since 1995, the tiny increases they have provided are not enough to keep up with inflation.

When OCAP did actually find a means to get additional income to people on Social Assistance, through a provision known at the ‘Special Diet’ that allocates extra benefits to meet health related nutritional needs, the Liberals did all they could to oppose this. They changed the application forms to make access to the Special Diet much harder and the Ministry of Community and Social Services issued statements that presented our work to ensure families could eat and pay the rent as an ‘abuse.’

The poor in Ontario are actually worse off now than they were when the Tories left office. The basic and obvious indicators show this. More people are being evicted from their housing because they can't pay their rent than under the Tories. Food bank use is increasing under McGuinty. With this in mind, we have arrived at an opportune moment to take up the issue of ‘poverty reduction.’

The Hype of a Poverty Reduction Agenda

At the moment, there is so much hype in this Province about ‘poverty reduction’ that it feels more like a dance craze than a social policy discussion. Minister of Children and Youth Services, Deb Matthews, is now the Liberals' front person on this initiative. She is now touring Ontario holding consultations. The Liberals have had a little packaging problem because they opted for closed door meetings instead of public hearings but Matthews has wisely chosen to accept some critical voices at these things and to err on the side of ’openness.’ In any event, the official Matthew's meetings are being augmented by MPPs' town halls and a range of social organizations and municipal bodies are inviting the Liberals to come and consult about poverty at events they set up.

So, what is to be made of this frenzied public discussion of poverty? The obvious consideration flows from what I pointed out above. The process is being conducted by a Government that has had five years to deal with poverty. But it has chosen to keep in place those elements of the Tory ‘Common Sense Revolution’ that made the poor so much poorer. This is a consideration worth keeping in mind when deciding what worth to place on the whole spectacle of public hand wringing on poverty in Ontario (or Canada, for that matter). There is no rejection of the hard right poverty policies of neoliberalism implemented by Harris at hand.

The next thing to highlight is that, while the Ontario Liberals have jumped onto the ‘poverty reduction’ bandwagon with a lot of flourish, they are only the latest in a series of regimes internationally who have found it useful to take up this kind of an initiative. The notion of ‘poverty reduction’ has, actually, emerged in the context of the oppressed developing countries. In the context of an agenda that is making rural subsistence impossible for countless millions, masses of people are moving into the ‘mega’ and ‘hyper’ cities of the ‘Third World’ to be warehoused in the greatest slums in human history. Economists linked to the International Monetary Fund and World Bank have come up with the notion that such oppressed populations can be ‘empowered’ as small scale entrepreneurs. It is a grotesque reworking of the old concept of ‘every man a shop keeper.’ Naturally, such a 'solution' is to the liking of those who are inflicting this misery on millions of people because it doesn't challenge their creation of a ‘planet of slums.’ It is the kind of fake ‘reform’ that a vast process of retrogression that has been global neoliberalism can happily embrace.

In ‘developed’ countries, too, poverty reduction is now being taken up. Ireland and Britain are often being invoked as examples. Ireland does not provide much of a parallel to the situation in Ontario. Poverty reduction measures there took place in the context of a rather unique period of ‘Celtic Tiger’ economic development (with significant and enduring poverty still remaining) that is about as far removed from the present context in Ontario as could be imagined. In Britain, then Labour Party Prime Minister Tony Blair moved to stabilize the situation following the years of the Conservative Party led by Margaret Thatcher by reorganizing what she left standing of the social infrastructure to ensure some of the worst excesses were removed (or appeared to be) at very low cost. Blair also placed a great deal of emphasis on ‘child poverty’ (an issue I shall return to shortly). In any event, the main point is that 'poverty reduction' in the 'developed' countries is also based on the notion that the neoliberal order is immutable and that 'solutions' must be found, as Minister Matthews likes to tell her audiences here, ‘within existing resources.’

From the standpoint of capital and their interests, I would point to two considerations that prompt a concern with the meaning of the 'poverty reduction' agenda. Firstly, you do actually have a wing of the ruling class who find themselves uneasy with a too brutal and naked dismantling of the mechanisms of social provision. We know that the enactment of social programs often results from organized working class pressure or the fear of mass discontent. That, indeed, is the major factor but it is also sometimes the case that concessions are brokered out of a concern for a basic level of social stability necessary for good order and profit making without any resistance coming from the working class. In the 1920s, Ontario put in place a 'mothers' allowance' system to provide income for some single parent families. There were no riots or marches that convinced the Government to act. Instead, a lobby of well connected reactionaries put forward a case for improving social stability and creating a better next generation of wage workers by ensuring that children were not raised in conditions of out and out destitution.

So, in the present Ontario climate of post-Harris consolidation of capital's agenda, there are concerns in high places about how to best enjoy the fruits of victory. I don't want to exaggerate this tendency, but it is a factor. When economists from some of the leading Canadian banks talk about welfare rates being too low, as happens from time to time, we are seeing expressed the squeamish reservations of the post-Harris (and the post-Paul Martin cuts at the national level) social engineering wing of the capitalist class. Of course, the clearest example of this process at work is the Toronto Star's preposterous “war on poverty.” This newspaper, linked historically as it is to the Liberal Party, thinks that the social inequalities of capitalism can be preserved without the need for extremes of poverty. So, the Star takes up the role of a respectable and not overly demanding conscience of the government and, naturally, its concern for poverty evaporates in the event the poor get angry and fight back.

The above consideration, however, competes with another second motive underlying ‘poverty reduction.’ As serious a bite as Harris took out of Ontario's systems of social provision, no one could suggest that the process has run its course. There is still more surplus value to be extracted from the working class and the welfare system can still be modified to that effect. Such reform of welfare has characterized neoliberalism in attempting make the poor ever more dependent upon the market and widening the differentials between social assistance rates, minimum wages and median wages.

It would be wrong to imagine that the package of ‘poverty reduction’ measures that the government tells us to expect by the end of the year will simply be inadequate. There is every reason to fear that they will include elements that are extremely regressive. Everywhere she goes, Minister Matthews places the focus on child poverty. The Ontario Government is, in fact, already moving in the direction of a distinct benefit for low income children. The first payments under this system will be organized in such a way that more money will go to low wage families in poorly paid occupations and less to those on social assistance. In fact, they are removing clothing allowances for kids on welfare at the same time as they implement the new benefits. This means that these families will be expected to put aside money for winter and 'back to school' clothing out of the wretched few dollars a month they are receiving as a children's benefit.

This direction points to a very dangerous feature of what is being prepared by Queen's Park. They want the welfare system to be an even more effective conduit towards lower wage jobs. If children's income is separated from that of their parents, it is easier to create a mythical income adequacy for the most 'deserving' while tightening the screws on the employable adults, be they parents or people without children.

Welfare has always been a reluctant concession. The idea was that, while some measure of social provision was needed to prevent starvation, social dislocation and mass disturbances, the income level provided should be as low as possible and the experience of receiving it should be as punitive and degrading as possible. Exceptionally exploitative employment had to remain the better option for the poor. The refinement of the system that is now being prepared provides a subsidy to low wage employers, a sub-standard benefit for children on assistance and a way of isolating and dealing harshly with employable adults. There are, indeed, a few wolves to be found in the sheep's clothing of 'poverty reduction' in McGuinty's Ontario.

Mobilization Against Poverty

There is a great deal that can and must be done around reducing poverty in Ontario. But the present antics of the Liberal Government are not going to take us there. They are presently controlling the process to a maddening degree and this reflects bigger problems in terms of the working class movement and its lack of effective mobilization. Certainly, there is grumbling even at the forums the Government is setting up. The Matthews' line that poverty will be addressed without reversing the transfer of wealth to the wealthy that was the essence of Harris's Common Sense Revolution, and one of the central objectives of neoliberal policies in Ontario and the world over, is starting to rub people the wrong way.

However, the Liberals still have control of the process they have established. They are bringing in to sit at their table many of those who could give a lead in terms of challenging the Liberals on poverty issues. People are telling them what they have told governments for decades all over again and community energy is being drawn into exploring questions that have been answered a thousand times over. If we are really to talk about reducing poverty it does come down to winning resources to build housing, provide decent income and other such basic and simple initiatives. The needs are clear and the measures needed are not hard to discern. The issue is to force these things from a political regime that is determined not to provide them.

Clearly, the present round of Ontario Government consultations on poverty can't be wished away. It is dominating the political landscape in Ontario at the moment. In OCAP, we deplore this fact but have to recognize it. At present, we can only present our point of view and realize that we are not able to transfer community energy from talking with Liberals to mobilizing against them. However, there is one obvious limitation to the government's consultation strategy. At a certain point, the talking has to stop and the results of the process must be revealed. At that time, the striking lack of progress on poverty reduction is going to hit people in the face.

We intend to look for any and all openings for community mobilization as the consultation process unfolds, and eventually winds down and produces its meager fruits. We hope that it will be sooner rather than later that we can counter the cosmetic and often counter-productive 'solutions' that the Ontario government has been offering with a community mobilization based on demands that address the real needs of poor people.

The Liberals are the main political mechanism in Canada for diverting community anger into safe channels. But their abilities are not absolute in this regard. The Senate Committee on Poverty in the 1970s created expectations and, when it dashed them, a powerful wave of anti-poverty organizing was the result. In 1989, the Social Assistance Review Committee in Ontario did not contain community discontent. Mobilization that followed it, forced the Peterson Liberals to make more concessions than they had wished. It is by no means impossible that we are in the early stages of a similar process to day.

In September of last year, an initiative called Toronto Anti Poverty (TAP) brought together, briefly, an ad hoc coalition of community organizations and trade unions. It was able to organize the largest demonstration on poverty that has been seen in the life of the McGuinty government to date. That was a glimpse of the potential that exists. The anger of poor communities is, as yet, incapable of taking political form on any large scale but it is real and growing. The false hopes generated by the government's 'poverty reduction' strategy can only feed that anger and, very possibly, release it.

That McGuinty is not about to provide measures that will alleviate poverty is a virtual political certainty. His record to date makes it inconceivable that he will go against the neoliberal flow and meet real needs. Moreover, his government is now encountering the results of losses in the industrial sector, economic downturn and the international phenomenon of rising food prices. Already, the food banks are measuring these impacts in terms of increased demand for their services.

Dalton McGuinty is the consummate Liberal and his regime has reflected this. He politically works to maintain the economic system and the social injustices that meet the profit needs of the banks and corporations. At the same time, he allocates the thinnest slivers of social reform along with the illusion that more serious improvements are on the way. It is, however, an illusion that can't be maintained indefinitely. As the Ontario economy falls deeper into recession and crisis and poverty increases, and as the delivery date for 'poverty reduction' comes and goes, the prospects for community mobilization can only increase. The issue is to be ready and to exploit those prospects to the full. •

John Clarke is a Toronto activist in OCAP.

Professor David Harvey teaches Das Kapital by Karl Marx

David Harvey teaches Das Kapital

I highly recommend this to anyone who wants to understand the exploitation of a capitalist economy. It's lengthy but seriously amazing.

For Marc with C.

Global Instability and Challenges to the Dollar:
Assessing the Current Financial Crisis

By David McNally

We are living through financial turmoil so serious at the moment that the International Monetary Fund calls it “the largest financial crisis in the United States since the Great Depression.” Already, commercial banks have collapsed in both Britain and Germany, as has the fifth-largest investment bank on Wall Street. A series of hedge funds have gone under or are teetering on the brink of ruin. It is a near certainty that more financial institutions will fail before the crisis burns out.

It is clear that the Left needs serious analysis of just what is happening to world capitalism at the moment. Too often, however, our assessments are stuck in the past, revolving around debates as to whether or not this crisis represents a repeat of 1929 and the Great Depression.

Such debates detract from the hard work of analysis that is needed. Ignoring the inherently dynamic and historical nature of capitalist society and the continual transformations this involves, they take one particular historical moment in the history of capitalism as the norm against which all others will be measured. The end result is a sterile exchange between, on the one hand, those who assume that history tends to repeat itself and, on the other side, those critics who so exaggerate what has changed (particularly the ability of central banks to dampen tendencies to financial instability) that they present a picture of a capitalism whose contradictions have been effectively muted.

The real challenge for Marxist analysis, however, is to grasp both the changes and the enduring economic contradictions within capitalism, in order to understand how capitalist transformation displaces and reorganizes crisis tendencies without eliminating them.

In the absence of such analysis, much of the radical commentary on offer tends to focus on the blatant deceit and corruption of financial players who have contributed to the market upheaval. This has its purposes. But it runs the risk of downplaying the structural features of late capitalism that breed financial meltdowns – and in so doing of suggesting that the Left should focus on issues like financial regulation rather than class struggle against capital.

Trying to make sense of this crisis is one important step toward developing both an analysis of late capitalism and some of the tasks that confront the Left. To be sure, any assessment of unfolding events will necessarily be partial and incomplete. Nonetheless, it is possible to offer some crucial guidelines for making sense of this crisis.

A Banking Crisis, Not a Liquidity Crisis

It is critical to recognize at the outset that, contrary to the claims of central banks, this is not a liquidity crisis, i.e. financial turmoil caused by insufficient supplies of money flowing through the financial system. Instead, we are dealing with an insolvency crisis caused by the fact that many financial institutions are effectively broke. The result is a trauma in the banking sector.

This trauma persists because a myriad of lending institutions hold billions of dollars in massively depreciated paper that nobody is interested in buying from them. There is a host of exotic names for this paper – Collaterallized Debt Obligations (CDOs), Asset Backed Commercial Paper (ABCP) and so on – but essentially it is an array of debt obligations, or titles to payment of interest and principal on a vast array of loans. Until the crisis broke, investors had been treating such paper as a stock of assets that could at any time be sold, i.e. as liquid wealth. Yet, the value of a debt rests in the first instance on the capacity of the borrower to pay. If the borrower cannot pay, the alternative is for the creditor to seize the asset. But if the asset itself is losing value, then it may not cover the loan – and there might not be anyone out there who wants to buy it. In short, it may not be convertible to cash.

And that is precisely what is happening on a larger and more complex scale today. Economic reality is demonstrating that much of this paper – tied in the first instance to tens of millions of US mortgages – is worth billions of dollars less than what was paid for it. So, much of it is being written off or written down (revalued at amounts that involve enormous losses). It is as if you once had $1000 in the bank, against which you had borrowed many times that amount (say, ten times that amount or $10,000), and you have now learned that you only have $500. Once your creditors discover that, they will scramble to collect in the knowledge that there’s no way you will ever pay off all that you owe. But your $500 will be gone pretty fast. And since you owe $10,000, a lot of your creditors won’t be able to collect. And they won’t be able to sell off your debts to anyone else either.

Fictitious Capital in the Current Crisis

To their holders debts, no matter what their exotic names, are forms of fictitious capital, to use Marx’s term. Rather than consisting of actual assets – such as machines, equipment, factories, buildings or stocks of commodities – that have been produced by past labour, fictitious capitals are paper titles to future wealth. So, if I purchase someone’s mortgage, I have bought a claim to their future mortgage payments. But this claim only becomes real when they have met all the payments required. Until such time, my “capital” in the form of someone’s mortgage remains largely fictitious, or unreal. Stocks, bonds and a whole host of complex financial instruments all qualify as fictitious capitals, where money has been paid for future returns that may or may not materialize.

When capitalism is in a boom or prosperity phase, capitalists rarely worry about the idea that future returns might not materialize. Banks, corporations and investors frenetically buy and sell paper claims to wealth, often with manic get-rich-quick expectations. These are the moments when asset bubbles develop, i.e. ridiculously inflated prices for things like shares of dotcom companies or real estate in Tokyo or San Francisco. So over-confident are investors about the solidity of their fictitious capitals that they use them as means of payment between financial institutions and investors as if they were hard cash.
Bubbles burst, however. And when they first start to lose air an investor panic sets in. All of a sudden, those holding commercial paper realize it is not as good as cash. Indeed, as its value plummets, buyers are hard to find and the values of fictitious capitals start to collapse. At such moments, institutions and individual investors begin panic selling. And they start to call in their loans to other companies or investors. Over night, cash and cash alone becomes king.

“A monetary crisis,” writes Marx, “occurs only where an ongoing chain of payments has been developed along with an artificial system for settling them. Whenever there is a general disturbance . . . money suddenly and immediately changes over from its merely nominal shape, money of account, into hard cash…” [1]

And at such moments, capitalists start to trust only those who have great stacks of cash in reserve. Those whose assets consist overwhelmingly of dubious debt paper quickly find they are being abandoned. In such circumstances, an institutional “run on a bank” can occur, of the sort that rocked Bear Stearns in mid-March of 2008. In the course of 48 hours, Bear’s holdings of cash and liquid assets plummeted from $17 billion to $2 billion as investors pulled their funds from the bank.

So, the root problem is not a lack of liquidity in the system. It’s that there are all kinds of institutions out there that to whom nobody wants to lend, and whose ostensible “assets” nobody wants to buy. Worse, none of the players in the system are entirely certain as to who is holding increasingly worthless paper, or how much of it they have. As a result, the flow of funds between banks and between banks and other lenders (like mortgage companies) keeps seizing up.

This is the reason that injecting cash into the system does not restore confidence. In fact, despite deep cuts to interest rates by central banks, particularly the US Federal Reserve (designed to encourage borrowing) and massive injections of money into the banking system, American banks have continued to tighten lending to consumers, corporations and other banks [2]. The loss of confidence in Bear Stearns thus took place for a fundamental economic reason, not a simply psychological one: Bear’s actual assets, particularly those tied to real estate loans, had been losing massive amounts of value for months. In fact, in June of 2007 two of the bank’s hedge funds, which were deeply invested in sub-prime mortgages, effectively collapsed.

From Housing Bubble to…

And it is there, in the housing sector, that we find a key link between the financial crisis and material assets in the wider economy. For, central to this crisis is the collapse of a manic bubble in US house prices.

For a hundred years after 1895, as Dean Baker has noted, US house prices increased at the rate of inflation. Then, as a result of speculative mania in housing, from 1995 to 2007 they rose 70 per cent more than the cost of everything else. That created an extra $8 trillion in paper wealth for US homeowners. And, with that ostensible wealth in their sights, American consumers ran to the stores, often after taking out loans against the increased value of their homes. At the same time, banks started to loosen up mortgage lending, often far beyond the real capacity of borrowers to pay, and then turned around and sold the debt to all kinds of investors. As a result, huge amounts of fictitious capital from the US mortgage sector built up throughout the financial system.

That bubble started to burst last summer, with a rise in the number of mortgage holders in default. Many of the mortgages that US buyers had taken out were designed with very low payments in the first year or two. But as they “reset” at higher levels, large numbers of borrowers could not keep up. And it just kept getting worse. US housing prices dropped about 13 per cent last year, and have continued tumbling this year. As the houses on which they have taken mortgages fall in value, the cost of buying them has risen for millions of Americans. Huge numbers are just putting the keys in the mail and sending them back to the mortgage lender. Others, unable to make payments, are suffering foreclosure. In March of this year, foreclosures jumped 57 per cent in the US, while house repossessions by banks more than doubled compared to a year earlier. In May, despite claims that the worst was over, foreclosures rose another 48 percent over a year earlier [3]. Many analysts now expect US house prices to decline by another 10 to 20 per cent over the next year. Some believe prices will fall for the next five years.

Meanwhile, the meltdown in the value of their paper assets is calamitous for those who bought those mortgages – through a variety of schemes known as mortgage-backed securities. The borrowers cannot pay and the underlying assets are in freefall. The fictitious character of their assets has been thrown into sharp relief. Buyers for these toxic debts cannot be found, unless it is at staggering low prices.

This is why the asset-backed commercial paper (ACPB) market has been frozen in Canada for the last six months. And now the same thing has happened to the $300 billion auction rate note market in the US. There are simply no buyers of these “assets” to be found.

Yet housing is just part of the problem. Equally dubious junk is now turning up in commercial paper tied to credit card loans, commercial (not just residential) real estate, auction rate notes, leveraged buyout loans and much more. Indeed, growing numbers of analysts are also raising warnings about corporate debt [4].

Not surprisingly, estimates of the total damage of the crisis to the financial system keep rising. Initial predictions had the figure between $50 and $100 billion. Then as bank after bank wrote off billions more, estimates in the range of $400 billion and even $600 billion emerged. In April, the International Monetary Fund calculated that the meltdown will result in losses of nearly $1 trillion. One analyst writing in the Wall Street Journal suggests the global damage will hit $1.4 trillion.

Whatever the ultimate figure – and it is likely to be at the higher end of the predictions – it represents a very large hit for the system. It also means that there are huge losses still to be recorded before the financial system recovers. Nouriel Roubini, among that very small minority of economists who saw the sub-prime meltdown coming and one of the few who have consistently warned that its consequences would be extremely serious, has argued that “the worst is still to come” for the US and global economies. Indeed, in May of this year the number of companies at risk of receiving a credit rating downgrade – i.e. as being more financially precarious than before – rose to record levels, indicating that much more turmoil lies ahead [5].

Global Slowdown

Just how deep and prolonged the slowdown in the global economy will be remains to be seen. But in recent years as much as half of all US economic growth has been housing-driven. Borrowing against rising home values, American consumers fed the engine of the world economy, particularly in their enormous purchases of manufactured goods from around the world. During this round of credit-driven growth, US household debt more than doubled, increasing from $6.4 trillion in 1999 $13.8 trillion in 2006.

Between 1980 and 2000 US imports increased 40 per cent, accounting for 19 per cent of world imports and roughly four per cent of world GDP. Now, as the housing bubble bursts, as consumers hold off on big purchases and try to pay down debt, world exports to the US will decline, and global growth will taper off. In fact, imports into the US dropped by over $6 billion in March, a clear sign that the global slowdown is spreading. Moreover, even a modest move by US consumers to rebuild their savings will knock about 1.5 per cent off US economic growth per annum. And with US consumer confidence now at a 28 year low, it is clear that consumption spending in the US will no longer be driving global growth.

Across the US, construction spending, industrial production, private employment and manufacturing output are all falling. The US economy is clearly in recession. It remains to be seen just how significant the accompanying global slowdown will be.

The Dollar, World Money and the Current Crisis

Alongside the turmoil in financial markets, the current crisis also poses major challenges to the US dollar as the dominant form of world money today.

World money is necessary to the measuring and allocating of value – prices, profits, wages, etc. – within and between regions and nations. It is also essential as a store of value, as a stable asset in which wealth can be stored. In order to do this efficiently, global money must be effectively “as good as gold” – something that everyone will accept because it is a stable and universally recognized means of payment. This is what it means for money to play the role of a genuinely universal equivalent.

For most of the history of capitalism, gold anchored the system of world money, either through an actual gold standard (in which international payments were made in gold) or a gold convertibility standard, under which the leading currency could be converted into gold by the world’s central banks.

Since 1971, however, when US President Nixon broke the dollar’s tie to gold, the US dollar has operated as inconvertible world money. This has produced two tendencies: first, a significant long-term decline in the value of the dollar relative to other major currencies; and, secondly, a new volatility in world currency markets, as investors try to avoid holding on to currencies whose value may plummet. In fact, much of the proliferation of those complex financial instruments called derivatives is a product of the new instabilities in prices, currencies and profits that monetary instability creates. But in the absence of any other viable candidates for world money status, the dollar continued its reign.

Indeed, throughout the last decade or more, the status of the dollar seemed to be rising. Despite huge deficits in the US current account – the balance between what economic actors based in the US owe the rest of the world and what the rest of the world owes these US actors – the dollar kept riding high. This led some pundits to argue that current account deficits (i.e. debts to the rest of the world) are irrelevant where the dominant imperial power is concerned. Even as the US economy started to run deficits of $500 billion per year and more with the rest of the world – deficits that are essentially paid for by printing and shipping off dollars – these commentators insisted that there would be no meaningful consequences for the economy of the United States.

The reality is much more complex. It is true that the world money-issuing state can get away with deficits that would not be tolerated in the case of any other nation-state. But it is not true that it can do so infinitely. Sooner or later, as more and more of the currency floods into world markets to cover these deficits, a point must be reached at which some of those holding dollars become tempted to unload them in favour of other currencies or assets. And at that point, an inevitable decline in the dollar’s value would set in, increasing the pressure on others to dump it as a depreciating financial asset.

Flight from the Dollar?

In fact, precisely this process has been underway for some time now. Beginning in 2001, private investors began to dump dollars. As a result, the greenback has lost 40 per cent of its value relative to other currencies since 2002. And the decline would have been much worse were it not for the fact that central banks in Asia, particularly China and Japan, stepped into the breach and invested massively in the US.

These Asian central banks have been effectively returning to the US the dollars it ships overseas to pay for its current account deficit. (This is done by making foreign investments in the US, be it in US treasury bills or the stocks of banks and corporations.) Some commentators have held that this process could continue for decades, dubbing it “Bretton Woods II,” after the original Bretton Woods agreement that created the post-World War 2 dollar-gold regime.

But there have always been three inherent flaws in this arrangement. First, this massive recycling of dollars back to the US only fuels speculative bubbles, as US financial institutions try to make profits by finding borrowers for this money, be it investors in dotcom stocks, or low income home buyers. Yet, when these bubbles burst, as has the most recent one in housing, it makes the US national economy a less attractive place for investment (since investments have become highly risky and unprofitable). Secondly, as the Federal Reserve lowers interest rates to prevent the bursting bubble from becoming a full-fledged crisis (as it has been doing in recent months), it makes dollar-denominated assets less and less attractive, since higher interest rates are available elsewhere. Finally, as low US interest rates provoke a flight from the dollar, investors holding the US buck have a greater and greater incentive to get out of it.

And even foreign central banks are doing so, albeit incrementally, under the byword of “diversifying” their holdings – i.e. reducing the percentage of international reserves they keep in dollars. In recent years, China, Russia and South Korea have all reduced the proportion of international reserves they hold in dollars. Russia, for instance, has gone from 30 per cent to 50 per cent of its reserves in currencies other than the dollar. More recently, a number of Middle East oil-exporting states have done the same. So worried are US officials by these moves that, when the United Arab Emirates was musing about dropping its currency peg to the dollar, US officials visited the UAE central bank governor to lobby against the move.

Why does the US government care about countries reducing their dollar holdings? Put simply, the ability to print dollars to pay debts is a huge imperial privilege. It is, in the words of the Economist magazine, as if you could “write cheques that were accepted as payment but never cashed” [6]. This privilege, known as seigniorage, allows the state that issues world money to appropriate a disproportionate share of global value and surplus value just by virtue of its role in the world monetary system. This has allowed the US great flexibility in financing imperial wars and it has provided an enormous boost to the US national economy, which has paid for goods with paper.

But now private investors and central banks are becoming increasingly reticent about taking ever-growing amounts of these blank cheques. Furthermore, for the fist time in several generations they now have a meaningful alternative to the dollar: the euro. And many signs indicate that the euro is starting to play a larger world money role.

When it was first introduced in 1999, for instance, the euro comprised 18 per cent of all global reserves. Today it represents 25 per cent of international reserves. As a means of payment for cross-border operations, the euro now figures in 39 per cent of all such transactions, versus 43 per cent for the dollar. And in international bond markets, 49 per cent of all debt was denominated in euros in 2006, compared to 37 per cent for the dollar.

None of this is meant to suggest that the euro will simply displace the dollar. The European Union economy is not large and dynamic enough for that to happen and the dollar is still the world’s dominant currency by a considerable measure. But these trends do suggest that the dollar’s role is diminishing now that there is a viable alternative. With this in mind, Deutsche Bank predicts that the euro will constitute between 30 and 40 per cent of world reserves by 2010.

What these developments indicate is a genuine contradiction between regionally based accumulation projects. Capitals based primarily in Europe are using the European Union and its central bank to strengthen their global standing relative to American-based capitals. To be sure, capitals share convergent interests. But they are equally divided by divergent ones. Indeed, one of the keys to understanding the patterns of regional rivalry in the age of the new imperialism is to grasp the complex ways in which convergence and divergence of interests interact. The long-term conflict between the world-money capacities of the euro and the dollar figures centrally here. Without a doubt, this is not the territorially-based rivalry that was at the core of early 20th century competition among imperialist powers. But it does nevertheless involve new patterns of competition between regional political-economic projects for the appropriation of larger shares of world value.

And at the moment, the capacities of the American state look to be constrained by a declining global appetite for the dollar among investors. In 2007, for instance foreign residents borrowed $596 billion in long-term stocks and bonds in the US, down from $722 billion the year before [7]. This relative decline in the appetite for the dollar poses a real dilemma for the US state. In order to prop up the dollar, and retain the seigniorage privileges that boost its national economy and underwrite the financing of imperial militarism, it would have to raise US interest rates. But interest rate hikes would deepen the recession in the US (making it harder to borrow and pushing many indebted Americans into bankruptcy and default), and they might topple more indebted corporations and banks.

For the moment, the US state has chosen to try to offset the recession by keeping interest rates low. But this only depresses the value of the dollar and weakens its world money status. And this gives the US state less financial means to maneuver on the world stage. As a result, the chairman of the Federal Reserve Bank, Ben Bernanke has taken to talking up the dollar, though so far to mixed results [8].

And so, the US state confronts a dilemma: to prevent a deep slump it must pursue policies that weaken the world standing of the dollar. In the medium to longer term, however, a diminished dollar will create tighter constraints on the financial capacities of US imperial operations. This is a real and abiding contradiction and the US state is not able to wish it away.

Persistent Contradictions

If the current financial crisis illustrates anything, then, it is the persistence of fundamental contradictions of neoliberal capitalism. With an enormous “dollar overhang” sloughing through the world economy, asset bubbles regularly form – in Japanese real estate, in East Asian stock markets, in dot-com, or in US real estate. And each time, central banks intervene to monetize debt obligations, i.e. to give legal tender for junk. And the end result is to flood the financial system with money that will flow into yet another speculative bubble, as seems to be happening at the moment in commodities such as oil, gold and foodstuffs. Meanwhile, global dollar surpluses will continue to exert downward pressure on the value of the greenback.

Thus far the US Federal Reserve has offered up $500 billion in US treasury bonds, effectively as good as cash, for junk on the books of banks and investment houses. The Bank of England is proceeding along the same lines.

But as they flood the system with money, these central banks also prime the pump of their nemesis – inflation. This has prompted the International Monetary Fund to issue a stern warning about rising inflation. As soon as central banks think they have stabilized the financial system, they are likely to heed the warning by turning to anti-inflation policies that will trigger corporate bankruptcies, job losses and declining living standards. Already the European Central Bank has indicated that fighting inflation is its priority and the Bank of Canada surprised observers by failing to lower interest rates in June 2008, citing worries about inflation.

Of course, capitalist classes the world over will try to make sure that working classes and the global poor bear the brunt of the inflationary hardship. And the weakness of the international left is not promising in this regard, despite important and inspiring movements of resistance, particularly in much of Latin America.

Too often, however, sections of the Left imagine that their role is to offer policies that will avert crises of capitalism. In so doing, they gravitate to a kind of Keynesian politics designed to boost demand and consumption.

It is not the job of the Left to save capitalism from itself, however. To be sure, we have an obligation to advocate and agitate for policies to protect the victims of the crisis, policies that cut against the very market logic of neoliberalism. A case in point would be campaigns for publicly-funded social housing programs at a time when, in the US, millions face foreclosure. Equally important are campaigns to raise social assistance rates in order to protect the most vulnerable.

But equally vital is a Left that names the actual contradictions of capitalism, one that addresses the disasters of the neoliberal model and publicizes the inherent conflict between capital accumulation and the satisfaction of human needs. And this requires a Left that speaks openly of socialism as the alternative.

We now confront a significant crisis of the neoliberal reorganization of capitalism. And every crisis represents an opportunity – for both the old order and the forces of the new. The Marxist Left is not especially well-equipped in this regard. But we must do what we can so that the forces of authentic change are better prepared when the next crisis breaks, as surely it will. To this end, it is incumbent on us to seek to understand this crisis, to agitate to protect its poorest victims, and to do the patient work of socialist education about real alternatives to the logic of the market.

Obama’s Chicago Boys

By Naomi Klein

Barack Obama waited just three days after Hillary Clinton pulled out of the race to declare, on CNBC, "Look. I am a pro-growth, free-market guy. I love the market."

Demonstrating that this is no mere spring fling, he has appointed 37-year-old Jason Furman to head his economic policy team. Furman is one of Wal-Mart's most prominent defenders, anointing the company a "progressive success story." On the campaign trail, Obama blasted Clinton for sitting on the Wal-Mart board and pledged, "I won't shop there." For Furman, however, it's Wal-Mart's critics who are the real threat: the "efforts to get Wal-Mart to raise its wages and benefits" are creating "collateral damage" that is "way too enormous and damaging to working people and the economy more broadly for me to sit by idly and sing ‘Kum-Ba-Ya' in the interests of progressive harmony."

Obama's love of markets and his desire for "change" are not inherently incompatible. "The market has gotten out of balance," he says, and it most certainly has. Many trace this profound imbalance back to the ideas of Milton Friedman, who launched a counter-revolution against the New Deal from his perch at the University of Chicago economics department. And here there are more problems, because Obama—who taught law at the University of Chicago for a decade—is thoroughly embedded in the mindset known as the Chicago School.

He chose as his chief economic adviser Austan Goolsbee, a University of Chicago economist on the left side of a spectrum that stops at the center-right. Goolsbee, unlike his more Friedmanite colleagues, sees inequality as a problem. His primary solution, however, is more education—a line you can also get from Alan Greenspan. In their hometown, Goolsbee has been eager to link Obama to the Chicago School. "If you look at his platform, at his advisers, at his temperament, the guy's got a healthy respect for markets," he told Chicago magazine. "It's in the ethos of the , which is something different from saying he is laissez-faire."

Another of Obama's Chicago fans is 39-year-old billionaire Kenneth Griffin, CEO of the hedge fund Citadel Investment Group. Griffin, who gave the maximum allowable donation to Obama, is something of a poster boy for an unbalanced economy. He got married at Versailles and had the after-party at Marie Antoinette's vacation spot (Cirque du Soleil performed)—and he is one of the staunchest opponents of closing the hedge fund tax loophole. While Obama talks about toughening trade rules with China, Griffin has been bending the few barriers that do exist. Despite sanctions prohibiting the sale of police equipment to China, Citadel has been pouring money into controversial China-based security companies that are putting the local population under unprecedented levels of surveillance.

Now is the time to worry about Obama's Chicago Boys and their commitment to fending off serious attempts at regulation. It was in the two and a half months between winning the 1992 election and being sworn into office that Bill Clinton did a U-turn on the economy. He had campaigned promising to revise NAFTA, adding labor and environmental provisions and to invest in social programs. But two weeks before his inauguration, he met with then Goldman Sachs chief Robert Rubin, who convinced him of the urgency of embracing austerity and more liberalization. Rubin told PBS, "President Clinton actually made the decision before he stepped into the Oval Office, during the transition, on what was a dramatic change in economic policy."

Furman, a leading disciple of Rubin, was chosen to head the Brookings Institution's Hamilton Project, the think tank Rubin helped found to argue for reforming, rather than abandoning, the free trade agenda. Add to that Goolsbee's February meeting with Canadian consulate officials, who left with the distinct impression that they had been instructed not to take Obama's anti-NAFTA campaigning seriously, and there is every reason for concern about a replay of 1993.

The irony is that there is absolutely no reason for this backsliding. The movement launched by Friedman, introduced by Ronald Reagan and entrenched under Clinton, faces a profound legitimacy crisis around the world. Nowhere is this more evident than at the University of Chicago itself. In mid-May, when university president Robert Zimmer announced the creation of a $200 million Milton Friedman Institute, an economic research center devoted to continuing and augmenting the Friedman legacy, a controversy erupted. More than 100 faculty members signed a letter of protest. "The effects of the neoliberal global order that has been put in place in recent decades, strongly buttressed by the Chicago School of Economics, have by no means been unequivocally positive," the letter states. "Many would argue that they have been negative for much of the world's population."

When Friedman died in 2006, such bold critiques of his legacy were largely absent. The adoring memorials spoke only of grand achievement, with one of the more prominent appreciations appearing in the New York Times—written by Austan Goolsbee. Yet now, just two years later, Friedman's name is seen as a liability even at his own alma mater. So why has Obama chosen this moment, when all illusions of a consensus have dropped away, to go Chicago retro?

The news is not all bad. Furman claims he will be drawing on the expertise of two Keynesian economists: Jared Bernstein of the Economic Policy Institute and James Galbraith, son of Friedman's nemesis John Kenneth Galbraith. Our "current economic crisis," Obama recently said, did not come from nowhere. It is "the logical conclusion of a tired and misguided philosophy that has dominated Washington for far too long."

True enough. But before Obama can purge Washington of the scourge of Friedmanism, he has some ideological housecleaning of his own to do.

This column was first published in The Nation.

Obama’s Victory Ours?

By Mumia Abu-Jamal

With the attainment of the required delegates to claim the Democratic Party’s nomination for U.S. president, Sen. Barack H. Obama (D. ILL.) has written a new page in American history.

For by so doing he succeeds where Channing Phillips, Shirley Chisholm, Jesse Jackson, Sr., and Al Sharpton could not-by gaining the necessary delegates to demand nomination.

Of course, there have been numerous Black candidates for president, but these have been third party efforts designed more to raise issues, to organize or protest than to actually win elections. Some of the best known have been Eldridge Cleaver (former Black Panther Minister of Information), Dick Gregory, Dr. Lenora Fulani, and the former congresswoman, Cynthia McKinney.

But this is a different kettle of fish, for Obama’s candidacy is the closest to make it to the winner’s circle.

What also distinguishes Obama from his predecessors is he doesn’t come from civil rights, Black liberation, socialist or anti war movements. (He often remarks at speeches, “I’m not against all wars, I’m just against dumb wars”)

Indeed, although his detractors may try to paint him as a leftist liberal this is hardly true. On issues both foreign and domestic he would’ve been more at home in the Republican Party of his senatorial forebear, Edward Brooke of Massachusetts. For though he is Black by dint of his African father, he has studiously avoided Black political groups in his long, harrowing climb to the rim of the White House.

He has studiously avoided the very real and long standing grievances of Black America. In fact, he tried to run a “post-racial” campaign until Sen. Hillary R. Clinton (D.N.Y.) (and her rambunctious husband, former Pres. Bill), brought race front and center during the Super Tuesday February primaries, by trying to pigeonhole him as “the Black candidate.”

This primary wounded Obama, and as he won in the delegate count, he also lost a number of primary states, such as Ohio and Pennsylvania, which are necessary for a win in November.

Politics is the art of making people believe that they are in power when in fact, they have none.

It is a measure of how dire is the hour that they’ve passed the keys to the kingdom to a Black man.

As in many American cities, Black Mayors were let in when the treasuries were almost barren, and tax bases were almost at rock-bottom.

With the nation’s manufacturing base also a thing of history, amidst the socioeconomic wreckage of globalization, with foreign affairs in shambles, the rulers reach for a pretty, brown face to front for the Empire.

“Real change that you could believe in” would be an end to Empire, and an end to wars for corporate greed, not just a change of the shade of the political managers.

That change, I’m afraid, is still to come.

Mumia Abu-Jamal is an acclaimed American journalist and author who has been writing from Death Row for more than twenty-five years. Mumia was sentenced to death after a trial that was so flagrantly racist that Amnesty International dedicated an entire report to describing how the trial “failed to meet minimum international standards safeguarding the fairness of legal proceedings.” Mumia is author of many books, including Jailhouse Lawyers: Prisoners Defending Prisoners vs. The USA, forthcoming from City Lights Books.

This article is reproduced from ZNet