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There have been endless discussions as to whether the current economic crisis is a debt crisis, a banking crisis or (in Europe) a trade imbalance crisis.  Ultimately, we are facing redistribution issues between a wealthy minority and an increasingly beleaguered majority (the 99%) but it's worth remembering out how that actually played out to bring us to today's situation, and how that's playing out in the euro crisis.

The main general trend is the one pushed by globalization: there is an excess of available labor compared to capital, and thus downwards pressure on the price of labor. Capital is mobile and needs to be satisfied; labor is stuck, and many others (the unemployed, the immigrants or the rural moving to the cities) can replace you. Stagnant or dropping wages, and lower taxes on capital, in most Western countries over the past 40 years are the fundamental background to today's situation.

As this was not seen as acceptable politically (after all, most voters have labor to sell rather than capital), various ways have been found to hide this reality. Some, like increasing workforce participation by women, are not negative per se. But the main tool which has been used has been to make it possible for households to increase their debts.  This allowed consumption growth to continue, fueled by borrowed money rather than by actual income increases. A lot of that added debt has, for a while, looked benign, as it was backed by corresponding growth in asset (read - housing) values. Everybody enjoyed the asset bubble - the wealthy, as they own most assets, and everybody else, as they rode that housing bubble at their scale. Oh sure, in the meantime, productivity increases were captured, on the revenue side, by a very small slice of the population, but that was ok as long as everybody could keep on spending!

In other words, the combination of asset price inflation (the kind of inflation that our modern central bankers love, somehow) combined with no wage inflation (because central bankers hate that kind of inflation) allowed to hide a massive shift in income distribution, as shown in the first part of the graph below:

But what could not last for ever did not, and the asset bubble duly collapsed - but not after having being extended several years beyond its due date thanks to repeated interventions by the central banks, who seem to be endlessly willing to provide free money to protect asset prices. What should have caused, as in previous such crises, a re-balancing of incomes away from the rich (as, after all, they own most of the assets) via large scale bankruptcies and asset write downs turned into something else this time: the asset price collapse was deemed systemic and the cost of that was borne by governments instead of by the private owners of overvalued assets (except, well, individual owners of houses - they did not get protection from falling housing prices - only financial assets backed by failing mortgages got that protection). That amounted to a massive transfer of wealth from everybody to a small minority - i.e. those that made money on the way up ended up sharing their losses on the way down.

Imaginary wealth backed by claims on dubious assets suddenly turned into real wealth backed by claims on highly creditworthy counter parties - our governments. But, having taken on this new burden, our governments found themselves significantly more indebted than before and their creditors (including those who had traded their worthless assets for claims on government) began to fret that such burden was unsustainable and that governments needed to reduce their spending.

Of course, they did not suggest that government renege on their commitments to make whole the speculators who would otherwise have gone bankrupt in the bubble crash - no, they insisted that the reasonable thing to do was to cut on everything else - the spending which was not the cause of the problem, which was necessary before and remains necessary today, but which could no longer be afforded - because, well, the claims of the speculators had precedence, obviously. Thus the second part of the graph above, where the new wealth sharing arrangements remain even as overall wealth comes back to its previous level.

In terms of class warfare, you thus had the following phases of transfer of wealth from the many to the few:

  • in the boom phase, tax cuts and an asset bubble allow the rich to capture most of the increase in imaginary wealth while everybody else trudges along (many thinking that they are also lifted into wealth as their houses appear to become worth more and more); the few increase their share of the pie;
  • in the crash, the bank bondholders (i.e. the rich, directly or indirectly), get bailed out while homeowners don't; debt is transferred from financial asset owners onto taxpayers; that share of the pie is "sanctuarised"
  • in the ongoing recession, government spending (which goes mainly to fulfill the needs of the many) is cut, reducing actual living standards for most; money is transferred to rich taxpayers from everybody else; the pie shrinks, (other than the "sanctuarised" bit).

If you look at the euro crisis, caused at heart by persistent trade imbalances between countries not corrected by some mechanism to recycle the surpluses from export countries to import countries, there are various ways to ultimately unwind the trade imbalances: (i) voluntary direct transfers (in the form of a fiscal union, a federal pension system like US Social Security, regional investment funds or the like), (ii) involuntary direct transfers (in the form of default by the trade-deficit side borrowers), (iii) asset-stripping and recession, or (iv) increased spending by the surplus citizens in deficit goods. The choice of (iii) over (i) and (ii) is again a political choice to redistribute wealth away from the poor (the deficit countries) to the rich (the bank bondholders in the rich countries in option ii, or their taxpayers in option i) in a manner which is not symmetrical to the previous wealth 'creation' through trade deficit spending, which did not impoverish the exporters or their financiers, quite the opposite. The fact that (iv), which would most easily happen through wage increases in the surplus countries, is not even discussed, tells us how far we've moved from real solutions.

Bringing the discussion on such wealth transfers would be quite useful, as the debate on the crisis has been quite successfully presented as a fight by the hard working and virtuous, to not pay for the lazy and wasteful. The key to that is the transfer of liabilities from banks to taxpayers, which also creates an acceptable rationale for the Northerner's taxpayers complaints, as they appear to be asked to shoulder burdens that they have no direct responsibility for. That original sin needs to be emphasized again and again, because its sheer scale permits and solidifies all the rest of the wealth capture.

The next step is to present the positive alternative of revenue increases in surplus countries (something that should be popular there...), debt default in the deficit countries (something that should be popular there...), and nationalization at bargain basement prices of the infrastructure of the banks and insurance companies which collapse as a result of such defaults (with bondholders left to fight over the remaining liabilities of such institutions). As to private pension holders who get shafted in the process, well, we've been told for decades that they could do a better job than government of managing their pensions themselves on the markets, so why should they be bailed out? They will still get basic state pensions, because governments won't default on these...

Originally posted to Jerome a Paris on Mon Jan 02, 2012 at 12:13 PM PST.

Also republished by In Support of Labor and Unions, ClassWarfare Newsletter: WallStreet VS Working Class Global Occupy movement, and Progressive Hippie.

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