In 1916, a few months prior to the Russian Revolution, Vladimir Lenin declared that imperialism, dominated by international monopolies, was the highest, and final, stage of capitalism, and that extreme distress amongst the marginalized would inevitably create revolutionary conditions. However, as Nazi Germany was to prove within a little over two decades, that though revolutionary conditions do indeed lead to a social revolution, the nature of that revolution does not necessarily follow the vision outlined by Lenin or, for that matter, by Karl Marx.
The current state of the global economy today makes the best case for restraining the power of private capital to exploit, waste, enrich, indulge and, finally, self-destruct. But as the rapidly unfolding events are proving today, far from being in crisis, big capital is undergoing a compelling resurgence. Ostensibly, authorities in Europe and America are busy trying to find answers to the unprecedented chaos within their financial systems; the facts however show that what really is happening is the cementing, by legislation, of the alliance between institutions representing political power on one hand and corporations in control of the engines of the domestic and global environment on the other.
State capitalism, as this phenomenon can be termed, is not akin to nationalization, as many western economic experts would lead you to believe. State capitalism, as understood from a detailed study of the structural framework of countries like Russia, China and Iran, is not one step forward towards socialism, by any measure. In fact, state capitalism enables private capital, particularly big capital, to continue its relentless pursuit for profit with renewed vigour, primarily due to replacement of insurance pools by political authority as the willing re-insurer of last resort, and all resorts with the passage of time.
Closely scrutinized, the Wall Street bailout package and other rescue programmes constitute, for all practical purposes, transfer of business risks to the state when the very business models (including banking, housing and industry) which characterized the free world are on the verge of imploding. While approving the bailout, the US Congress also passed legislation granting a 25-billion-dollar loan for General Motors, Chrysler and Ford, apparently to produce fuel-efficient cars. Another 600 billion dollars have been approved for veteran affairs and, yes, for defense and homeland security. And latest reports suggest that at least two additional economic stimulus bills, each worth at least 200 billion dollars, are now circulating in the corridors of power in Washington.
In the interim, nobody has credible answers to declining family incomes, to rising unemployment, to the quality of health care and education for the middle- and lower-income segments of the population, and to the grave situation concerning immigration. The better judgement is that, outside the steady flow of political spin, state capitalism is not a system designed to help the needy. Truth be told, today’s global economy does not provide the kind of surpluses which sustained the concept of a welfare state for nearly five decades anyway.
The question of the day is this: what does this phenomenon of state capitalism tell us about the fate of the credit and the equity markets?
Firstly, as the examples cited prove, spreads on debt and valuations of equity will be dictated by those in political and financial power, not by free market supply and demand considerations. Secondly, since state capitalism, as an ideology, addresses economic misalignments on a crisis-by-crisis basis, the capital markets are due for exponentially higher levels of volatility and implied volatility; option prices will shortly hit record, never-seen-before levels.
Finally, and most importantly, credit for the working poor will become increasingly onerous and, in many instances, non-existent. As much as one hates to bring pre-1933 Germany into the equation, it is a fact that the consolidation of state capitalism under Adolf Hitler gradually eliminated the economic functions of medium and small businesses. The case for the expropriation of Jewish capital was firmly predicated on this proposition. Any discussion of the evils of Nazi Germany invariably point to the holocaust; but, before one gets to the holocaust, it is critical to understand the economic dynamics which created Kristallnacht, the Night of Broken Glass (November, 1938), when thousands of Jewish homes and businesses were destroyed by marauding gangs under the very eyes of law enforcement. One is not suggesting that Kristallnach will be repeated in American or Europe; today, tight credit will do the job, and more.
Political and social considerations apart, investors with cash on hand certainly stand to make money in the dawn of the new era. In terms of equities, the trick is to ride the forthcoming wave of recapitalizations, by investing after a corporate restructuring plan has been announced in a definitive manner. In terms of securitized debt, the safest approach is to demand substantially higher spreads (with 10-12% as a minimum regardless of a credit rating) only once it is evident that the underlying asset has passed thorough valuation scrutiny and is not subject to collateral attack.
In brief, this is no cyclical crisis and, in the eyes of big capital, what we are going through is a major socio-economic transaction, not a crisis of mammoth proportions. Why Lenin and Marx failed to foresee the development of state capitalism, as yet another higher stage of capitalism, will be the subject of a separate commentary.
Tags: bailouts, capitalism, lenin, marx, nationalization, state capitalism
