Making Every Central Bank a Bad Bank: Ernst Lohoff and Norbert Trenkle Discuss the Economic and Financial Crisis – Part 1 of 3
Black clouds on the horizon: With economies in Europe threatening to fall like dominoes and the end of the euro in sight, the political countermeasures seem to be increasingly ineffective despite their absurd dimensions (Germany, for example, is currently committed to an overall liability of € 644 billion).
Every solution to the problem seems to discretely transform into an even bigger problem while exacerbating and deepening the economic, debt, and financial crisis even further. With the end of the final remaining financial bubble, namely sovereign lending, together with looming inflation, the current crisis could make the period following Black Friday in 1929 look like a pleasant stroll on a bright Easter Sunday. The following is a conversation with Ernst Lohoff and Norbert Trenkle, whose book Die große Entwertung (The Great Devaluation) locates the historical limits of the bourgeois economy in our time.
Richard Jellen: How does Marx help us understand the present crisis better than other theorists?
Ernst Lohoff: To answer that, first we have to look at the conversation around the present crisis, which is characterized by a remarkable discrepancy. On one hand it’s an established fact that this is a crisis of “historical proportions” and every couple of weeks there is a new summit meeting that ends with the most important heads of state announcing that they have just saved the global economy from destruction. On the other hand, the explanations that are being offered for this dramatic development are extremely meager. The official discourse around the crisis is being conducted at the level of an amateur plumber who fixes a pipe here and there while the basement fills with water. Every kind of finance-technological maneuver is being discussed, but nobody really knows what will come of them because there is no theoretically grounded analysis of the ongoing crisis process.
Meanwhile, economic theory’s more thoughtful representatives are openly conceding the bankruptcy of their discipline. Harvard professor and former IMF chief economist Kenneth Rogoff, for example, recently told the German business paper Handelsblatt that the highly elegant economic models that have dominated academia for decades have, in practice, been “very, very unsuccessful. When the big shock came, they turned out to be worthless.”
RJ: What caused that total failure?
EL: We think that it goes back to the very questions they’re asking in the first place. The fundamental question of our crisis era is really quite obvious: Why does a society with absolutely explosive material productivity, one that can produce material wealth endlessly, have to conclude that it is apparently “living beyond its means”? We can find the answer to this question in Marx – provided that we read him critically and not along the interpretive models of traditional Marxism or the so-called Marx Renaissance that we’re experiencing now.
Material Wealth vs. Abstract Wealth
Marx’s Capital doesn’t begin by contrasting capital and labor but with the “elementary form” of capitalist society: the commodity. Marx shows that the basic contradiction that explains capitalism’s tendency toward crisis in general and the current crisis in particular is built into the commodity itself. It is the contradiction between two different forms of wealth: material wealth, as expressed in the production of goods, and abstract wealth, which is categorially represented as value and reified in the form of money.
Under the conditions of modern commodity production, meaning within a capitalist society, material wealth is only ever produced to the extent that it can also be represented as value, meaning to the extent that it contributes to the valorization of capital. So the production of goods is always a means to an external end: the end in itself of turning money into more money. Any time this end cannot be achieved because the valorization of capital has ground to a halt, material wealth also stops being produced. Goods are even destroyed because they can’t be sold despite the fact that needs are left unmet on a massive scale. People have to live in tents while their houses sit empty, for example, simply because they can no longer pay off their credit.
RJ: What characterizes economic crises in bourgeois society in comparison with other eras?
Norbert Trenkle: Basically we can say that crises in capitalism don’t arise from scarcity but from and amid abundance. This is a basic insanity that economics can’t explain because it naturalizes the production of abstract wealth: It presents commodity production as a sort of innate form of human economy. For that reason, it doesn’t pay any attention to the internal contradictions between the production of material and abstract wealth and it is blind to the deeper causes of the ongoing crisis.
“Structural crisis in the production of real value”
RJ: What kind of economic crisis is the current one?
EL: Marx distinguishes between collective and particular crises, saying that, “In world market crises, all the contradictions of bourgeois production erupt collectively; in particular crises (particular in their content and in extent) the eruptions are only sporadical [sic], isolated and one-sided.” No crisis in the history of capitalism has really deserved to be called a collective crisis so much as the one that has become manifest since fall 2008. It is an entire system of partial crises that mutually create, overlap, and build upon one another.
Above all, two main layers have to be looked at separately. First there is a structural crisis of real value production. This has been ongoing below the surface since the 1970s, has never been overcome, and in fact cannot be overcome because is it caused by the fact that productivity since then has been too high to keep the process of capital valorization going. Capital has to reproduce itself because otherwise it ceases to be capital and for that purpose a continuously growing workforce has to be utilized to produce commodities. But at the same time, competition is driving an unstoppable productivity race that at its core leads to the permanent replacement of labor with physical capital. That is the fundamental internal contradiction in the capitalist mode of production that ultimately has to turn on the mode of production itself. Specifically, if productivity is so high that huge masses of labor power are made superfluous, that jeopardizes the very basis of capital valorization. That is precisely what is at the core of the fundamental structural crisis that the global capitalist system has found itself in since the end of the postwar boom.
RJ: What is the other essential component of the crisis?
NT: The crisis that we just described has been covered up by the bloat in the financial markets for decades. On the level of our entire society, capital accumulation went back into overdrive after the crises of the 1970s and the global economy managed to start growing again. That growth was no longer supported by actual production of value through the use of labor, however, but by explosive increase in capital within the finance industry. While the finance industry was circulating more and more property titles (debts, stocks, derivatives, etc.), it managed to transform the sleight of hand known as future value, meaning value that has not actually been produced yet and may never be produced, into abstract wealth.
But this reproduction of capital through anticipation of value, which has long since reached astronomical proportions, has itself fallen into crisis. Although the permanent increase in property titles, which capitalism can no longer survive without, is operating in the same way that it always has and is even picking up speed, that’s only because that job is now being done by governments and above all by central banks. States drive up their debt and central banks guarantee private banks excessive credit at what amounts to zero interest while simultaneously buying up government bonds that no one else will buy. In fact we’re slowly reaching the limits to this, the euro crisis being one example.
“Central banks assume the risks”
RJ: How has the role of central banks changed over the course of the financial crisis?
EL: Above all, the term “fictitious capital” conjures the fictitious capital formed by actors in the private sector; commercial banks’ claims against their borrowers; and stocks and bonds that are held by insurance companies, bond funds, or private investors. But to the extent that currencies have been removed from the gold standard, there is another actor that has become important in the creation of finance capital in the finance industry: the central bank. Monetary policy means nothing if not the influence of a currency’s custodians’ on the extent to which fictitious money capital is created. That can happen indirectly, for instance by setting minimum reserves that commercial banks are not allowed to lend.
But there is something else that is much more important. Central banks themselves are entering the financial and capital markets as market participants and accumulating fictitious capital. So-called “money creation” consists of central banks guaranteeing credit to commercial banks, which means buying payment promises. When central banks reduce the interest rates on that credit, it fuels the creation of fictitious capital. Increasing the prime rate has the opposite effect. That interest policy has been essential to overcoming previous crisis slumps in the era of fictitious capital. It even managed to jump start private accumulation of fictitious capital during the serious crisis of the New Economy at the turn of the millennium by drastically reducing the prime rate.
The real estate bubble, which also reignited the flagging real economy, was fed by cheap credit. But the current crisis looks different. To prevent the financial system from collapsing, the central banks have to successively take on more and more toxic assets and guarantee credit on a grand scale where no one else would do so in addition to maintaining a zero-interest policy that will provide the raw material for new bubbles. During the acute crisis phase in the fall of 2008, it only replaced the paralyzed interbank market. Ordinarily, international banks lend each other money that they aren’t currently using at a moment’s notice, but they were so mistrustful of one another after Lehmann Brothers went under that that form of liquidity dried up and the private banks only received credit from central banks.
What’s even more serious than that short-term rescue action is the fact that the central banks have to buy up government bonds on a grand scale in the meantime to prevent the market for those securities from collapsing and setting off a chain reaction of government bankruptcies. But the banking crisis is still smoldering and the central banks are taking on the risks there as well in that they are providing distressed commercial banks with long-term credit that would obviously have to be written off in the event of bankruptcy.
Be it the Fed in the US or the European Central Bank, this is turning every central bank into a bad bank. They’re wildly pumping money capital into the banking system while the quality of their currency reserves is rapidly deteriorating because they are increasingly made up of unmarketable toxic assets. The last four years’ worth of emergency purchases of payment promises may have prevented the financial system from collapsing, but they have only postponed the necessity of devaluation and, in doing so, nationalized it.
“The question is not if there will be inflation but when.”
RJ: How likely do you think it is that inflation will set in?
NT: Monetary stability is threatened from two sides: On one hand, the central banks are feeding more and more money capital into the banking system. As long as the banks and their customers reuse that money capital as capital, meaning as long as they buy property titles or invest it productively, there are no serious consequences for monetary stability. That changes, however, when it flows into product markets and is treated merely as extra money against the commodities that are being traded. Once that happens on a large scale because of a lack of capital investments, the bloat in the financial superstructure will have to be transformed into a currency devaluation, which means inflation. At the same time, as we’ve already indicated, sooner or later this will lead to an open devaluation of monetary reserves. So a hyperextended supply of money will be met with reduced demand.
In this context, the question is not whether there will be inflation but when it will start and just what course it will take. So far inflation, at least here in Germany, has been limited to precious metals and real estate, which function as safe investments in the world of material goods. In everyday life this is already apparent in the form of increasing rents. But it can hardly stop at that.
Incidentally, in a way that means a return to the state that the global economy was in before fictitious capital really took off. In the 1970s, the central capitalist countries were marked by a phenomenon that economists called “stagflation:” Weak growth was accompanied by annual inflation of around 10%. But the dimensions have really slipped in comparison with the proportions of that period. Weak growth may lead to a manifest depression and inflation to hyperinflation. Postponing crisis has a price.
In Part II of this interview, Ernst Lohoff and Norbert Trenkle comment on fictitious capital and the consequences of austerity.
 Marx, Karl: Theories of Surplus Value, Part II, pg. 725, Prometheus Books, 2000.