The GENIUS Act: Setting the Stage for a Federal Bailout When Stablecoins Become Insolvent
Posted on March 4, 2025 by Yves Smith
Yves here. Law professor and bankruptcy expert Adam Levitin, who among other things was Special Counsel to the Congressional Oversight Panel for the TARP, explains in a detailed but layperson-friendly post why the pending GENIUS Act looks designed to lure more chump investors into the crypto pool by giving the impression that stablecoins are safe. But the GENIUS Act would not override bankruptcy laws, and stablecoin investors would likely take large haircuts in any windup….after waiting a long time to get any recovery.
Levitin contends that the GENIUS Act lays the foundation for a federal bailout by creating impression that stablecoins do not have credit risk and that stablecoin investors have protections that they do not in fact enjoy.
I encourage you to read this post in full and circulate it widely, particularly to crypto enthusiasts (to see if they can remotely ‘splain their way out of these issues, given the record in past bankruptcies of crypto custodians) and even more important, to anyone thinking of jumping into the crypto cesspool pond.
To encourage you to give the article the attention it warrants, consider a couple of its important observations:
So what happens if a stablecoin issuer ends up insolvent and files for Chapter 11 bankruptcy? First, it’s not clear that all stablecoin holders would even have a claim in the bankruptcy. Some stablecoins given redemption rights only to a limited subset of institutions, such that most holders do not have redemption rights. Without redemption rights, a stablecoin holder probably doesn’t have a claim. Instead, it would have to sell its claim to one of those institutions with redemption rights, which could then have a claim. Those institutions are going to extract a serious discount, if they’ll buy at all.
And:
If the stablecoin holder has a claim, the GENIUS Act provides that it has super-duper-duper priority per a new section 507(e) of the Bankruptcy Code…..Section 507 provides that section 507(b) claims having superpriority over section 507(a) claims, such as the administrative expenses of the bankruptcy or certain tax claims. But even 507(b) claims get trumped by super-duper priority claims of DIP financiers under section 364(c)(1). So what does new section 507(e) do? It would say that stablecoin claimants have priority over the administrative expenses of the bankruptcy and employee claims and tax claims, but not over DIP financing claims, secured claims, or swaps and repos.
As an initial matter, that’s just unworkable. The administrative claims–the lawyers and other bankruptcy professionals—-need to come first or they won’t do the work: you gotta pay the gravedigger. But once you do, notice the problem: there might not be anything left by the time the stablecoin claimants come up for payment. Remember that a stablecoin issuer isn’t likely to file for bankruptcy unless its peg has broken the buck. That’s doubly bad news for the investors. First, if the stablecoin has broken its peg, then it probably does not have enough assets to pay all of its creditors. So the order of priority really matters. If the issuer’s reserves include lots of swap and repos positions, the issuer’s assets could be cleaned out by counterparties. At that point the DIP financier and the professionals will gobble up what’s left.
So please get a cup of coffee! This piece will reward your attention.
By Adam Levitin, Professor of Law, Georgetown University. Originally published at Credit Slips
In 2021 I posted a draft of an article about custodial risk in cryptocurrency that turned out to be quite prescient. At the time I wrote it, I got a lot of pushback from people in the crypto world that I was scaremongering and that crypto custodians were rock solid. I tried to explain to crypto investors that whatever they knew about crypto, they didn’t know bupkes about bankruptcy, and that if and when things went south, the custodial situation was going to be a hot, hot mess.
And lo and behold, when Voyager and Celsius and BlockFi and FTX came along, a lot of crypto investors got slapped in the face by the workings of Chapter 11. Crypto investors found out that: (1) they were generally just unsecured creditors; (2) their claims were for dollars based on the value of the crypto holdings at the moment of the bankruptcy filing; and (3) it takes a long, long, long time to get paid in a bankruptcy case and you don’t get interest if you’re unsecured. Ouch.
Now we’re again at another peak crypto moment, and it appears that the industry has learned …. nothing (or perhaps everything, if you’re cynical), as it is pushing federal stablecoin legislation, the so-called GENIUS Act, that is going to lull a lot of investors into thinking that stablecoins are safe assets, namely that a stablecoin is always redeemable for US dollars at a 1:1 ratio. It’s not. A stablecoin will maintain a 1:1 peg … until it doesn’t, and once that happens, stablecoin investors are going to be taking serious haircut in the ensuing bankruptcy. None of the insolvency provisions in the GENIUS Act change that. There is no way to eliminate credit risk for free, but the GENIUS Act sets up expectations: I fear that this legislation is going to make unsophisticated investors wrongly believe that credit risk on stablecoins is not an issue. If that happens, the GENIUS Act is setting the stage for a federal bailout of disappointed cryptocurrency investors when a stablecoin issuer goes belly-up and investors discover that they don’t have the protections they thought they had.
In other words, the GENIUS Act is creating an implicit guaranty of stablecoins, which means it is creating an implicit subsidy of the whole DeFi world that operates outside the reach of anti-money laundering regulations. What genius thought this up?
What Is a Stablecoin and What Is Its Use?
A stablecoin is a cryptocurrency token that is pegged to a fiat currency value (or sometimes to a commodity like gold). For example, Circle’s USDC token is pegged 1:1 to the US dollar, such that 1 USDC should be redeemable for $1. The whole idea of a stablecoin is that it is a stable store of value. In other words, a stablecoin is just a token that can be redeemed for a fixed amount of cash.
Although the crypto industry likes to highlight the use of stablecoins for real world applications such as remittances and peer-2-peer payments, the real world usage is scant. As Alexis Goldstein showed in Congressional testimony several years back, the cost of sending remittances in stablecoin when all fees are included is often much, much higher than with good old Western Union; the comparisons the industry posts are never apples-to-apples of all-in costs. (And if you doubt this, ask yourself exactly how useful is it for a recipient in say, Venezuela, to receive a remittance in a form of a stablecoin? Will they be able to pay rent or buy groceries with it? There will have to be conversion into fiat, which involves fees and inconvenience.)
Instead, the primary use of stablecoins is for DeFi market making and lending protocols. This is why stablecoins account for the majority of crypto transactions, even though they are a rather limited percentage of total crypto market capitalization.
Market making. Crypto can trade either through an “exchange” like Coinbase, that’s really just a brokerage that operates a traditional order book like Charles Schwab, or through a DeFi protocol like UniSwap, Curve, or Balancer, that acts as an automated market maker (AMM). AMM’s are apps that manage liquidity pools: liquidity providers put up a pool of stablecoins and Bitcoins/altcoins, which are locked in via an ERC-20 smart contract, and liquidity takers buy and sell the Bitcoins/altcoins from the pool in exchange for stablecoins.
AMMs use stablecoins as their liquidity medium; everything trades in and out for stablecoins. The reason: the AMM doesn’t have a bank account because it’s “owned” by a DAO, which does not have legal personhood and cannot satisfy bank KYC requirements for itself. This means that almost the whole volume of DeFi trading involves trades of stablecoins for other crypto, hence the high transaction volume in stablecoins.
(Ironically, if you wanted to start providing liquidity to an AMM liquidity pool, you’d first need to acquire some stablecoins, and you’d need to go buy them from a traditional exchange like Coinbase or Gemini in exchange for fiat, so there’s no avoiding the need to get a fiat on-ramp somewhere. In other words, there’s no DeFi without CentFi.)
Crypto lending. DeFi lending is also built around stablecoins. DeFi lending protocols use stablecoins as collateral. If you borrow from a DeFi protocol, your repayment is guarantied not by the threat of litigation in the courts or foreclosure on real world assets, but by the automatic liquidation of the stablecoin collateral you posted under an ERC-20 smart contract. DeFi lenders are relying on stablecoins to retain their stable value, otherwise borrowers might opportunistically breach if collateral values fall below the cost of repayment.
What Distinguishes a Stablecoin from a Digital Poker Chip?
Beyond the particularized uses, what makes a stablecoin different from a poker chip in Vegas? Only that ownership is determined not by physical possession, but by control of the private key that is used to authorize transactions in the stablecoin on a blockchain, including redemptions. So it’s basically a digital poker chip.
But is a actual poker chip actually interchangeable with cash at a fixed peg? Sort of, but it’s geographically contingent. You can of course redeem a poker chip from a casino’s own cash cage, and some Vegas establishments besides casinos will accept payment in poker chips because they can readily redeem them at the casino’s cash cage. But most casinos won’t redeem more than a very limited amount of other casinos’ chips (unless they have common ownership); each casino family is a separate currency zone.
Now try paying someone with a Vegas chip in Chicago or DC. If the chip is even accepted for payment it will be accepted at a steep discount. So much for the fixed peg. The discount exists because of five related problems:
Counterfeiting. The payee will be concerned about whether it is even a legitimate poker chip or a counterfeit. How does a DC denizen know whether something is a legitimate Caesars’ chip?
Transaction costs. The payee cannot readily redeem the chip for cash—which is needed for paying certain transactions, such as tax bills and judgments—without traveling to Vegas, which is a huge transaction cost.
Custodial risk. The chip is easy to lose and vulnerable to theft in a way a bank transfer is not.
Issuer insolvency risk. There’s a chance that the casino will go bankrupt and won’t honor redemptions of the chips, so there’s credit risk of the chip issuer.
Uncertainty of value; network effect. The payee will be worried about whether other, downstream payees will accept the chip, and with what sort of discount, which in turn depends on the extent of the first four problems. In short, we have a network effect problem, which cannot be solved until there is enough critical volume of persons willing to accept the chip at par. It’s not enough if they will accept at a discount because that discount will have to be negotiated in every transaction, rendering the chip of uncertain value.(The reason some Vegas merchants will take poker chips as payment is because they have a customer base that might have greater willingness to spend: I might be willing to spend a whole $100 chip on a $90 item rather than shlep back to the casino cash cage to redeem it and get cash so I can pay $90.)
Now consider how that compares with a stablecoin, which fixes the counterfeiting problem and changes the nature of the transaction cost issue, but does not fix the custodial risk or issuer insolvency risk problem, and that in turn results in an uncertainty in value, at least outside of the crypto-ecosystem, such that there is little real world demand for stablecoins.
Counterfeiting. It is easy enough to verify if it is a legitimate stablecoin; counterfeiting isn’t a concern with a stablecoin.
Transaction costs. The stablecoin might be readily redeemable (or not depending on its terms) from any geographic location. But there might be transaction fees on the redemption. The mining necessary to validate the block ain’t free, particularly if you want it done fast, so transaction costs still remain that exceed those faced by a payor on a ACH, debit card, or check transaction. (And please don’t start telling me about merchant fees–I’ve been writing about those for 20 years now, so I know that payments are not free, but they are paid by the payee, not the payor, in the first instance.)
Custodial risk. A stablecoin does not fix the custodial risk problem. The stablecoin still needs to be stored somewhere, as the wallet where it is stored could be hacked (Bybit) or the custodian could embezzle the funds (FTX, Celsius) or the custodian could simple go bankrupt (Celsius, Voyager, BlockFi). The details of the custodial risk change by going digital, but they still exist.
Issuer insolvency risk. A stablecoin does not address the credit risk of the issuer. A stablecoin issuer might not be able to honor its redemption requests because its own investments go bad. USDC, for example, dropped from a $1 peg to 87¢ in the wake of Silicon Valley Bank.
Uncertainty of value; network effect. Here’s where things get weird….Because of factors two through four, the willingness of other downstream payees to accept the stablecoin should still be uncertain; the network effect problem should remain. And for real world users, it absolutely does. Few parties will accept payment in stablecoin for real world transactions, much less at par. The only folks who do for real world transactions are those who are willing to take stablecoins at par do so because they are willing to subsidize stablecoin payments to satisfy their ideological priors about crypto. (This could change–one could imagine Amazon or WalMart issuing their own stablecoins to save on payment costs because they have the scale to make it worthwhile for consumers to bother having their coins. )
In the crypto ecosystem, however, the network effect problem has been overcome–there are enough folks who are willing to take payment in stablecoins at par that the uncertainty of value issue has disappeared. In part this is because if you’re doing DeFi transactions, payment in stablecoins at par is cheaper/easier/faster than the alternative of conversion in and out of fiat. But one would still expect discounting to reflect the risk.
So what gives then? Perhaps investors are subsidizing the risk because of their ideological commitment to crypto. But perhaps investors do not understand or simply cannot measure/price credit risk on stablecoins. Stablecoins have two distinct types of credit risk—custodial and issuer—and both are incredibly hard to measure. Investors have no real way of verifying the security of custodial arrangements or the solvency of stablecoin issuers, and ByBit, Terraform, and FTX should underscore the exposure of the market to sudden catastrophic events. There’s no way to price that risk, so maybe it just gets ignored, especially on the theory that it’s rare and couldn’t possibly happen to me (some behavioral economic spicing here…). But I think another piece is that many investors simply don’t understand the credit risk and just what could happen to them if either a custodian or an issuer runs into trouble. And that brings us to the GENIUS Act, which I fear is going to lull investors into a false sense of security about the credit risk on stablecoins.
The GENIUS Act and Insolvency Risk with Stablecoins
The GENIUS Act would create a federal regulatory framework for “payment stablecoins,” that is stablecoins used for payment or settlement. The entire GENIUS Act is built around addressing credit risk in stablecoins. Most of the GENIUS Act is devoted to creating an upfront regulatory system for stablecoin issuers. I won’t go into the details, but the basic idea is that by having a standardized regulatory system, users of stablecoins can have confidence that the coins are in fact backed by the reserves claimed. (Basically this is just taking a move out of the 1863 National Bank Act, in which national banks were authorized to issue bank notes, but only in accordance with their holdings of Treasury debt, and the Office of Comptroller of the Currency was created to make sure they were complying.) So a lot of the GENIUS Act is trying to address credit risk ex ante and assure investors that bad things won’t happen.
But two provisions of the GENIUS Act deal with what happens if things do go wrong. There are two insolvency risks that arise with stablecoins. First, there is custodial risk, which is a risk that exists for all crypto. And second, there is issuer insolvency risk, which is unique to stablecoins.
Custodian Insolvency Risk
The GENIUS Act attempts to deal with custodial risk by declaring the stablecoins to be property of the investor and requires it to be segregated (but it may be commingled in an omnibus account held by a bank or trust company). What does this property status mean if the custodian ends up in bankruptcy? First, no one should assume that a bankrupt custodian has in fact been complying with its segregation requirements. If they haven’t, the there’s going to be a hot mess.
Second, even if the coins are segregated, they might just not be there. The custodian could have been hacked (ByBit) or the coins could have been embezzled (FTX…). If the coins aren’t there, the investors just have an unsecured claim for their market value as of the date of the bankruptcy filing. No one is actually guarantying that there will be coins for the investors to get back.
Third, even if the stablecoins have been segregated and are still around, it does not mean that the investors have immediate and unfettered access to their stablecoins. An investor cannot unilaterally transfer its coins out of a custodian’s possession without the custodian’s consent (and even more so if the coins are commingled). The investor doesn’t have the full set of keys to the custodian’s wallet.
The bankrupt custodian has little reason to facilitate transfers out of its custody; it’s already lost every customer who wants to take its coins and go elsewhere. Instead, the custodian’s bankruptcy estate will probably freeze transactions, at least temporarily, so it can figure out whether (1) it even has enough of the stablecoins to meet all transfer requests, (2) whether the exceptions to the property rule apply, and (3) whether it has any claims against the investors that it might want to try to exercise through a setoff. Accordingly, the bankrupt custodian will likely take the position that the automatic stay applies to all attempts to transfer the coins. And if the custodian is in a free-fall hot mess, like FTX, where there’s no telling that they will actually even have your coins or have operational functionality even if they wanted to release your coins.
So you’re likely jammed up by the automatic stay, even if it is your property (and smart contracts are not necessarily a work around–they might well be stay violations and subject to avoidance as post-petition transfers). You can move to lift the stay, but again, that’s not automatic. There will have to be a hearing and the court might not rule immediately. In the best scenario, you’re probably not gaining access to your stablecoins for a good month and possibly much longer. Meanwhile, you are exposed to market swings. If the coins drop in value in the interim, well, that’s on you bro. So just making the coins your property doesn’t actually eliminate the custodial risk problem. It only lessens it. Yes, it is better to have the coins as your property than to be an unsecured creditor of the custodian, but it doesn’t mean that you are unimpaired.
Put another way, the GENIUS Act doesn’t entirely resolve the problem of coin ownership that bedeviled the 2022 round of cryptocurrency exchange bankruptcies, but even if it did, that doesn’t actually get the coins back in the hands of the investors immediately.
Contrast this with the fate of deposits at a failed bank. The FDIC probably does a whole bank resolution–the bank is sold as a going concern to a buyer that assumes all of the deposit obligations. The depositor has nearly uninterrupted access to its funds, whereas the stablecoin investor has to wait and possibly fight to get access to its coins and faces market value risk in the meanwhile.
Issuer Insolvency Risk
Custodial risk is a problem that exists for all crypto, but stablecoins have an additional type of credit risk, that of the issuer. The attraction of a stablecoin is that it is (in theory) redeemable at a fixed peg. That requires the issuer to have sufficient liquid assets to be able to meet all redemption requests. In theory, a stablecoin issuer should just be putting its reserves into very, very safe assets, like insured bank deposits, Treasuries, commercial paper, etc. But we know from recent history that sometimes that is not the case. USDC was trading at 87¢ on the dollar when investors realized that its issuer, Circle, had billions in reserve in uninsured deposits at the failed Silicon Valley Bank. Paxos’s BUSD has also found itself massively short on reserve assets in the past. Stablecoin issuers make money off their reserve earnings, so they are always incentivized to try to chase higher yield if they can get away with it.
Does the Investor Even Have a Claim?
So what happens if a stablecoin issuer ends up insolvent and files for Chapter 11 bankruptcy. First, it’s not clear that all stablecoin holders would even have a claim in the bankruptcy. Some stablecoins given redemption rights only to a limited subset of institutions, such that most holders do not have redemption rights. Without redemption rights, a stablecoin holder probably doesn’t have a claim. Instead, it would have to sell its claim to one of those institutions with redemption rights, which could then have a claim. Those institutions are going to extract a serious discount, if they’ll buy at all. (And if the stablecoin is locked up in a smart contract, there are further questions about who would have the bankruptcy claim…)
Super-Duper-Duper Priority Still Doesn’t Make You Top Dog
If the stablecoin holder has a claim, the GENIUS Act provides that it has super-duper-duper priority per a new section 507(e) of the Bankruptcy Code. The Bankruptcy Code’s priority system is somewhat opaque and needs to be pieced together from disparate Code provisions. Here’s the short version. Sitting at the top of the tree are claims not subject to the automatic stay, such as those of repo and swap counterparties. They are entitled to grab whatever margin has been posted to the transactions. After then come secured claims (section 725), but only from their collateral. Then section 726 takes over. It proves that section 507 claims have priority over general unsecured claims. Section 507 provides that section 507(b) claims having superpriority over section 507(a) claims, such as the administrative expenses of the bankruptcy or certain tax claims. But even 507(b) claims get trumped by super-duper priority claims of DIP financiers under section 364(c)(1). So what does new section 507(e) do? It would say that stablecoin claimants have priority over the administrative expenses of the bankruptcy and employee claims and tax claims, but not over DIP financing claims, secured claims, or swaps and repos.
Bankrupt Stablecoin Issuers Are Likely Insolvent
As an initial matter, that’s just unworkable. The administrative claims–the lawyers and other bankruptcy professionals—-need to come first or they won’t do the work: you gotta pay the gravedigger. But once you do, notice the problem: there might not be anything left by the time the stablecoin claimants come up for payment. Remember that a stablecoin issuer isn’t likely to file for bankruptcy unless its peg has broken the buck. That’s doubly bad news for the investors. First, if the stablecoin has broken its peg, then it probably does not have enough assets to pay all of its creditors. So the order of priority really matters. If the issuer’s reserves include lots of swap and repos positions, the issuer’s assets could be cleaned out by counterparties. At that point the DIP financier and the professionals will gobble up what’s left. Bankruptcies aren’t cheap: FTX has had nearly $1 billion in professionals fees. So yes, priority is nice, but stablecoins investors aren’t getting enough priority to really protect them and giving them more (or even what they currently have in the GENIUS Act) starts to make bankruptcy unworkable. (And just so it’s clear, if there’s no bankruptcy process, every stablecoin investor is in a race to the courthouse with all the other investors to try to get a judgment and levy on whatever assets remain of the issuer. Good luck with that.)
Stablecoin Investors’ Claims Might Be Dollarized at Market Values at the Time of the Bankruptcy
Second, their claims are not for a stablecoin, but instead get dollarized as of the time of the bankruptcy petition. There’s an argument that they get dollarized at the market price of the stablecoin, rather than at the redemption value. If so, then they have already realized the market value loss at the time of the bankruptcy filing and will not get it back.
Putting Some Numbers on It
Let’s suppose, however, that there are enough reserves around to pay all of the prioritized stablecoin investor claims. Even if the investors get their claims paid in full, they don’t get them paid until the effective date of a bankruptcy plan, which might be years in the future, and they don’t get any interest on their claims. Let’s put some numbers on it. Imagine a stablecoin issuer that fails after breaking the buck and that its plan does not go effective for 2 years. What happens to an investor who has a $1 million stablecoin claim? He gets paid $1 million in 2 years. If we used a 7.5% discount rate, continuously compounded, then the present value of that claim is less than $800,000. The delay alone will eat up a fifth of the value of the claim.
Now let’s make it even worse. Let’s suppose that the stablecoin is trading at $0.87 and the court says that the investor’s claim is for the value of the coin, not the par redemption amount. Under section 502, the investor’s claim is locked in at 87 cents on the dollar. So the $1 million investment is now a $870,000 claim. If it is paid in 2 years, then the present value, assuming a 7.5% continuously compounded discount rate, is around $750,000, and if it is paid in 3 years, the present value would be down to under $700,000.
Now let’s make it even worse and say that swap and repo claims and professional expenses have eaten away half of the reserves before the plan goes effective. At that point, the stablecoin investor is getting a nominal 43.5¢ on the dollar in 3 years, so the present value under the prior assumptions would be around $350,000.
You might dicker with my discount rate assumption or with the question of whether the claim will be allowed only at the market value rather than face or how long the bankruptcy will take or even if the reserves will be insufficient. Maybe the loss won’t be as bad as in my scenario. But there is no avoiding that (1) there will be a present value loss and (2) whatever the payment is, it will be delayed. It’s either a bit bad, or really, really bad, but there’s no scenario in which the investor doesn’t take a loss.
Bankruptcy Ends up Very Badly for Stablecoin Investors, Any Which Way
The GENIUS Act tries to mitigate credit risk on stablecoins by declaring their property of the investor vis-a-vis custodians, and prioritizing the investors’ claims vis-a-vis creditors of the issuer. But neither is really a fix, and the truth is that absent a government guaranty, there’s no way around this problem. No matter how much stablecoins are prioritized in bankruptcy, bankruptcy is a slow process, and time is money. And there are limits to how far stablecoins can be prioritized in bankruptcy without rendering the bankruptcy system unworkable. (Making stablecoins the property of the investors is no help in an issuer bankruptcy because all the investor gets is a digital token that is worthless without the redemption right, and that’s just a bankruptcy claim; this is different than in the custodian bankruptcy scenario.) The only real way to ensure 100% timely repayment is a government backstop, but that’s not something the industry wants (because it goes with regulation).
At the end of the day, even with a 1:1 peg, a stablecoin is not the equivalent of a dollar in a bank deposit account. If the bank fails, the FDIC steps in and ensures uninterrupted access to the deposit. If the stablecoin custodian or issuer gets in trouble, investors are going to be impaired; the only question is by how much.
So this should raise the question of how a stablecoin pegged to the dollar at 1:1 can clear at par in the market. Perhaps there is some sort of discounting that cannot be observed, but short of that, the only answers I can provide is that investors either do not understand the credit risk on stablecoins, hyperbolically discount it to zero because they cannot readily measure it, or are just willing to subsidize stablecoins because of ideological priors.
Any which way, there’s some sort of unpriced risk here, and the GENIUS Act is likely to lull investors into thinking that stablecoins are equivalent to deposit accounts in terms of credit risk, and they ain’t. That’s not just bad for stablecoin investors. It’s also bad for taxpayers who want nothing to do with crypto.
The GENIUS Act Creates an Implicit Government Guaranty of Stablecoins, Meaning a Subsidy for the DeFi Market
By creating a regulatory regime for stablecoins, the federal government will “own” any problem that arises in the market. And here’s the pernicious operation of its ineffective insolvency provisions: they promise to have created safety for stablecoin investors at no cost, but because it cannot deliver on that promise, it sets up a situation where the government has to deliver safety otherwise, on its own dime. In other words, it sets up a bailout. When there is another crypto crash and stablecoin owners realize that their going to incur major losses, they will come crying for a bailout, noting how critical stablecoins are for the whole DeFi world and how they thought their investments were safe because of the GENIUS Act.
What do you think will happen then? After Silicon Valley Bank can one really have confidence that they won’t get a bailout? Will banks be allowed to support their insolvent stablecoin issuer subsidiaries? Will the US Strategic Cryptocurrency Reserve (if created) be used to bail them out by buying their stablecoins at 100¢ on the dollar?
The GENIUS Act creates an implicit government guaranty of stablecoins. That means that taxpayers will be implicitly subsidizing the DeFi transactions that rely on stablecoins and that generally sit outside of the reach of anti-money laundering enforcement: taxpayers are going to be implicitly subsidizing money laundering. Is that really a desirable policy outcome? I fear the consequences of the GENIUS Act haven’t been fully thought through.
https://www.nakedcapitalism.com/2025/03 ... lvent.html
'Crypto' is the ultimate rentier scam and should be abolished with no compensation.
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The Dangerous Political Game Powell & Yellen Played In 2024
A "Secret" Stimulus: Short Term Democrat Gain For Medium Term Pain
Roger Boyd
Mar 17, 2025
Below is an interview with Michael Howell who has constructed a holistic view of global liquidity that is very different to the usual “M2” bank deposits measure. What he is showing is that the US Federal Reserve, while publicly carrying out Quantitative Tightening (QT) in 2024 was actually carrying out a “hidden” major stimulus to help get the Democrats elected. This was “hidden” by very tightly defining QT as a reduction in the amount of US government bonds on its balance sheet, excluding other forms of Fed activity that would affect bank reserves.
The main liquidity injection by the Federal Reserve (Fed) was through the run down in its Reverse Repo account. This is where the Fed sells securities to financial intermediaries with the promise to purchase them back later; in essence draining liquidity from the financial system. By running down this book, the Fed injected liquidity into the financial markets. The Reverse Repo account peaked at US$2 trillion at the start of 2024 and was run down to near zero by early 2025; nigh on US$2 trillion added to bank liquidity in 2024 with very little in 2025. At the same time, the Fed cut short term interest rates by half a percent on September 18th, for the first time in four years, about 7 weeks before the US elections. In addition, the Fed changed the Bank Stress Test calculations in August 2024; changes which in effect freed up bank reserves.
Another trick that Janet Yellen, the Treasury Secretary, played was to massively reduce the duration of US government borrowing by issuing T-bills (debt instruments of 1 year or less) rather than longer-term bonds. The shorter duration bills are much more liquid and require less of a bank’s balance sheet to cover the risk. This injected the equivalent of nearly US$5 trillion liquidity duration into the financial system, with an economic stimulatory effect of about US$1 trillion. At the same time the US budget deficit had been expanding from US$1.4 trillion in fiscal 2022 (moving from contraction to expansion late in that fiscal year), to US$1.7 trillion in fiscal 2023, to US$1.8 trillion in fiscal 2024 (the fiscal year ends at the end of September); the latter being 6.4% of GDP. In the first five months of fiscal 2025 the government deficit equalled US$1.147 trillion, which is US$318 billion more than for the same period the previous fiscal year; receipts increased by 2% while outlays grew 13%. The US economy has been receiving significant incremental fiscal stimulus in the first 5 months of fiscal 2025 (October to February). To add even more stimulus, after the US government debt limit was reinstated on January 2nd, 2025, the government started to spend down its liquid assets on hand to fund spending. This will continue until a new higher debt limit is agreed, during which US$100 billions of extra stimulus will be added to the US economy. The date when the US government actually runs out of cash is estimated to be between June and August 2025, so this stimulatory spending as the government runs down its cash on hand toward zero could continue for quite a few months. The refunding headache, as the government works to rebuild its cash balances, will get worse and worse the longer no new debt ceiling is agreed; an amount that could grow to about US$800 billion.
Official Fed Quantitative Tightening (QT) of US$60 billion a month, US$720 billion per year, pales into near insignificance when compared to the numbers above. Jerome Powell and Janet Yellen threw the kitchen sink of liquidity and more at the US economy while publicly stating that liquidity was being drained through QT, while the gargantuan US government deficit was allowed to grow a little more. With both the Fed Reverse Repo book and US government funding duration games now pretty much played out, they will be providing no extra stimulus ongoing and the US economy will be left with the ongoing QT; net deflationary. At the same time, the tariffs being implemented by Trump, together with the DOGE related government spending cuts, are also deflationary. The US economy has now flipped from massive stimulus in 2024 to Fed and government driven deflation in 2025. The “punch bowl” has been removed and now we are left with the headache and rumbling stomach. Trumps mercurial antics with respect to tariffs etc., are also not helping as they increase the level of uncertainty for businesses and consumers. Tej Parikh in this article in the Financial Times already considers that the US is headed for a recession.
One offset is that China seems to be in a reflationary process, after years spent deflating its housing bubble; with a focus on the maintenance of a 5% growth rate and the continued technological development and upgrading of the economy. At the same time we see the European nations looking to fund major increases in war and infrastructure spending from increased borrowing, which will also be reflationary. The European Central Bank (ECB) has been reducing its balance sheet by about Euro 30 billion per month and this is currently set to continue. Extra government borrowing together with this QT will tend to lead to higher government borrowing costs across Europe, which will be very toxic for nations such as Italy that already have government debt of over 100% of GDP; with interest rates higher than yearly nominal GDP growth. The same predicament that the US is now in.
The move to short term funding by Yellen in 2024 has now created a very large headache in 2025 as those bills mature and have to be rolled over into new bills or bonds. So in 2025 the US government will have to fund not only the current year’s deficit but also the previous year’s deficit plus any other maturing government bonds. To make matters even worse, once a new debt ceiling is in place the government will start to rebuild its cash balances; with an additional funding need of up to US$800 billion which will have a deflationary impact. Nearly US$3 trillion in US government debt will mature in 2025 (much of it short term bills from 2024) and need to be rolled over, together with about US$2 trillion to fund the fiscal 2025 deficit and up to US$800 billion to rebuild the government cash reserves; a total of about US$6 trillion. All the while, government debt interest rates will be higher than they otherwise would be due to the gargantuan funding needs.
Howell sees the “shit hitting the fan” around about July as bank reserves fall below adequate levels and a new (probably regional) banking crisis kicks off. The effect of this will be to keep interest rates higher than they would otherwise be, until the real economy is seen as going into recession and/or a banking crisis starts. One “trick” that Howell puts forward is the revaluation of the US gold holdings much closer to current market price of about US$2900 than the current book value of US$42 (repeating moves made by Roosevelt in the 1930s and Nixon in the 1970s), which would create about a US$1 trillion windfall gain for the US Treasury that could be used to fund the US government deficit for a period without government debt issuance.
That such actions can be contemplated is an indictment of the massive fiscal and monetary spigots that have been opened wider and wider since the beginning of this century. With a US government deficit of 6.4% in 2024, and US government debt to GDP at 124%. Private debt has also expanded massively, with low interest rates driving corporate and financial leverage and so many Americans maintaining their standard of living through increased debt, at over 200% of GDP. The expansion of government and private debt to GDP is now pretty much played out without a very major round of monetization by the Fed. We can expect the Fed to halt QT, and then move back to QE as the economic and financial crisis deepens. There is no way that the Trump administration can meaningfully reduce the US government deficit, as that would produce a severe economic deflation; which would then increase the deficit through reduced tax revenues and increased social spending. What the US, and European, governments need is a long and sustained period of government bond interest rates below the rate of inflation, allowing nominal GDP to grow faster than the growth in the debt.
The problem for the US is that it cannot do this in isolation as such a move could then upend the position of the US$ as the reserve currency, a status that greatly supports the ability of the US to project its military power and to fund its current account deficit of 4.2% of GDP with US dollars. The US government is within a straight-jacket made significantly worse by both the Powell Fed and the Yellen Treasury engaging in highly risky monetary and fiscal shenanigans in an attempt to shore up the Democrats prior to the 2024 elections. The irony shown in post election opinion polls is that all the Democrats had to do to win was to stop fully supporting the Zionist genocide. Without the fiscal expansion started in late 2022, the monetary games played by Powell and the funding games played by Yellen it is obvious that the US economy would have entered a severe economic and financial crisis in late 2022 / early 2023 that would have carried into 2024; dooming the Democrats to electoral disaster.
The US economy has been on monetary and fiscal life support since the turn of the century financial crisis, life support greatly increased after the 2008 GFC, and then again after the 2019 Repo Crisis (with the rescue hidden under the COVID pandemic measures). We now find that the life support was turned up even more by both Powell and Yellen from 2022 onwards, as the previous slight reduction in life support threatened to create a new crisis within the patient. Even after that, the regional bank crisis erupted in the first half of 2023. The problem is that the underlying condition of the patient keeps worsening, significantly due to the negative impacts of the life support mechanisms.
And during all of this, Trump wants to keep his “temporary” 2017 tax cuts and add even more. The House budget proposal contains an extra US$4 to US$4.5 trillion in tax cuts predominantly for the rich, balanced by at most US$2 trillion in spending cuts (including US$880 billion from Medicaid) to social programs over the next decade; which will produce an actual increase in the US government deficit. And that does not take into account the increased interest costs as debt funded at much lower previous rates has to be rolled over at higher present interest rates. The Congressional Budget Office (CBO) forecasts a budget deficit of US$1.9 trillion in fiscal 2025, close to 7% of GDP, which may be proven conservative if tax payments start to lag due to economic weakness. The same CBO forecasts sunny economic skies for the next decade, as that is the only way that the deficit (and debt) forecast does not spiral out of control. Only growing budget deficits are stimulatory, so the US economy will be magically growing with non recessions while receiving little or no fiscal stimulus during that forecast period; a fiscal cold turkey.
All of this is happening while China overcomes US technology advantages in one sector after another, and continues to increase its lead in the green technologies of the future. Using its faster growing GDP to fund increased military expenditures that have already most probably invalidated any ability of the US to win a war against China. And while Russia continues to grow robustly even after all the sanctions and FX reserves theft. Eurasia minus the Western nations (Europe, South Korea, Japan) is in ascendance while the West is experiencing the symptoms of imperial decline. With the USA looking more and more like the slow growing, increasingly corrupt and troubled economy of the Soviet Union of the 1980s while China takes the position of the faster growing and more dynamic US economy of the same era. Will Trump end up as the Gorbachev that destroyed the Soviet Union, or will that be left to another president? Ursula von der Leyen is certainly working hard at becoming the European Union’s Gorbachev.
https://rogerboyd.substack.com/p/the-da ... ame-powell
A "Secret" Stimulus: Short Term Democrat Gain For Medium Term Pain
Roger Boyd
Mar 17, 2025
Below is an interview with Michael Howell who has constructed a holistic view of global liquidity that is very different to the usual “M2” bank deposits measure. What he is showing is that the US Federal Reserve, while publicly carrying out Quantitative Tightening (QT) in 2024 was actually carrying out a “hidden” major stimulus to help get the Democrats elected. This was “hidden” by very tightly defining QT as a reduction in the amount of US government bonds on its balance sheet, excluding other forms of Fed activity that would affect bank reserves.
The main liquidity injection by the Federal Reserve (Fed) was through the run down in its Reverse Repo account. This is where the Fed sells securities to financial intermediaries with the promise to purchase them back later; in essence draining liquidity from the financial system. By running down this book, the Fed injected liquidity into the financial markets. The Reverse Repo account peaked at US$2 trillion at the start of 2024 and was run down to near zero by early 2025; nigh on US$2 trillion added to bank liquidity in 2024 with very little in 2025. At the same time, the Fed cut short term interest rates by half a percent on September 18th, for the first time in four years, about 7 weeks before the US elections. In addition, the Fed changed the Bank Stress Test calculations in August 2024; changes which in effect freed up bank reserves.
Another trick that Janet Yellen, the Treasury Secretary, played was to massively reduce the duration of US government borrowing by issuing T-bills (debt instruments of 1 year or less) rather than longer-term bonds. The shorter duration bills are much more liquid and require less of a bank’s balance sheet to cover the risk. This injected the equivalent of nearly US$5 trillion liquidity duration into the financial system, with an economic stimulatory effect of about US$1 trillion. At the same time the US budget deficit had been expanding from US$1.4 trillion in fiscal 2022 (moving from contraction to expansion late in that fiscal year), to US$1.7 trillion in fiscal 2023, to US$1.8 trillion in fiscal 2024 (the fiscal year ends at the end of September); the latter being 6.4% of GDP. In the first five months of fiscal 2025 the government deficit equalled US$1.147 trillion, which is US$318 billion more than for the same period the previous fiscal year; receipts increased by 2% while outlays grew 13%. The US economy has been receiving significant incremental fiscal stimulus in the first 5 months of fiscal 2025 (October to February). To add even more stimulus, after the US government debt limit was reinstated on January 2nd, 2025, the government started to spend down its liquid assets on hand to fund spending. This will continue until a new higher debt limit is agreed, during which US$100 billions of extra stimulus will be added to the US economy. The date when the US government actually runs out of cash is estimated to be between June and August 2025, so this stimulatory spending as the government runs down its cash on hand toward zero could continue for quite a few months. The refunding headache, as the government works to rebuild its cash balances, will get worse and worse the longer no new debt ceiling is agreed; an amount that could grow to about US$800 billion.
Official Fed Quantitative Tightening (QT) of US$60 billion a month, US$720 billion per year, pales into near insignificance when compared to the numbers above. Jerome Powell and Janet Yellen threw the kitchen sink of liquidity and more at the US economy while publicly stating that liquidity was being drained through QT, while the gargantuan US government deficit was allowed to grow a little more. With both the Fed Reverse Repo book and US government funding duration games now pretty much played out, they will be providing no extra stimulus ongoing and the US economy will be left with the ongoing QT; net deflationary. At the same time, the tariffs being implemented by Trump, together with the DOGE related government spending cuts, are also deflationary. The US economy has now flipped from massive stimulus in 2024 to Fed and government driven deflation in 2025. The “punch bowl” has been removed and now we are left with the headache and rumbling stomach. Trumps mercurial antics with respect to tariffs etc., are also not helping as they increase the level of uncertainty for businesses and consumers. Tej Parikh in this article in the Financial Times already considers that the US is headed for a recession.
One offset is that China seems to be in a reflationary process, after years spent deflating its housing bubble; with a focus on the maintenance of a 5% growth rate and the continued technological development and upgrading of the economy. At the same time we see the European nations looking to fund major increases in war and infrastructure spending from increased borrowing, which will also be reflationary. The European Central Bank (ECB) has been reducing its balance sheet by about Euro 30 billion per month and this is currently set to continue. Extra government borrowing together with this QT will tend to lead to higher government borrowing costs across Europe, which will be very toxic for nations such as Italy that already have government debt of over 100% of GDP; with interest rates higher than yearly nominal GDP growth. The same predicament that the US is now in.
The move to short term funding by Yellen in 2024 has now created a very large headache in 2025 as those bills mature and have to be rolled over into new bills or bonds. So in 2025 the US government will have to fund not only the current year’s deficit but also the previous year’s deficit plus any other maturing government bonds. To make matters even worse, once a new debt ceiling is in place the government will start to rebuild its cash balances; with an additional funding need of up to US$800 billion which will have a deflationary impact. Nearly US$3 trillion in US government debt will mature in 2025 (much of it short term bills from 2024) and need to be rolled over, together with about US$2 trillion to fund the fiscal 2025 deficit and up to US$800 billion to rebuild the government cash reserves; a total of about US$6 trillion. All the while, government debt interest rates will be higher than they otherwise would be due to the gargantuan funding needs.
Howell sees the “shit hitting the fan” around about July as bank reserves fall below adequate levels and a new (probably regional) banking crisis kicks off. The effect of this will be to keep interest rates higher than they would otherwise be, until the real economy is seen as going into recession and/or a banking crisis starts. One “trick” that Howell puts forward is the revaluation of the US gold holdings much closer to current market price of about US$2900 than the current book value of US$42 (repeating moves made by Roosevelt in the 1930s and Nixon in the 1970s), which would create about a US$1 trillion windfall gain for the US Treasury that could be used to fund the US government deficit for a period without government debt issuance.
That such actions can be contemplated is an indictment of the massive fiscal and monetary spigots that have been opened wider and wider since the beginning of this century. With a US government deficit of 6.4% in 2024, and US government debt to GDP at 124%. Private debt has also expanded massively, with low interest rates driving corporate and financial leverage and so many Americans maintaining their standard of living through increased debt, at over 200% of GDP. The expansion of government and private debt to GDP is now pretty much played out without a very major round of monetization by the Fed. We can expect the Fed to halt QT, and then move back to QE as the economic and financial crisis deepens. There is no way that the Trump administration can meaningfully reduce the US government deficit, as that would produce a severe economic deflation; which would then increase the deficit through reduced tax revenues and increased social spending. What the US, and European, governments need is a long and sustained period of government bond interest rates below the rate of inflation, allowing nominal GDP to grow faster than the growth in the debt.
The problem for the US is that it cannot do this in isolation as such a move could then upend the position of the US$ as the reserve currency, a status that greatly supports the ability of the US to project its military power and to fund its current account deficit of 4.2% of GDP with US dollars. The US government is within a straight-jacket made significantly worse by both the Powell Fed and the Yellen Treasury engaging in highly risky monetary and fiscal shenanigans in an attempt to shore up the Democrats prior to the 2024 elections. The irony shown in post election opinion polls is that all the Democrats had to do to win was to stop fully supporting the Zionist genocide. Without the fiscal expansion started in late 2022, the monetary games played by Powell and the funding games played by Yellen it is obvious that the US economy would have entered a severe economic and financial crisis in late 2022 / early 2023 that would have carried into 2024; dooming the Democrats to electoral disaster.
The US economy has been on monetary and fiscal life support since the turn of the century financial crisis, life support greatly increased after the 2008 GFC, and then again after the 2019 Repo Crisis (with the rescue hidden under the COVID pandemic measures). We now find that the life support was turned up even more by both Powell and Yellen from 2022 onwards, as the previous slight reduction in life support threatened to create a new crisis within the patient. Even after that, the regional bank crisis erupted in the first half of 2023. The problem is that the underlying condition of the patient keeps worsening, significantly due to the negative impacts of the life support mechanisms.
And during all of this, Trump wants to keep his “temporary” 2017 tax cuts and add even more. The House budget proposal contains an extra US$4 to US$4.5 trillion in tax cuts predominantly for the rich, balanced by at most US$2 trillion in spending cuts (including US$880 billion from Medicaid) to social programs over the next decade; which will produce an actual increase in the US government deficit. And that does not take into account the increased interest costs as debt funded at much lower previous rates has to be rolled over at higher present interest rates. The Congressional Budget Office (CBO) forecasts a budget deficit of US$1.9 trillion in fiscal 2025, close to 7% of GDP, which may be proven conservative if tax payments start to lag due to economic weakness. The same CBO forecasts sunny economic skies for the next decade, as that is the only way that the deficit (and debt) forecast does not spiral out of control. Only growing budget deficits are stimulatory, so the US economy will be magically growing with non recessions while receiving little or no fiscal stimulus during that forecast period; a fiscal cold turkey.
All of this is happening while China overcomes US technology advantages in one sector after another, and continues to increase its lead in the green technologies of the future. Using its faster growing GDP to fund increased military expenditures that have already most probably invalidated any ability of the US to win a war against China. And while Russia continues to grow robustly even after all the sanctions and FX reserves theft. Eurasia minus the Western nations (Europe, South Korea, Japan) is in ascendance while the West is experiencing the symptoms of imperial decline. With the USA looking more and more like the slow growing, increasingly corrupt and troubled economy of the Soviet Union of the 1980s while China takes the position of the faster growing and more dynamic US economy of the same era. Will Trump end up as the Gorbachev that destroyed the Soviet Union, or will that be left to another president? Ursula von der Leyen is certainly working hard at becoming the European Union’s Gorbachev.
https://rogerboyd.substack.com/p/the-da ... ame-powell
"There is great chaos under heaven; the situation is excellent."
Re: The crisis of bourgeois economics
What this fella is calling 'mercantilist' might also be called a return to imperialist competition. Perhaps that is too 'Marxist' for him...
Under the Fog of Trumpist Bravado: the imprecise contours of the new U.S. strategy
Mauricio Metri
March 22, 2025
The liberal globalist world order will collapse if everyone becomes mercantilist again due to geopolitics.
In October 2024, Donald Trump gave an interview to talk show host Tucker Carlson, in which he made clear his administration’s most crucial challenge in the international arena: to keep Russia away from China, as he identified China as the main threat to the United States in the 21st century. It means redesigning the central core of the great powers, made up of just these three countries.
That may be why he chose the strange figure of television host Pete Hegseth as Secretary of Defense. Author of the book American Crusade: Our Fight to Stay Free, published in 2020, the new secretary suggests, in histrionic tones, a Judeo-Christian crusade in defense of the West against China above all. Nothing much different for the State Department. Trump picked Marco Rubio out, a neoconservative who also identifies China as the most critical geopolitical challenge facing the United States this century. Like his boss in Washington, Secretary Rubio has spoken openly about the need for rapprochement with Moscow to isolate and weaken Beijing’s position in the world (For details, see journalist Ben Norton’s excellent article).
It is immediately apparent that there has been a significant shift in the tradition of U.S. foreign policy about Russia. Since 1947, with the inauguration of the Truman Doctrine, the United States has aligned itself more directly with the guidelines of British geopolitical thinking, whose structuring axis lies in defining Russia as the main threat to its global interests and national security. Something that is still alive today in British palaces. This vision was born in 1814, when Russia defeated Bonaparte, and remained present in London’s power spaces throughout the 19th century, for example, in the Great Game of Asia. Its formalization gained more precise contours in 1904, with the publication of the famous article “The Geographical Pivot of History” by British geographer Halford Mackinder, the primary reference for later Anglo-Saxon geopolitical thinking.
If, on the one hand, the policy (of containment of the USSR) inaugurated by President Harry Truman in 1947, marking the beginning of the Cold War, was structured based on the Russian, by then Bolshevik, challenge, on the other hand, it implied the expansion, to the borders of Eurasia, of the interventionist and violent tradition of the United States, practiced with iron and fire in the Western Hemisphere since the beginning of the 19th century. In this sense, to deal with the European challenges of the post-war period, Washington created NATO in 1949, whose basic principle, summarized by its first secretary, British General Lionel Ismay, was to keep the Americans in Europe, Russians out, and Germans down.
Interestingly, this anti-Russian view remained alive even after the U.S. victory in the Cold War. In the 1991 National Security Strategy (NSS), published by the White House, Russia continued to be perceived as the main threat to U.S. security, even when defeated. For no other reason, the document indicated the need to expand NATO, which occurred over the last few decades, when NATO doubled in size, incorporating 16 new countries and moving towards Russia’s borders. As part of this post-Cold War Russian framing agenda, a violent punitive peace was imposed on Russia through the Shock Therapy Program, formulated by Western economists, including Jeffrey Sachs.
Challenges for the Trumpist strategy
Therefore, it is against this old anti-Russian guideline of Anglo-Saxon geopolitics that the current Trump administration is initially rebelling. If this does prevail, which is not certain, the main initiatives of the new Trump administration will necessarily involve three intertwined challenges: obviously, stepping up the confrontation against China on all the world’s chessboards; by derivative, weakening the Sino-Russian strategic partnership; and, as a consequence, negotiating a new insertion of Russia about international security (which involves emptying NATO) and the global economy (which implies suspending the broad spectrum of economic sanctions created since the start of the Ukrainian War).
As for the first challenge, the issue is not simple. China is already the most important economy on the planet, with the largest share of the world’s GDP (in terms of purchasing power parity); the most significant industrial and commercial hub on the globe; dominates approximately 90% of critical technologies; has around 18% of the world’s population and has the third largest territory, behind Russia and Canada. In addition, China has an atomic arsenal and developed armed forces, as well as leading the world’s most ambitious geo-economic integration project, the Belt and Road Initiative, and participating in critical international arrangements based on cooperation, such as the Shanghai Cooperation Organization, focused on Asian security and defense, and BRICS, a grouping to build a new global financial governance.
So far, although the new Trump administration has not revealed the guidelines of its geostrategic conception, it has hinted at this. Some initiatives to block China are taking shape through the expansion, strengthening, and more direct control of economic territories, zones of domination, areas of influence, and protectorates. It is evident, for example, in its hemispheric policy, aimed at a more significant presence and more direct control in some of its regions, such as the Gulf of Mexico and the northern part of the American Continent. If in the former, the intention is to block China’s access to the Panama Canal, the heart of the so-called Greater Caribbean, a fundamental concept of U.S. geopolitics; in the latter, the impression is that the White House wants to negotiate a sharing of the Arctic only with the Kremlin. To this end, it envisages framing Canada and projecting Greenland. In more global terms, the White House has pointed to the establishment of cordons sanitaires through bilateral pressures, which prevent or compromise the strategic partnerships of other countries (susceptible to Washington’s pressures) with China, to fundamentally block both the geographical scope of the Belt and Road Initiative and the actions of the BRICS which directly or indirectly threaten the position of the dollar in the international system.
About the challenge of weakening the Sino-Russian partnership, the apparent idea is to reproduce the triangular diplomacy of the Nixon administration (1969-74), when Washington exploited the excessively latent rivalries between Beijing and Moscow. The fraying of relations between the two countries throughout the 1960s had come to a head in 1969 when Chinese and Soviet soldiers exchanged fire in three border regions. Not for nothing did China, in an official document that year, redraw the main threat to its national security from the USA to the USSR, kick-starting the famous triangular diplomacy.
The current idea of reversing the sign of this triangulation, which was openly discussed in Washington, is to support Moscow in isolating Beijing. However, the big problem at the current juncture is that, unlike the Sino-Soviet relations of the 1960s, marked by the sharpening of rivalries and the abrupt reduction of cooperation spaces, relations between the Kremlin and Zhongnanhai in recent years have never been so productive, deep and broad, structured around the same common threat: precisely the drive for violence and barbarism derived from the U.S. global military imperial project after its victory in the Cold War. Against the unilateral U.S. global order, Russia and China have converged and allied, especially since March 1999, after the first round of NATO expansion and the bombing of Belgrade by NATO forces. In this sense, it is improbable that the United States can change this triangulation in the current context.
Finally, the challenge of reinserting Russia into the North Atlantic-led system is no simple matter. Since 2000, the Kremlin has taken a clear revisionist stance, made explicit, for example, in Putin’s famous speech at the Munich Conference in 2007. Over the years, it has centralized power against the local oligarchies, rebuilt the national economy, especially the Russian military-industrial complex, and in 2018, achieved a revolution in the art of war when it took the technological lead in sensitive weaponry with the development of hypersonic weapons. In addition, it has won significant victories, for example, in Georgia in 2008, in Syria in 2017, and currently in Ukraine. Therefore, very different from the immediate post-Cold War context, the current challenge is reinserting a victorious country on the battlefield and the technological frontier in sensitive weapons.
Faced with this situation, the White House seems to want to realize NATO’s defeat in the Ukrainian War, throwing the responsibility for failure on the shoulders of the Democrats. It is therefore seeking the “least bad” peace agreement possible, which would involve freezing the borders as they currently stand, guaranteeing U.S. access to the mineral wealth of Ukrainian territory not taken by the Russian army. In this case, there is an understanding that prolonging the war tends to produce a territorial design that is even more favorable to Russia. There is also talk of NATO being disbanded and economic sanctions against Russia being lifted.
Bomb of tectonic proportions
However, the great dilemma is that the possibility of reinserting Russia on these terms is a bomb of tectonic proportions for Europe, especially for England, France, and Germany. The same nightmare hangs over Europe that tormented Winston Churchill in the final years of the Second World War when Germany’s defeat was inevitable, and the victors were fighting over the shape of the post-war world. To the dismay of British authority, Franklin Roosevelt (then president of the USA) did not identify Stalin’s Russia (then the USSR) as a threat to his priority interests. He was more antagonistic towards Churchill’s England and other European countries because of the extensive colonial empires they still controlled, which had long blocked the projection of the USA to different regions. As has been said on another occasion, to the despair of the British and French, the post-war outline of Europe pointed to: a disarmed and occupied Germany (above all, by the Soviets); a France with no capacity for strategic initiative; an exhausted England; a withdrawal of U.S. troops from the Continent; a Russia of historic proportions never seen before; a Russia with no other central authority capable of countering it in the whole of Eurasia; and the absence of a common threat, such as had existed in Vienna (1815) and also in Lodi (1454), which would, to some degree, dilute the differences between victors and tie them together in some way.
Today, something similar to Churchill’s nightmare can be seen spreading through the halls and palaces of power in Europe: the U.S. is threatening to hollow out NATO, weakening Europe; Europe, tutored for decades by the U.S. via NATO, has little capacity for initiative in the military field; Russia has defeated NATO’s armaments on the battlefield and enjoys a significant strategic advantage; and there is no ordinary threat between the Russians, Americans, Chinese and Europeans to dilute their rivalries, concerns and fears.
Therefore, considering what has been said and if the guidelines of the new Trump administration are maintained, the most likely outcome will be that Europe will return to the path of militarization, nationalism, and, ultimately, war. To do so, it will have to adjust its national economies, no longer to the principles of and commitments to deregulation and trade liberalization and, above all, financial liberalization; to strict fiscal rules to control spending; to austerity and restrictive monetary policies; to the idea of a minimal state; and, ultimately, to an ode to the “god of the market” and his natural forces. Over time, the modus operandi of the old war economy invented by the European mercantilists should end up prevailing, resurrected from time to time, more precisely from war to war, where the guiding principle shifts to: the expansion of military spending, via public indebtedness; protectionism; capital controls; the centralization of the foreign exchange market; the strengthening of the national capital in industry, finance, and agriculture; and so many other policies aimed at reducing vulnerabilities relating to interstate competition in the field of arms, energy, food, technology, information, finance, health, etc.
It’s not hard to see that if these trends prevail, the liberal order imposed by the U.S. on Western Europe and Japan in the 1980s and globalized for the rest of the world in the following decade will collapse. In the end, everyone will be mercantilist again due to geopolitics.
https://strategic-culture.su/news/2025/ ... -strategy/
Under the Fog of Trumpist Bravado: the imprecise contours of the new U.S. strategy
Mauricio Metri
March 22, 2025
The liberal globalist world order will collapse if everyone becomes mercantilist again due to geopolitics.
In October 2024, Donald Trump gave an interview to talk show host Tucker Carlson, in which he made clear his administration’s most crucial challenge in the international arena: to keep Russia away from China, as he identified China as the main threat to the United States in the 21st century. It means redesigning the central core of the great powers, made up of just these three countries.
That may be why he chose the strange figure of television host Pete Hegseth as Secretary of Defense. Author of the book American Crusade: Our Fight to Stay Free, published in 2020, the new secretary suggests, in histrionic tones, a Judeo-Christian crusade in defense of the West against China above all. Nothing much different for the State Department. Trump picked Marco Rubio out, a neoconservative who also identifies China as the most critical geopolitical challenge facing the United States this century. Like his boss in Washington, Secretary Rubio has spoken openly about the need for rapprochement with Moscow to isolate and weaken Beijing’s position in the world (For details, see journalist Ben Norton’s excellent article).
It is immediately apparent that there has been a significant shift in the tradition of U.S. foreign policy about Russia. Since 1947, with the inauguration of the Truman Doctrine, the United States has aligned itself more directly with the guidelines of British geopolitical thinking, whose structuring axis lies in defining Russia as the main threat to its global interests and national security. Something that is still alive today in British palaces. This vision was born in 1814, when Russia defeated Bonaparte, and remained present in London’s power spaces throughout the 19th century, for example, in the Great Game of Asia. Its formalization gained more precise contours in 1904, with the publication of the famous article “The Geographical Pivot of History” by British geographer Halford Mackinder, the primary reference for later Anglo-Saxon geopolitical thinking.
If, on the one hand, the policy (of containment of the USSR) inaugurated by President Harry Truman in 1947, marking the beginning of the Cold War, was structured based on the Russian, by then Bolshevik, challenge, on the other hand, it implied the expansion, to the borders of Eurasia, of the interventionist and violent tradition of the United States, practiced with iron and fire in the Western Hemisphere since the beginning of the 19th century. In this sense, to deal with the European challenges of the post-war period, Washington created NATO in 1949, whose basic principle, summarized by its first secretary, British General Lionel Ismay, was to keep the Americans in Europe, Russians out, and Germans down.
Interestingly, this anti-Russian view remained alive even after the U.S. victory in the Cold War. In the 1991 National Security Strategy (NSS), published by the White House, Russia continued to be perceived as the main threat to U.S. security, even when defeated. For no other reason, the document indicated the need to expand NATO, which occurred over the last few decades, when NATO doubled in size, incorporating 16 new countries and moving towards Russia’s borders. As part of this post-Cold War Russian framing agenda, a violent punitive peace was imposed on Russia through the Shock Therapy Program, formulated by Western economists, including Jeffrey Sachs.
Challenges for the Trumpist strategy
Therefore, it is against this old anti-Russian guideline of Anglo-Saxon geopolitics that the current Trump administration is initially rebelling. If this does prevail, which is not certain, the main initiatives of the new Trump administration will necessarily involve three intertwined challenges: obviously, stepping up the confrontation against China on all the world’s chessboards; by derivative, weakening the Sino-Russian strategic partnership; and, as a consequence, negotiating a new insertion of Russia about international security (which involves emptying NATO) and the global economy (which implies suspending the broad spectrum of economic sanctions created since the start of the Ukrainian War).
As for the first challenge, the issue is not simple. China is already the most important economy on the planet, with the largest share of the world’s GDP (in terms of purchasing power parity); the most significant industrial and commercial hub on the globe; dominates approximately 90% of critical technologies; has around 18% of the world’s population and has the third largest territory, behind Russia and Canada. In addition, China has an atomic arsenal and developed armed forces, as well as leading the world’s most ambitious geo-economic integration project, the Belt and Road Initiative, and participating in critical international arrangements based on cooperation, such as the Shanghai Cooperation Organization, focused on Asian security and defense, and BRICS, a grouping to build a new global financial governance.
So far, although the new Trump administration has not revealed the guidelines of its geostrategic conception, it has hinted at this. Some initiatives to block China are taking shape through the expansion, strengthening, and more direct control of economic territories, zones of domination, areas of influence, and protectorates. It is evident, for example, in its hemispheric policy, aimed at a more significant presence and more direct control in some of its regions, such as the Gulf of Mexico and the northern part of the American Continent. If in the former, the intention is to block China’s access to the Panama Canal, the heart of the so-called Greater Caribbean, a fundamental concept of U.S. geopolitics; in the latter, the impression is that the White House wants to negotiate a sharing of the Arctic only with the Kremlin. To this end, it envisages framing Canada and projecting Greenland. In more global terms, the White House has pointed to the establishment of cordons sanitaires through bilateral pressures, which prevent or compromise the strategic partnerships of other countries (susceptible to Washington’s pressures) with China, to fundamentally block both the geographical scope of the Belt and Road Initiative and the actions of the BRICS which directly or indirectly threaten the position of the dollar in the international system.
About the challenge of weakening the Sino-Russian partnership, the apparent idea is to reproduce the triangular diplomacy of the Nixon administration (1969-74), when Washington exploited the excessively latent rivalries between Beijing and Moscow. The fraying of relations between the two countries throughout the 1960s had come to a head in 1969 when Chinese and Soviet soldiers exchanged fire in three border regions. Not for nothing did China, in an official document that year, redraw the main threat to its national security from the USA to the USSR, kick-starting the famous triangular diplomacy.
The current idea of reversing the sign of this triangulation, which was openly discussed in Washington, is to support Moscow in isolating Beijing. However, the big problem at the current juncture is that, unlike the Sino-Soviet relations of the 1960s, marked by the sharpening of rivalries and the abrupt reduction of cooperation spaces, relations between the Kremlin and Zhongnanhai in recent years have never been so productive, deep and broad, structured around the same common threat: precisely the drive for violence and barbarism derived from the U.S. global military imperial project after its victory in the Cold War. Against the unilateral U.S. global order, Russia and China have converged and allied, especially since March 1999, after the first round of NATO expansion and the bombing of Belgrade by NATO forces. In this sense, it is improbable that the United States can change this triangulation in the current context.
Finally, the challenge of reinserting Russia into the North Atlantic-led system is no simple matter. Since 2000, the Kremlin has taken a clear revisionist stance, made explicit, for example, in Putin’s famous speech at the Munich Conference in 2007. Over the years, it has centralized power against the local oligarchies, rebuilt the national economy, especially the Russian military-industrial complex, and in 2018, achieved a revolution in the art of war when it took the technological lead in sensitive weaponry with the development of hypersonic weapons. In addition, it has won significant victories, for example, in Georgia in 2008, in Syria in 2017, and currently in Ukraine. Therefore, very different from the immediate post-Cold War context, the current challenge is reinserting a victorious country on the battlefield and the technological frontier in sensitive weapons.
Faced with this situation, the White House seems to want to realize NATO’s defeat in the Ukrainian War, throwing the responsibility for failure on the shoulders of the Democrats. It is therefore seeking the “least bad” peace agreement possible, which would involve freezing the borders as they currently stand, guaranteeing U.S. access to the mineral wealth of Ukrainian territory not taken by the Russian army. In this case, there is an understanding that prolonging the war tends to produce a territorial design that is even more favorable to Russia. There is also talk of NATO being disbanded and economic sanctions against Russia being lifted.
Bomb of tectonic proportions
However, the great dilemma is that the possibility of reinserting Russia on these terms is a bomb of tectonic proportions for Europe, especially for England, France, and Germany. The same nightmare hangs over Europe that tormented Winston Churchill in the final years of the Second World War when Germany’s defeat was inevitable, and the victors were fighting over the shape of the post-war world. To the dismay of British authority, Franklin Roosevelt (then president of the USA) did not identify Stalin’s Russia (then the USSR) as a threat to his priority interests. He was more antagonistic towards Churchill’s England and other European countries because of the extensive colonial empires they still controlled, which had long blocked the projection of the USA to different regions. As has been said on another occasion, to the despair of the British and French, the post-war outline of Europe pointed to: a disarmed and occupied Germany (above all, by the Soviets); a France with no capacity for strategic initiative; an exhausted England; a withdrawal of U.S. troops from the Continent; a Russia of historic proportions never seen before; a Russia with no other central authority capable of countering it in the whole of Eurasia; and the absence of a common threat, such as had existed in Vienna (1815) and also in Lodi (1454), which would, to some degree, dilute the differences between victors and tie them together in some way.
Today, something similar to Churchill’s nightmare can be seen spreading through the halls and palaces of power in Europe: the U.S. is threatening to hollow out NATO, weakening Europe; Europe, tutored for decades by the U.S. via NATO, has little capacity for initiative in the military field; Russia has defeated NATO’s armaments on the battlefield and enjoys a significant strategic advantage; and there is no ordinary threat between the Russians, Americans, Chinese and Europeans to dilute their rivalries, concerns and fears.
Therefore, considering what has been said and if the guidelines of the new Trump administration are maintained, the most likely outcome will be that Europe will return to the path of militarization, nationalism, and, ultimately, war. To do so, it will have to adjust its national economies, no longer to the principles of and commitments to deregulation and trade liberalization and, above all, financial liberalization; to strict fiscal rules to control spending; to austerity and restrictive monetary policies; to the idea of a minimal state; and, ultimately, to an ode to the “god of the market” and his natural forces. Over time, the modus operandi of the old war economy invented by the European mercantilists should end up prevailing, resurrected from time to time, more precisely from war to war, where the guiding principle shifts to: the expansion of military spending, via public indebtedness; protectionism; capital controls; the centralization of the foreign exchange market; the strengthening of the national capital in industry, finance, and agriculture; and so many other policies aimed at reducing vulnerabilities relating to interstate competition in the field of arms, energy, food, technology, information, finance, health, etc.
It’s not hard to see that if these trends prevail, the liberal order imposed by the U.S. on Western Europe and Japan in the 1980s and globalized for the rest of the world in the following decade will collapse. In the end, everyone will be mercantilist again due to geopolitics.
https://strategic-culture.su/news/2025/ ... -strategy/
"There is great chaos under heaven; the situation is excellent."
Re: The crisis of bourgeois economics
Globalization, its Demise, and its Consequences
There is very, very much to like about the recent (3-24-2025) article in Jacobin by Branko Milanović entitled What Comes After Globalization?
First, Milanović explores historical comparisons between the late-nineteenth-century expansion of global markets and trade (what he calls Globalization I and dates from 1870 to 1914) and the globalization of our time (what he calls Globalization II and dates from 1989 to 2020). The search for and exposure of historical patterns are the first steps in scientific inquiry, what Marxists mean by historical materialist analysis.
Unfortunately, many writers-- including on the left-- take the more recent participation of new and newly engaged producers and global traders, a revolution in logistics, the success of free-trade politics, and the subsequent explosion of international exchange as signaling the arrival of a new, unique capitalist era, even a new stage in its evolution.
Recognizing a growing share of trade in global output, but burdened with a limited historical horizon (the end of the Second World War), left theorists drew unwarranted, speculative conclusions about a new stage of capitalism featuring a decline in the power of the nation state, the irreversible domination of “transnational capital,” and even the coming of a borderless “empire” contested by an amorphous “multitude.”
Countering these views, writers like Linda Weiss (The Myth of the Powerless State, 1998) and Charles Emmerson (1913: In Search of the World Before the Great War, 2013) bring some sobriety to the question and remind us that we have seen the explosive growth of world trade before, generated by many of the same or similar historic forces. Weiss tells us that “the ratios of export trade to GDP were consistently higher in 1913 than they were in 1973.” Noting the same historical facts, Emmerson wryly concludes “Plus ça change”.
Milanović’s recognition of this parallel between two historic moments gives his analysis a gravitas missing from many leftists, many self-styled Marxist interpretations of the globalization phenomenon.
Secondly, Milanović-- an acknowledged expert in comparative economic inequality-- makes an important observation regarding the asymmetry between Globalization I and II. While they are alike in many ways, they differ in one important, significant way: while Globalization I benefited the Great Powers at the expense of the colonial world, the workers in the former colonies were actually benefited by Globalization II. In Milanović’s words:
Replacing domestic labor with cheap foreign labor made the owners of capital and the entrepreneurs of the Global North much richer. It also made it possible for the workers of the Global South to get higher-paying jobs and escape chronic underemployment… It is therefore not a surprise that the Global North became deindustrialized, not solely as the result of automation and the increasing importance in services in national output overall, but also due to the fact that lots of industrial activity went to places where it could be done more cheaply. It’s no wonder that East Asia became the new workshop of the world.
While he misleadingly uses the expression “coalition of interests,” Milanović elaborates:
This particular coalition of interests was overlooked in the original thinking regarding globalization. In fact, it was believed that globalization would be bad for the large laboring masses of the Global South — that they would be exploited even more than before. Many people perhaps made this mistake based on the developments of Globalization I, which indeed led to the deindustrialization of India and the impoverishment of the populations of China and Africa. During this era, China was all but ruled by foreign merchants, and in Africa farmers lost control over land — toiled in common since time immemorial. Landlessness made them even poorer. So the first globalization indeed had a very negative effect on most of the Global South. But that was not the case in Globalization II, when wages and employment for large parts of the Global South improved.
Milanović makes an important point, though it risks exaggeration by his insistence that because Globalization II brought a higher GDP per worker, the workers are better off and exploited less.
They may well be better off in many ways, but they are likely exploited more.
Because he forgoes a rigorous class analysis, he assumes that gain in GDP per worker goes automatically to the worker. Most of it surely does not; if it did, capital would not have shifted to the Global South. Instead, most of the GDP per capita goes to the capitalist-- foreign or domestic. Capital would not migrate to the former colonies if it garnered a lower rate of exploitation.
But engagement with manufacturing in Globalization II, rather than resource extraction or handicraft, certainly provides workers in the former colonies with greater employment, better wages, and more opportunity to parlay their labor power into a more advantageous position-- a fact that nearly all development theorists from right to left should concede.
Structural changes in capitalism-- the rapid mobility and ease of mobility of capital, the opening of new lower wage markets, a revolution in the means and costs of transportation-- have shifted manufacturing and its potential benefits for workers from its location in richer countries to a new location in poorer countries, creating a new leveling between workers in the North and South.
Denying or neglecting this reality has led many leftists-- like John Bellamy Foster-- to support the “labor aristocracy” thesis as a reason to ignore or demean the potentially militant role of workers in the advanced capitalist countries. As one of the strongest voices in support of the revolutionary potential of the colonial workers and peasants, Lenin was scathingly critical of elements of the working class who were indirectly privileged by the wealth accumulated from the exploitation of the colonies. Those “labor aristocrats” constituted an ideological damper on the class politics of Lenin’s time (and even today), but by no means gave a reason to deny the class’s revolutionary potential. Certainly, the ruling classes of the Great Powers employed that relative privilege and many other ploys to further exploit their domestic workers to the fullest extent and discourage their rebellion.
Bellamy and others want to deny the revolutionary potential of the workers in the advanced capitalist countries in order to support the proposition that the principal contradiction today is between the US, Europe, and Japan and the countries of the Global South. Bellamy endorses the Monthly Review position taken as far back as the early 1960s: “Some Marxist theorists in the West took the position, most clearly enunciated by Sweezy, that revolution, and with it, the revolutionary proletariat and the proper focus of Marxist theory, had shifted to the third world or the Global South.”
While frustration with the lack of working-class militancy (worldwide) is understandable and widespread, it does not change the dynamics of revolutionary change-- the decisive role of workers in replacing the existing socio-economic system. Nor does it dismiss the obligation to stand with the workers, the peasants, the unemployed, and the déclassé wherever they may be-- within either the Great Powers or the former colonies.
Just as revolutionary-pessimism fostered the romance of third-world revolution among Western left-wing intellectuals in the 1960s, today it is the foundation for another romantic notion-- multipolarity as the rebellion of the Global South. Like its Cold War version, it sees a contradiction between former colonies and the Great Powers of our time as superseding the contradiction between powerful monopoly corporations and the people.
Of course, richer capitalist states and their ruling classes do all they can to protect or expand any advantages they may enjoy over other states-- rich or poor-- including economic advantages. But for the workers of rich or poor states, the decisive question is not a question of sovereignty, not a question of defending their national bourgeoisie, or their elites, but of ending exploitation, of combatting capital.
The outcome of the global competition between Asian or South American countries and their richer Western counterparts over market share or the division of surplus value has no necessary connection with the well-being of workers in the sweatshops of the various rivals. This is a fact that many Western academics seem to miss.
Thirdly, Milanović clearly sees the demise of Globalization II-- the globalization of our time:
The international wave of globalization that began over thirty years ago is at its close. Recent years have seen increased tariffs from the United States and the European Union; the creation of trade blocs; strong limits on the transfer of technology to China, Russia, Iran, and other “unfriendly” countries; the use of economic coercion, including import bans and financial sanctions; severe restrictions on immigration; and, finally, industrial policies with the implied subsidization of domestic producers.
Again, he is right, though he fails to acknowledge the economic logic behind the origins of Globalization II, the conditions leading to its demise, and the forces shaping the post-globalization era. For Milanović, globalization's end comes from policy decisions-- not policy decisions forced on political actors-- but simply policy preferences: “Trump fits that mold almost perfectly. He loves mercantilism and sees foreign economic policy as a tool to extract all kinds of concessions…” Thus, Trump’s disposition “explains” the new economic regimen; we need to look no deeper.
But Trump did not end globalization. The 2007-2009 economic crisis did.
Globalization was propelled by neoliberal restructuring combined with the flood of cheap labor entering the global market from the “opening” of the People’s Republic of China and the collapse of Eastern Europe and the USSR. Cheaper labor power means higher profits, everything else being the same.
With the subsequent orgy of overaccumulation and capital running wildly looking for even the most outlandish investment opportunities, it was almost inevitable that the economy would crash and burn from unfettered speculation.
And when it did in 2007-2009, it took trade growth with it and marked “paid” on globalization.
As I wrote in 2008:
As with the Great Depression, the economic crisis strikes different economies in different ways. Despite efforts to integrate the world economies, the international division of labor and the differing levels of development foreclose a unified solution to economic distress. The weak efforts at joint action, the conferences, the summits, etc. cannot succeed simply because every nation has different interests and problems, a condition that will only become more acute as the crisis mounts…
“Centrifugal forces” generated by self-preservation were operant, pulling apart existing alliances, blocs, joint institutions, and common solutions. Trade agreements, international organizations, regulatory systems, and trust greased the wheels of global trade; distrust, competition, and a determination to push economic problems on others threw sand on those wheels.
Anticipating the period after the demise of globalization, I wrote in April of 2009:
To simplify greatly, a healthy, expanding capitalist order tends to promote intervals of global cooperation enforced by a hegemonic power and trade expansion, while a wounded, shrinking capitalist order tends towards autarky and economic nationalism. The Great Depression was a clear example of heightened nationalism and economic self-absorption.
The aftermath of the 2007-2009 Great Recession was one such example of “a wounded, shrinking capitalist order.” And predictably, autarky and economic nationalism followed.
The tendency was exacerbated by the European debt crisis that drove a wedge between the European Union’s wealthier North and the poorer South. Similarly, Brexit was an example of the tendency to go it alone, substituting competition for cooperation. Ruling classes replaced “win-win” with zero-sum thinking.
The pace and intensity of international trade has never recovered.
While Milanović does not attend to it, this cycle of capitalist expansion, economic crisis, followed by economic nationalism (and often, war) recurs periodically.
In the late-nineteenth century, the global economy saw a vast restructuring of capitalism, with new technologies and rising productivity (and concomitant rises in rates of exploitation).The era also saw what economists cite as “a world-wide price and economic recession” from 1873 to 1879 (the Long Depression). In its wake, protectionism and trade wars broke out as everyone tried to dispose of their cheaper goods in other countries, only to be met with tariff barriers.
The imperialist “scramble for Africa” -- so powerfully described by John Hobson and V. I. Lenin-- raised the intensity of international competition and rivalry, while generating the foundation for economic growth and global trade with newly acquired colonies. This is the period that Milanović characterizes as Globalization I. A further aspect and stimulus of the rebirth of growth and trade was the massive armament programs mounted by the Great Powers. The unprecedented armament race-- the “Dreadnought race” -- served as an engine of growth, while exponentially increasing the danger of war (from 1880 to 1914 armament spending in Germany increased six-fold, in Russia three-fold, in Britain three-fold, in France double, source: The Bloody Trail of Imperialism, Eddie Glackin, 2015).
One could argue, similarly, that the 1930s were a period of depression and economic nationalism, following a broad, exuberant economic expansion. And as with the pre-World War I Globalization I, the contradictions were resolved with World War.
Is War our Destiny after the Demise of Globalization II?
Certainly, the historical parallels cited above suggest that wars often follow pronounced economic disruptions and the consequent rise of economic nationalism, though we must remember that events do not follow a mechanical pattern.
Yet if history is a great teacher, it certainly looks like the mounting contradictions of today’s capitalism point to intensifying rivalry and conflict. A March 24 Wall Street Journal headline screams: Trade War Explodes Across World at a Pace Not Seen in Decades!
The article notes that the infamous Smoot-Hawley (tariff) Act of 1930-- a response to the Great Depression-- was only rescinded after the war.
It also notes-- correctly-- that tariffs are not simply a Trump initiative. As of March 1, the Group of 20 have imposed 4500 import restrictions-- up 75% since 2016 and increased 10-fold since 2008.
The World Trade Organization, responsible for organizing Globalization II has failed its calling. As the WSJ reports:
In February, South Korea and Vietnam imposed stiff new penalties on imports of Chinese steel following complaints from local producers about a surge of cut-price competition. Similarly, Mexico has begun an antidumping probe into Chinese chemicals and plastic sheets, while Indonesia is readying new duties on nylon used in packaging imported from China and other countries.
Even sanctions-hit Russia is seeking to stem an influx of Chinese cars, despite warm relations between Russian President Vladimir Putin and Chinese leader Xi Jinping. Russia in recent weeks increased a tax on disposing of imported vehicles, effectively jacking up their cost. More than half of newly sold vehicles in Russia are Chinese-made, compared with less than 10% before its 2022 invasion of Ukraine.
As tensions mount on the trade front, rearmament and political tensions are growing. War talk mounts and the means of destruction become more effective and greater in number. The US alone accounts for 43% of military exports worldwide, up from 35% in 2020. France is now the number two arms exporter, surpassing Russia. And, in over a decade, NATO has more than doubled the value of weapons imported.
European defense spending is expanding at rates unseen since the Cold War, in some cases since World War II. According to the BBC, “On 4 March European Commission President Ursula Von der Leyen announced plans for an €800bn defence fund called The ReArm Europe Fund.” Germany has eliminated all restraints on military spending in its budget. Likewise, the UK plans to increase military spending to 2.5% of GDP in the next two years, while Denmark is aiming for 3% of GDP in the same period (growth rates consistent with those of the Great Powers before World War I, except for Germany).
Dangerously, centrist politicians in the EU are beginning to see rising military spending as a boost to a stuttering economy. As military Keynesianism takes hold, the possibility of global war increases, especially in light of the shifting alliances in the proxy war in Ukraine.
Even more ominously, Europe’s two nuclear powers-- France and the UK-- are seriously discussing the development of a European nuclear force independent of the US-controlled NATO nuclear capability.
At the same time, the incoming chair of the US Joint Chiefs of Staff announced readiness to supply more NATO powers with a nuclear capacity.
As war cries intensify, the EU Commission has issued a guidance that EU citizens should maintain 72 hours of emergency supplies to meet looming war dangers.
Of course, the continually escalating wave of tariffs, sanctions, and hostile words directed at The People's Republic of China by the US and its allies threatens to break into open conflict and wider war, a war for which the PRC is quite understandably actively preparing.
As with previous World Wars, it is not so much-- at this moment-- who is right or wrong, but when the momentum toward war will become irreversible. Another imperialist war-- for, in essence, that is what it would be-- will be an unimaginable disaster. No issue is more vital to our survival than stopping this momentum toward global war.
Greg Godels
zzsblogml@gmail.com
http://zzs-blg.blogspot.com/2025/04/glo ... d-its.html
There is very, very much to like about the recent (3-24-2025) article in Jacobin by Branko Milanović entitled What Comes After Globalization?
First, Milanović explores historical comparisons between the late-nineteenth-century expansion of global markets and trade (what he calls Globalization I and dates from 1870 to 1914) and the globalization of our time (what he calls Globalization II and dates from 1989 to 2020). The search for and exposure of historical patterns are the first steps in scientific inquiry, what Marxists mean by historical materialist analysis.
Unfortunately, many writers-- including on the left-- take the more recent participation of new and newly engaged producers and global traders, a revolution in logistics, the success of free-trade politics, and the subsequent explosion of international exchange as signaling the arrival of a new, unique capitalist era, even a new stage in its evolution.
Recognizing a growing share of trade in global output, but burdened with a limited historical horizon (the end of the Second World War), left theorists drew unwarranted, speculative conclusions about a new stage of capitalism featuring a decline in the power of the nation state, the irreversible domination of “transnational capital,” and even the coming of a borderless “empire” contested by an amorphous “multitude.”
Countering these views, writers like Linda Weiss (The Myth of the Powerless State, 1998) and Charles Emmerson (1913: In Search of the World Before the Great War, 2013) bring some sobriety to the question and remind us that we have seen the explosive growth of world trade before, generated by many of the same or similar historic forces. Weiss tells us that “the ratios of export trade to GDP were consistently higher in 1913 than they were in 1973.” Noting the same historical facts, Emmerson wryly concludes “Plus ça change”.
Milanović’s recognition of this parallel between two historic moments gives his analysis a gravitas missing from many leftists, many self-styled Marxist interpretations of the globalization phenomenon.
Secondly, Milanović-- an acknowledged expert in comparative economic inequality-- makes an important observation regarding the asymmetry between Globalization I and II. While they are alike in many ways, they differ in one important, significant way: while Globalization I benefited the Great Powers at the expense of the colonial world, the workers in the former colonies were actually benefited by Globalization II. In Milanović’s words:
Replacing domestic labor with cheap foreign labor made the owners of capital and the entrepreneurs of the Global North much richer. It also made it possible for the workers of the Global South to get higher-paying jobs and escape chronic underemployment… It is therefore not a surprise that the Global North became deindustrialized, not solely as the result of automation and the increasing importance in services in national output overall, but also due to the fact that lots of industrial activity went to places where it could be done more cheaply. It’s no wonder that East Asia became the new workshop of the world.
While he misleadingly uses the expression “coalition of interests,” Milanović elaborates:
This particular coalition of interests was overlooked in the original thinking regarding globalization. In fact, it was believed that globalization would be bad for the large laboring masses of the Global South — that they would be exploited even more than before. Many people perhaps made this mistake based on the developments of Globalization I, which indeed led to the deindustrialization of India and the impoverishment of the populations of China and Africa. During this era, China was all but ruled by foreign merchants, and in Africa farmers lost control over land — toiled in common since time immemorial. Landlessness made them even poorer. So the first globalization indeed had a very negative effect on most of the Global South. But that was not the case in Globalization II, when wages and employment for large parts of the Global South improved.
Milanović makes an important point, though it risks exaggeration by his insistence that because Globalization II brought a higher GDP per worker, the workers are better off and exploited less.
They may well be better off in many ways, but they are likely exploited more.
Because he forgoes a rigorous class analysis, he assumes that gain in GDP per worker goes automatically to the worker. Most of it surely does not; if it did, capital would not have shifted to the Global South. Instead, most of the GDP per capita goes to the capitalist-- foreign or domestic. Capital would not migrate to the former colonies if it garnered a lower rate of exploitation.
But engagement with manufacturing in Globalization II, rather than resource extraction or handicraft, certainly provides workers in the former colonies with greater employment, better wages, and more opportunity to parlay their labor power into a more advantageous position-- a fact that nearly all development theorists from right to left should concede.
Structural changes in capitalism-- the rapid mobility and ease of mobility of capital, the opening of new lower wage markets, a revolution in the means and costs of transportation-- have shifted manufacturing and its potential benefits for workers from its location in richer countries to a new location in poorer countries, creating a new leveling between workers in the North and South.
Denying or neglecting this reality has led many leftists-- like John Bellamy Foster-- to support the “labor aristocracy” thesis as a reason to ignore or demean the potentially militant role of workers in the advanced capitalist countries. As one of the strongest voices in support of the revolutionary potential of the colonial workers and peasants, Lenin was scathingly critical of elements of the working class who were indirectly privileged by the wealth accumulated from the exploitation of the colonies. Those “labor aristocrats” constituted an ideological damper on the class politics of Lenin’s time (and even today), but by no means gave a reason to deny the class’s revolutionary potential. Certainly, the ruling classes of the Great Powers employed that relative privilege and many other ploys to further exploit their domestic workers to the fullest extent and discourage their rebellion.
Bellamy and others want to deny the revolutionary potential of the workers in the advanced capitalist countries in order to support the proposition that the principal contradiction today is between the US, Europe, and Japan and the countries of the Global South. Bellamy endorses the Monthly Review position taken as far back as the early 1960s: “Some Marxist theorists in the West took the position, most clearly enunciated by Sweezy, that revolution, and with it, the revolutionary proletariat and the proper focus of Marxist theory, had shifted to the third world or the Global South.”
While frustration with the lack of working-class militancy (worldwide) is understandable and widespread, it does not change the dynamics of revolutionary change-- the decisive role of workers in replacing the existing socio-economic system. Nor does it dismiss the obligation to stand with the workers, the peasants, the unemployed, and the déclassé wherever they may be-- within either the Great Powers or the former colonies.
Just as revolutionary-pessimism fostered the romance of third-world revolution among Western left-wing intellectuals in the 1960s, today it is the foundation for another romantic notion-- multipolarity as the rebellion of the Global South. Like its Cold War version, it sees a contradiction between former colonies and the Great Powers of our time as superseding the contradiction between powerful monopoly corporations and the people.
Of course, richer capitalist states and their ruling classes do all they can to protect or expand any advantages they may enjoy over other states-- rich or poor-- including economic advantages. But for the workers of rich or poor states, the decisive question is not a question of sovereignty, not a question of defending their national bourgeoisie, or their elites, but of ending exploitation, of combatting capital.
The outcome of the global competition between Asian or South American countries and their richer Western counterparts over market share or the division of surplus value has no necessary connection with the well-being of workers in the sweatshops of the various rivals. This is a fact that many Western academics seem to miss.
Thirdly, Milanović clearly sees the demise of Globalization II-- the globalization of our time:
The international wave of globalization that began over thirty years ago is at its close. Recent years have seen increased tariffs from the United States and the European Union; the creation of trade blocs; strong limits on the transfer of technology to China, Russia, Iran, and other “unfriendly” countries; the use of economic coercion, including import bans and financial sanctions; severe restrictions on immigration; and, finally, industrial policies with the implied subsidization of domestic producers.
Again, he is right, though he fails to acknowledge the economic logic behind the origins of Globalization II, the conditions leading to its demise, and the forces shaping the post-globalization era. For Milanović, globalization's end comes from policy decisions-- not policy decisions forced on political actors-- but simply policy preferences: “Trump fits that mold almost perfectly. He loves mercantilism and sees foreign economic policy as a tool to extract all kinds of concessions…” Thus, Trump’s disposition “explains” the new economic regimen; we need to look no deeper.
But Trump did not end globalization. The 2007-2009 economic crisis did.
Globalization was propelled by neoliberal restructuring combined with the flood of cheap labor entering the global market from the “opening” of the People’s Republic of China and the collapse of Eastern Europe and the USSR. Cheaper labor power means higher profits, everything else being the same.
With the subsequent orgy of overaccumulation and capital running wildly looking for even the most outlandish investment opportunities, it was almost inevitable that the economy would crash and burn from unfettered speculation.
And when it did in 2007-2009, it took trade growth with it and marked “paid” on globalization.
As I wrote in 2008:
As with the Great Depression, the economic crisis strikes different economies in different ways. Despite efforts to integrate the world economies, the international division of labor and the differing levels of development foreclose a unified solution to economic distress. The weak efforts at joint action, the conferences, the summits, etc. cannot succeed simply because every nation has different interests and problems, a condition that will only become more acute as the crisis mounts…
“Centrifugal forces” generated by self-preservation were operant, pulling apart existing alliances, blocs, joint institutions, and common solutions. Trade agreements, international organizations, regulatory systems, and trust greased the wheels of global trade; distrust, competition, and a determination to push economic problems on others threw sand on those wheels.
Anticipating the period after the demise of globalization, I wrote in April of 2009:
To simplify greatly, a healthy, expanding capitalist order tends to promote intervals of global cooperation enforced by a hegemonic power and trade expansion, while a wounded, shrinking capitalist order tends towards autarky and economic nationalism. The Great Depression was a clear example of heightened nationalism and economic self-absorption.
The aftermath of the 2007-2009 Great Recession was one such example of “a wounded, shrinking capitalist order.” And predictably, autarky and economic nationalism followed.
The tendency was exacerbated by the European debt crisis that drove a wedge between the European Union’s wealthier North and the poorer South. Similarly, Brexit was an example of the tendency to go it alone, substituting competition for cooperation. Ruling classes replaced “win-win” with zero-sum thinking.
The pace and intensity of international trade has never recovered.
While Milanović does not attend to it, this cycle of capitalist expansion, economic crisis, followed by economic nationalism (and often, war) recurs periodically.
In the late-nineteenth century, the global economy saw a vast restructuring of capitalism, with new technologies and rising productivity (and concomitant rises in rates of exploitation).The era also saw what economists cite as “a world-wide price and economic recession” from 1873 to 1879 (the Long Depression). In its wake, protectionism and trade wars broke out as everyone tried to dispose of their cheaper goods in other countries, only to be met with tariff barriers.
The imperialist “scramble for Africa” -- so powerfully described by John Hobson and V. I. Lenin-- raised the intensity of international competition and rivalry, while generating the foundation for economic growth and global trade with newly acquired colonies. This is the period that Milanović characterizes as Globalization I. A further aspect and stimulus of the rebirth of growth and trade was the massive armament programs mounted by the Great Powers. The unprecedented armament race-- the “Dreadnought race” -- served as an engine of growth, while exponentially increasing the danger of war (from 1880 to 1914 armament spending in Germany increased six-fold, in Russia three-fold, in Britain three-fold, in France double, source: The Bloody Trail of Imperialism, Eddie Glackin, 2015).
One could argue, similarly, that the 1930s were a period of depression and economic nationalism, following a broad, exuberant economic expansion. And as with the pre-World War I Globalization I, the contradictions were resolved with World War.
Is War our Destiny after the Demise of Globalization II?
Certainly, the historical parallels cited above suggest that wars often follow pronounced economic disruptions and the consequent rise of economic nationalism, though we must remember that events do not follow a mechanical pattern.
Yet if history is a great teacher, it certainly looks like the mounting contradictions of today’s capitalism point to intensifying rivalry and conflict. A March 24 Wall Street Journal headline screams: Trade War Explodes Across World at a Pace Not Seen in Decades!
The article notes that the infamous Smoot-Hawley (tariff) Act of 1930-- a response to the Great Depression-- was only rescinded after the war.
It also notes-- correctly-- that tariffs are not simply a Trump initiative. As of March 1, the Group of 20 have imposed 4500 import restrictions-- up 75% since 2016 and increased 10-fold since 2008.
The World Trade Organization, responsible for organizing Globalization II has failed its calling. As the WSJ reports:
In February, South Korea and Vietnam imposed stiff new penalties on imports of Chinese steel following complaints from local producers about a surge of cut-price competition. Similarly, Mexico has begun an antidumping probe into Chinese chemicals and plastic sheets, while Indonesia is readying new duties on nylon used in packaging imported from China and other countries.
Even sanctions-hit Russia is seeking to stem an influx of Chinese cars, despite warm relations between Russian President Vladimir Putin and Chinese leader Xi Jinping. Russia in recent weeks increased a tax on disposing of imported vehicles, effectively jacking up their cost. More than half of newly sold vehicles in Russia are Chinese-made, compared with less than 10% before its 2022 invasion of Ukraine.
As tensions mount on the trade front, rearmament and political tensions are growing. War talk mounts and the means of destruction become more effective and greater in number. The US alone accounts for 43% of military exports worldwide, up from 35% in 2020. France is now the number two arms exporter, surpassing Russia. And, in over a decade, NATO has more than doubled the value of weapons imported.
European defense spending is expanding at rates unseen since the Cold War, in some cases since World War II. According to the BBC, “On 4 March European Commission President Ursula Von der Leyen announced plans for an €800bn defence fund called The ReArm Europe Fund.” Germany has eliminated all restraints on military spending in its budget. Likewise, the UK plans to increase military spending to 2.5% of GDP in the next two years, while Denmark is aiming for 3% of GDP in the same period (growth rates consistent with those of the Great Powers before World War I, except for Germany).
Dangerously, centrist politicians in the EU are beginning to see rising military spending as a boost to a stuttering economy. As military Keynesianism takes hold, the possibility of global war increases, especially in light of the shifting alliances in the proxy war in Ukraine.
Even more ominously, Europe’s two nuclear powers-- France and the UK-- are seriously discussing the development of a European nuclear force independent of the US-controlled NATO nuclear capability.
At the same time, the incoming chair of the US Joint Chiefs of Staff announced readiness to supply more NATO powers with a nuclear capacity.
As war cries intensify, the EU Commission has issued a guidance that EU citizens should maintain 72 hours of emergency supplies to meet looming war dangers.
Of course, the continually escalating wave of tariffs, sanctions, and hostile words directed at The People's Republic of China by the US and its allies threatens to break into open conflict and wider war, a war for which the PRC is quite understandably actively preparing.
As with previous World Wars, it is not so much-- at this moment-- who is right or wrong, but when the momentum toward war will become irreversible. Another imperialist war-- for, in essence, that is what it would be-- will be an unimaginable disaster. No issue is more vital to our survival than stopping this momentum toward global war.
Greg Godels
zzsblogml@gmail.com
http://zzs-blg.blogspot.com/2025/04/glo ... d-its.html
"There is great chaos under heaven; the situation is excellent."
Re: The crisis of bourgeois economics
The Curse of Private Equity & The PE Mindset
Unless You Are A Profiteering Destroyer
Roger Boyd
Apr 21, 2025
The Private Equity (PE) BS shtick is that private equity investors and managers will be driven to find greater efficiencies, and deliver better services and develop better products due to the pressure of the massive amount of debt taken on to purchase a target company. This ignores the fact that the debt is taken on by the purchased corporation not by the private equity investors. So the investors have relatively little skin in the game (the small amount of money they invested themselves, massively leveraged with debt). The PE partners have even less skin in the game and can more than recoup any personal investments through such things as “management fees” charged to the bought out corporation. Any corporate wholly-owned land and buildings can also be bought from it, after which high rents are charged to further extract value and remove these solid assets from the corporation’s ownership. The proceeds from these sales can very quickly be funnelled back to the investors and PE partners through a special dividend, greatly offsetting the property purchase costs. Fundamentally, the interest of the purchased corporation and the interest of the private equity investors and partners significantly diverge; producing what amounts to looting rather than investment.
The investors’ money can be multiplied by the looting of the company through massive cuts to corporate spending, which will goose profits in the short term, while they take lots more money out through special dividends etc. Once the target has been exploited as much as it can be, the private equity firm can walk away with outsized profits while leaving the debt they used to buy the company on the company’s books; with the company now a gutted shell of its previous existence. An overview of the reality of PE, with a twist of humour. The big players are Blackstone, Apollo, Carlyle Group, and KKR.
Walgreens has been bought by PE investors for US$10 billion, with the stable cash flows of a grocery chain it is a perfect target for leveraging up and gutting to produce outsized PE profits. PE has recently been getting its teeth deeper and deeper into the US healthcare sector, as its just too massive an area which has large cash flows to ignore. They are now gutting healthcare to drive outsized PE profits. Below is an investigation into some examples of PE plundering, including the gutting of employee pension funds.
In the fire truck industry, private equity worked to consolidate the industry into very few players to facilitate collusion to drive up profits. This includes investing very little in productive capacity, and even cutting capacity, even though the industry has huge order backlogs. The comparison between the monopolized US fire truck industry and the highly competitive Chinese fire truck industry is stark. US$400,000 and 6 weeks for a fire truck in China, US$2 million and 4 years for a fire truck in the US.
PE expanded rapidly with the very low interest rates of the 2010s and early 2020s, but is now struggling to raise funds in a very different liquidity environment. It also benefitted from the frothy asset prices of that period which facilitated the sales of company assets at good prices, and a growing economy that supports corporate revenues. The constant pressure from the possibilities of PE buyouts pushed all corporations to act more like PE firms, optimizing short term profits and investor returns over the longer term success of the company. The appliance maker Whirlpool is a great example of the metastasizing of the PE mindset across the corporate world. Its appliances have been crapified to drive short term results, at the cost of the destruction of brand value and customer loyalty. All the while the company hiked up dividend payments and repeatedly carried out large share buybacks (that boost the value of the executive stock options); extracting all of the value out of the company. Opening up the market for foreign competitors with a different mindset such as LG and Bosch.
US PE funds actually shrank in 2023 to US$4.7 trillion, and the raising of new money fell by 23% in 2024 to US$401 billion; that is after the global PE industry quadrupled during the 2010s though. As this article in the Financial Times points out, PE’s use of highly complex layers of extensive leveraging has lead to banks holding large amounts of PE debt. The ability to pay off that debt relies heavily on an active market in the buying and selling of corporate assets. A major downturn in the economy and market could quickly freeze that market and lead to widespread bad debts and defaults.
Different types of lending are led by different teams within a bank, and often different banks altogether. The lack of oversight has regulators worried about whether lenders can really know just how exposed they are.
The Bank of England official responsible for financial stability strategy and risk, Nathanaël Benjamin, cautioned in April that there were “natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem”.
In its Financial Stability Review in May, the European Central Bank said that although private markets had a relatively low risk profile overall, they had an “opaqueness and uncertain resilience” that was a source of concern.
The debt that ties private equity in with the banks, insurance companies and other groups dubbed “non-bank financial institutions” means that any stress in the industry could ripple across the wider financial system.
“The opacity, complexity, and interconnectedness of the sector have made assessing its developments difficult, but it also means that it is all the more important,” Benjamin added. “These developments could pose risks to financial stability.”
A perfect setup for the next financial crisis, where the bag will be held by the corporate creditors, suppliers and employees. Investors may also take a hit (pension funds, endowments and oligarch family investment offices etc.), after not getting a better return than just investing in a stock index tracking fund. The PE partners have been extracting most of the outsized profits through extravagant investment management fees and a 20% share of any profits. In effect, the PE partnerships have been asset stripping the purchased corporations that have been loaded up with debt while at the same time gouging the PE investors. Many individual PE partners have already become billionaires and oligarchs in their own right, by gutting the productive capacity of the US and other Western nations and charging ridiculously high investor fees - to the tune of US$100 billions over the past decade.
How has such a destructive group managed to keep operating like this? Easy, they give oodles of money to politicians and political campaigns, hire the best law firms, and operate a revolving door with their regulators, while also being allowed to obfuscate their investor returns and fees. They have even been able to keep the “Carried Interest” PE tax scam in place against many challenges. PE is a symptom of late empire, as scam artists in expensive suits feast on the productive capacity of the nation while gouging their investor clients - the majority of which are financial institutions such as pension funds and endowments.
Trump’s tariff barrage and slashing of government spending may be a toxic mix for the very highly leveraged private equity sector. Firstly, the tariffs slash revenues and increase costs for many companies, with the recession and more generalized inflation effects doing the same. The fall in the stock market also reduces the availability of credit and the prices at which private equity assets can be sold off. With the amount of leverage involved we may very well see some very major losses for PE funds and the financial firms that have extended so much credit to them, together with the pension fund and endowment investors. If this becomes reality we should also expect an avalanche of political contributions and lobbying to get the state to bail out the billionaire private equity partners, their investors and creditors. Once more, capitalism for the poor and socialism for the rich.
https://rogerboyd.substack.com/p/the-cu ... ty-and-the
It is incorrect to talk of 'socialism for the rich'. For it to be socialism they would have to work.
Unless You Are A Profiteering Destroyer
Roger Boyd
Apr 21, 2025
The Private Equity (PE) BS shtick is that private equity investors and managers will be driven to find greater efficiencies, and deliver better services and develop better products due to the pressure of the massive amount of debt taken on to purchase a target company. This ignores the fact that the debt is taken on by the purchased corporation not by the private equity investors. So the investors have relatively little skin in the game (the small amount of money they invested themselves, massively leveraged with debt). The PE partners have even less skin in the game and can more than recoup any personal investments through such things as “management fees” charged to the bought out corporation. Any corporate wholly-owned land and buildings can also be bought from it, after which high rents are charged to further extract value and remove these solid assets from the corporation’s ownership. The proceeds from these sales can very quickly be funnelled back to the investors and PE partners through a special dividend, greatly offsetting the property purchase costs. Fundamentally, the interest of the purchased corporation and the interest of the private equity investors and partners significantly diverge; producing what amounts to looting rather than investment.
The investors’ money can be multiplied by the looting of the company through massive cuts to corporate spending, which will goose profits in the short term, while they take lots more money out through special dividends etc. Once the target has been exploited as much as it can be, the private equity firm can walk away with outsized profits while leaving the debt they used to buy the company on the company’s books; with the company now a gutted shell of its previous existence. An overview of the reality of PE, with a twist of humour. The big players are Blackstone, Apollo, Carlyle Group, and KKR.
Walgreens has been bought by PE investors for US$10 billion, with the stable cash flows of a grocery chain it is a perfect target for leveraging up and gutting to produce outsized PE profits. PE has recently been getting its teeth deeper and deeper into the US healthcare sector, as its just too massive an area which has large cash flows to ignore. They are now gutting healthcare to drive outsized PE profits. Below is an investigation into some examples of PE plundering, including the gutting of employee pension funds.
In the fire truck industry, private equity worked to consolidate the industry into very few players to facilitate collusion to drive up profits. This includes investing very little in productive capacity, and even cutting capacity, even though the industry has huge order backlogs. The comparison between the monopolized US fire truck industry and the highly competitive Chinese fire truck industry is stark. US$400,000 and 6 weeks for a fire truck in China, US$2 million and 4 years for a fire truck in the US.
PE expanded rapidly with the very low interest rates of the 2010s and early 2020s, but is now struggling to raise funds in a very different liquidity environment. It also benefitted from the frothy asset prices of that period which facilitated the sales of company assets at good prices, and a growing economy that supports corporate revenues. The constant pressure from the possibilities of PE buyouts pushed all corporations to act more like PE firms, optimizing short term profits and investor returns over the longer term success of the company. The appliance maker Whirlpool is a great example of the metastasizing of the PE mindset across the corporate world. Its appliances have been crapified to drive short term results, at the cost of the destruction of brand value and customer loyalty. All the while the company hiked up dividend payments and repeatedly carried out large share buybacks (that boost the value of the executive stock options); extracting all of the value out of the company. Opening up the market for foreign competitors with a different mindset such as LG and Bosch.
US PE funds actually shrank in 2023 to US$4.7 trillion, and the raising of new money fell by 23% in 2024 to US$401 billion; that is after the global PE industry quadrupled during the 2010s though. As this article in the Financial Times points out, PE’s use of highly complex layers of extensive leveraging has lead to banks holding large amounts of PE debt. The ability to pay off that debt relies heavily on an active market in the buying and selling of corporate assets. A major downturn in the economy and market could quickly freeze that market and lead to widespread bad debts and defaults.
Different types of lending are led by different teams within a bank, and often different banks altogether. The lack of oversight has regulators worried about whether lenders can really know just how exposed they are.
The Bank of England official responsible for financial stability strategy and risk, Nathanaël Benjamin, cautioned in April that there were “natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem”.
In its Financial Stability Review in May, the European Central Bank said that although private markets had a relatively low risk profile overall, they had an “opaqueness and uncertain resilience” that was a source of concern.
The debt that ties private equity in with the banks, insurance companies and other groups dubbed “non-bank financial institutions” means that any stress in the industry could ripple across the wider financial system.
“The opacity, complexity, and interconnectedness of the sector have made assessing its developments difficult, but it also means that it is all the more important,” Benjamin added. “These developments could pose risks to financial stability.”
A perfect setup for the next financial crisis, where the bag will be held by the corporate creditors, suppliers and employees. Investors may also take a hit (pension funds, endowments and oligarch family investment offices etc.), after not getting a better return than just investing in a stock index tracking fund. The PE partners have been extracting most of the outsized profits through extravagant investment management fees and a 20% share of any profits. In effect, the PE partnerships have been asset stripping the purchased corporations that have been loaded up with debt while at the same time gouging the PE investors. Many individual PE partners have already become billionaires and oligarchs in their own right, by gutting the productive capacity of the US and other Western nations and charging ridiculously high investor fees - to the tune of US$100 billions over the past decade.
How has such a destructive group managed to keep operating like this? Easy, they give oodles of money to politicians and political campaigns, hire the best law firms, and operate a revolving door with their regulators, while also being allowed to obfuscate their investor returns and fees. They have even been able to keep the “Carried Interest” PE tax scam in place against many challenges. PE is a symptom of late empire, as scam artists in expensive suits feast on the productive capacity of the nation while gouging their investor clients - the majority of which are financial institutions such as pension funds and endowments.
Trump’s tariff barrage and slashing of government spending may be a toxic mix for the very highly leveraged private equity sector. Firstly, the tariffs slash revenues and increase costs for many companies, with the recession and more generalized inflation effects doing the same. The fall in the stock market also reduces the availability of credit and the prices at which private equity assets can be sold off. With the amount of leverage involved we may very well see some very major losses for PE funds and the financial firms that have extended so much credit to them, together with the pension fund and endowment investors. If this becomes reality we should also expect an avalanche of political contributions and lobbying to get the state to bail out the billionaire private equity partners, their investors and creditors. Once more, capitalism for the poor and socialism for the rich.
https://rogerboyd.substack.com/p/the-cu ... ty-and-the
It is incorrect to talk of 'socialism for the rich'. For it to be socialism they would have to work.
"There is great chaos under heaven; the situation is excellent."
Re: The crisis of bourgeois economics
The Curse of Private Equity & The PE Mindset
Unless You Are A Profiteering Destroyer
Roger Boyd
Apr 21, 2025
The Private Equity (PE) BS shtick is that private equity investors and managers will be driven to find greater efficiencies, and deliver better services and develop better products due to the pressure of the massive amount of debt taken on to purchase a target company. This ignores the fact that the debt is taken on by the purchased corporation not by the private equity investors. So the investors have relatively little skin in the game (the small amount of money they invested themselves, massively leveraged with debt). The PE partners have even less skin in the game and can more than recoup any personal investments through such things as “management fees” charged to the bought out corporation. Any corporate wholly-owned land and buildings can also be bought from it, after which high rents are charged to further extract value and remove these solid assets from the corporation’s ownership. The proceeds from these sales can very quickly be funnelled back to the investors and PE partners through a special dividend, greatly offsetting the property purchase costs. Fundamentally, the interest of the purchased corporation and the interest of the private equity investors and partners significantly diverge; producing what amounts to looting rather than investment.
The investors’ money can be multiplied by the looting of the company through massive cuts to corporate spending, which will goose profits in the short term, while they take lots more money out through special dividends etc. Once the target has been exploited as much as it can be, the private equity firm can walk away with outsized profits while leaving the debt they used to buy the company on the company’s books; with the company now a gutted shell of its previous existence. An overview of the reality of PE, with a twist of humour. The big players are Blackstone, Apollo, Carlyle Group, and KKR.
Walgreens has been bought by PE investors for US$10 billion, with the stable cash flows of a grocery chain it is a perfect target for leveraging up and gutting to produce outsized PE profits. PE has recently been getting its teeth deeper and deeper into the US healthcare sector, as its just too massive an area which has large cash flows to ignore. They are now gutting healthcare to drive outsized PE profits. Below is an investigation into some examples of PE plundering, including the gutting of employee pension funds.
In the fire truck industry, private equity worked to consolidate the industry into very few players to facilitate collusion to drive up profits. This includes investing very little in productive capacity, and even cutting capacity, even though the industry has huge order backlogs. The comparison between the monopolized US fire truck industry and the highly competitive Chinese fire truck industry is stark. US$400,000 and 6 weeks for a fire truck in China, US$2 million and 4 years for a fire truck in the US.
PE expanded rapidly with the very low interest rates of the 2010s and early 2020s, but is now struggling to raise funds in a very different liquidity environment. It also benefitted from the frothy asset prices of that period which facilitated the sales of company assets at good prices, and a growing economy that supports corporate revenues. The constant pressure from the possibilities of PE buyouts pushed all corporations to act more like PE firms, optimizing short term profits and investor returns over the longer term success of the company. The appliance maker Whirlpool is a great example of the metastasizing of the PE mindset across the corporate world. Its appliances have been crapified to drive short term results, at the cost of the destruction of brand value and customer loyalty. All the while the company hiked up dividend payments and repeatedly carried out large share buybacks (that boost the value of the executive stock options); extracting all of the value out of the company. Opening up the market for foreign competitors with a different mindset such as LG and Bosch.
US PE funds actually shrank in 2023 to US$4.7 trillion, and the raising of new money fell by 23% in 2024 to US$401 billion; that is after the global PE industry quadrupled during the 2010s though. As this article in the Financial Times points out, PE’s use of highly complex layers of extensive leveraging has lead to banks holding large amounts of PE debt. The ability to pay off that debt relies heavily on an active market in the buying and selling of corporate assets. A major downturn in the economy and market could quickly freeze that market and lead to widespread bad debts and defaults.
Different types of lending are led by different teams within a bank, and often different banks altogether. The lack of oversight has regulators worried about whether lenders can really know just how exposed they are.
The Bank of England official responsible for financial stability strategy and risk, Nathanaël Benjamin, cautioned in April that there were “natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem”.
In its Financial Stability Review in May, the European Central Bank said that although private markets had a relatively low risk profile overall, they had an “opaqueness and uncertain resilience” that was a source of concern.
The debt that ties private equity in with the banks, insurance companies and other groups dubbed “non-bank financial institutions” means that any stress in the industry could ripple across the wider financial system.
“The opacity, complexity, and interconnectedness of the sector have made assessing its developments difficult, but it also means that it is all the more important,” Benjamin added. “These developments could pose risks to financial stability.”
A perfect setup for the next financial crisis, where the bag will be held by the corporate creditors, suppliers and employees. Investors may also take a hit (pension funds, endowments and oligarch family investment offices etc.), after not getting a better return than just investing in a stock index tracking fund. The PE partners have been extracting most of the outsized profits through extravagant investment management fees and a 20% share of any profits. In effect, the PE partnerships have been asset stripping the purchased corporations that have been loaded up with debt while at the same time gouging the PE investors. Many individual PE partners have already become billionaires and oligarchs in their own right, by gutting the productive capacity of the US and other Western nations and charging ridiculously high investor fees - to the tune of US$100 billions over the past decade.
How has such a destructive group managed to keep operating like this? Easy, they give oodles of money to politicians and political campaigns, hire the best law firms, and operate a revolving door with their regulators, while also being allowed to obfuscate their investor returns and fees. They have even been able to keep the “Carried Interest” PE tax scam in place against many challenges. PE is a symptom of late empire, as scam artists in expensive suits feast on the productive capacity of the nation while gouging their investor clients - the majority of which are financial institutions such as pension funds and endowments.
Trump’s tariff barrage and slashing of government spending may be a toxic mix for the very highly leveraged private equity sector. Firstly, the tariffs slash revenues and increase costs for many companies, with the recession and more generalized inflation effects doing the same. The fall in the stock market also reduces the availability of credit and the prices at which private equity assets can be sold off. With the amount of leverage involved we may very well see some very major losses for PE funds and the financial firms that have extended so much credit to them, together with the pension fund and endowment investors. If this becomes reality we should also expect an avalanche of political contributions and lobbying to get the state to bail out the billionaire private equity partners, their investors and creditors. Once more, capitalism for the poor and socialism for the rich.
https://rogerboyd.substack.com/p/the-cu ... ty-and-the
It is incorrect to talk of 'socialism for the rich'. For it to be socialism they would have to work.
Unless You Are A Profiteering Destroyer
Roger Boyd
Apr 21, 2025
The Private Equity (PE) BS shtick is that private equity investors and managers will be driven to find greater efficiencies, and deliver better services and develop better products due to the pressure of the massive amount of debt taken on to purchase a target company. This ignores the fact that the debt is taken on by the purchased corporation not by the private equity investors. So the investors have relatively little skin in the game (the small amount of money they invested themselves, massively leveraged with debt). The PE partners have even less skin in the game and can more than recoup any personal investments through such things as “management fees” charged to the bought out corporation. Any corporate wholly-owned land and buildings can also be bought from it, after which high rents are charged to further extract value and remove these solid assets from the corporation’s ownership. The proceeds from these sales can very quickly be funnelled back to the investors and PE partners through a special dividend, greatly offsetting the property purchase costs. Fundamentally, the interest of the purchased corporation and the interest of the private equity investors and partners significantly diverge; producing what amounts to looting rather than investment.
The investors’ money can be multiplied by the looting of the company through massive cuts to corporate spending, which will goose profits in the short term, while they take lots more money out through special dividends etc. Once the target has been exploited as much as it can be, the private equity firm can walk away with outsized profits while leaving the debt they used to buy the company on the company’s books; with the company now a gutted shell of its previous existence. An overview of the reality of PE, with a twist of humour. The big players are Blackstone, Apollo, Carlyle Group, and KKR.
Walgreens has been bought by PE investors for US$10 billion, with the stable cash flows of a grocery chain it is a perfect target for leveraging up and gutting to produce outsized PE profits. PE has recently been getting its teeth deeper and deeper into the US healthcare sector, as its just too massive an area which has large cash flows to ignore. They are now gutting healthcare to drive outsized PE profits. Below is an investigation into some examples of PE plundering, including the gutting of employee pension funds.
In the fire truck industry, private equity worked to consolidate the industry into very few players to facilitate collusion to drive up profits. This includes investing very little in productive capacity, and even cutting capacity, even though the industry has huge order backlogs. The comparison between the monopolized US fire truck industry and the highly competitive Chinese fire truck industry is stark. US$400,000 and 6 weeks for a fire truck in China, US$2 million and 4 years for a fire truck in the US.
PE expanded rapidly with the very low interest rates of the 2010s and early 2020s, but is now struggling to raise funds in a very different liquidity environment. It also benefitted from the frothy asset prices of that period which facilitated the sales of company assets at good prices, and a growing economy that supports corporate revenues. The constant pressure from the possibilities of PE buyouts pushed all corporations to act more like PE firms, optimizing short term profits and investor returns over the longer term success of the company. The appliance maker Whirlpool is a great example of the metastasizing of the PE mindset across the corporate world. Its appliances have been crapified to drive short term results, at the cost of the destruction of brand value and customer loyalty. All the while the company hiked up dividend payments and repeatedly carried out large share buybacks (that boost the value of the executive stock options); extracting all of the value out of the company. Opening up the market for foreign competitors with a different mindset such as LG and Bosch.
US PE funds actually shrank in 2023 to US$4.7 trillion, and the raising of new money fell by 23% in 2024 to US$401 billion; that is after the global PE industry quadrupled during the 2010s though. As this article in the Financial Times points out, PE’s use of highly complex layers of extensive leveraging has lead to banks holding large amounts of PE debt. The ability to pay off that debt relies heavily on an active market in the buying and selling of corporate assets. A major downturn in the economy and market could quickly freeze that market and lead to widespread bad debts and defaults.
Different types of lending are led by different teams within a bank, and often different banks altogether. The lack of oversight has regulators worried about whether lenders can really know just how exposed they are.
The Bank of England official responsible for financial stability strategy and risk, Nathanaël Benjamin, cautioned in April that there were “natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem”.
In its Financial Stability Review in May, the European Central Bank said that although private markets had a relatively low risk profile overall, they had an “opaqueness and uncertain resilience” that was a source of concern.
The debt that ties private equity in with the banks, insurance companies and other groups dubbed “non-bank financial institutions” means that any stress in the industry could ripple across the wider financial system.
“The opacity, complexity, and interconnectedness of the sector have made assessing its developments difficult, but it also means that it is all the more important,” Benjamin added. “These developments could pose risks to financial stability.”
A perfect setup for the next financial crisis, where the bag will be held by the corporate creditors, suppliers and employees. Investors may also take a hit (pension funds, endowments and oligarch family investment offices etc.), after not getting a better return than just investing in a stock index tracking fund. The PE partners have been extracting most of the outsized profits through extravagant investment management fees and a 20% share of any profits. In effect, the PE partnerships have been asset stripping the purchased corporations that have been loaded up with debt while at the same time gouging the PE investors. Many individual PE partners have already become billionaires and oligarchs in their own right, by gutting the productive capacity of the US and other Western nations and charging ridiculously high investor fees - to the tune of US$100 billions over the past decade.
How has such a destructive group managed to keep operating like this? Easy, they give oodles of money to politicians and political campaigns, hire the best law firms, and operate a revolving door with their regulators, while also being allowed to obfuscate their investor returns and fees. They have even been able to keep the “Carried Interest” PE tax scam in place against many challenges. PE is a symptom of late empire, as scam artists in expensive suits feast on the productive capacity of the nation while gouging their investor clients - the majority of which are financial institutions such as pension funds and endowments.
Trump’s tariff barrage and slashing of government spending may be a toxic mix for the very highly leveraged private equity sector. Firstly, the tariffs slash revenues and increase costs for many companies, with the recession and more generalized inflation effects doing the same. The fall in the stock market also reduces the availability of credit and the prices at which private equity assets can be sold off. With the amount of leverage involved we may very well see some very major losses for PE funds and the financial firms that have extended so much credit to them, together with the pension fund and endowment investors. If this becomes reality we should also expect an avalanche of political contributions and lobbying to get the state to bail out the billionaire private equity partners, their investors and creditors. Once more, capitalism for the poor and socialism for the rich.
https://rogerboyd.substack.com/p/the-cu ... ty-and-the
It is incorrect to talk of 'socialism for the rich'. For it to be socialism they would have to work.
"There is great chaos under heaven; the situation is excellent."
Re: The crisis of bourgeois economics
This from the Dept of Silly Progressives demanding that capitalism be fair and just:
How the American Economy Is Rigged to Serve the Rich, and Why Tariffs Won’t Change That
Posted on April 25, 2025 by Yves Smith
Yves here. William Lazonick has explained how financialization, particularly stock buybacks, share-price linked executive pay, and the outsized role and pay levels in asset management, particularly private equity and hedge funds, have been at least as destructive to middle and working-class standards of living as globalization.
By Lynn Parramore. Originally published at the Institute for New Economic Thinking website
For the last 40 years, millions upon millions of hard-working Americans have been clocking in, doing their part — and getting less in return. They are very upset, as well they should be. Wages have stalled. Job security’s a joke.
Yet corporate profits are sky high.
Just look at the scoreboard: In 2024, Apple raked in $93.7 billion, Alphabet (Google’s parent company) pulled in $100.1 billion, and ExxonMobil reaped $33.6 billion. Yet the workers powering these companies aren’t seeing much of the immense value they have created. Some of Alphabet’s contract workers only recently fought their way up to $14.50 an hour. That’s not even close to a fair share of over $100 billion in profit.
So where’s the money going?
As economist William Lazonick, an expert on the American business corporation, points out, it’s not going to the people creating the value. It’s going into stock buybacks, dividends, bloated CEO pay, and the war chests of hedge-fund activists. In 2024, Apple did $94.9 billion in buybacks, Alphabet $62.2 billion, and Exxon Mobil $19.6 billion. These big productive companies aren’t struggling—they’re thriving. But instead of reinvesting in workers or society, they’re juicing their stock prices and enriching the top.
Just look at General Motors (GM), where the United Auto Workers (UAW) staged a major, large, successful strike in September 2023—only to have GM do $11.1 billion in stock buybacks in 2023 and $7.1 billion in 2024. Instead of using that money to pay workers better or invest in things that would actually help the company grow—like new equipment, research, training, or EVs—the company spent it buying back its own stock in order to push up the stock price and make shareholders and top executives richer.
Most workers don’t realize how much is quietly being siphoned away. They might blame globalization—and sure, it’s part of the story—but they often miss the issue that tariffs won’t touch: executives using Wall Street tricks to pocket profits that should’ve gone to the workers who earned them and helped make the profits possible.
Tariffs promise to bring back well-paid jobs, but they ignore the core problem: even the jobs we do have, in some of the most profitable industries, still aren’t paying what they should—and haven’t for decades. And it’s not because the money isn’t there—it’s because of where it’s going. As Lazonick notes, “UAW leader Shawn Fain has been supportiveof Trump’s tariffs — but what he and his members should be railing against is the $18.2 billion that GM spent on stock buybacks in 2023 and 2024.”
Lazonick points out that it wasn’t always like this. In the mid-20th century, many American jobs came with decent pay, benefits, and social support for upward mobility—though, of course, those gains were mostly reserved for white men. Still, back then, wages rose with productivity. When companies did well, workers shared in the success. And corporations and the wealthy accepted high tax rates that helped educate the labor force. That link is now broken, largely because companies have been allowed to get away with playing Wall Street games that short-change workers.
Lazonick brings up an idea from economist William Baumol’s 2012 book The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t. Baumol pointed out something interesting: industries that produce goods—like factories making computers—can boost productivity over time, which helps lower costs. But service-based industries—like education and health care—don’t really have that option. A teacher still needs to spend about the same amount of time teaching a class, and a doctor still needs time with each patient. Even though they can’t speed things up the way machines in factories can, these workers still need to be paid competitive wages. That’s what drives up costs in services over time, and it’s what Baumol called the “cost disease.”
Not to worry, said Baumol. Our society can afford the education and health care we need by transferring the profits from the goods producers (such as Apple, Alphabet, and Exxon Mobil) to fund social services. But, as Lazonick points out in a forthcoming INET working paper on goods and services in the U.S. economy, the high profits of the goods producers have been funneled into buybacks and dividends that make the rich richer, who then transform their economic might into political power to demand even lower taxes. Meanwhile, most Americans experience deteriorating social services—which, with the Republicans in control, are now on the chopping block.
The result of extreme corporate financialization is that even in high-productivity sectors like manufacturing and tech, wages lag behind. Companies are more productive and profitable than ever, but the gains are being concentrated at the top. Take a new chip or drug—costly to develop, cheap to mass-produce, and easy to sell worldwide. That’s the promise of scalable tech: big profits with low unit costs. It’s paying off—just not for most workers.
So what should those profits be doing? Lazonick argues that in a healthy economy, the incredible profits generated by high-productivity companies shouldn’t be used to do buybacks and flow to shareholders—they should be reinvested in the productive capabilities of the labor force and in the provision of the high-quality social services that we all need.
That means paying workers their fair share and funding essential services like education, health care, public safety, environmental protection, and the arts—most of which aren’t, or shouldn’t be, driven by profit (though private equity companies are trying to squeeze profits out of them). Lazonick, building on Baumol’s insight, points out that we have the economic capacity to support all of this—the real question is, do we choose to? Because the point of an economy isn’t just to provide jobs so people can scrape by. It’s to raise living standards for everyone and ensure that prosperity is shared.
That’s why profitable companies should be sharing more of the gains with their employees. And that’s why the country needs a fair corporate tax rate. As Lazonick argues: “That’s where you get the money — you recognize those corporations are actually living off society, and they need to pay their workers more and pay their taxes so that we can give everybody the services that make life worth living and, by the way, keep the economy productive.”
And here’s the political punch: when people feel secure — when they have decent jobs, health care, and a future — they’re less likely to fall for fear-based politics. A fair economy supports a healthy democracy — which, Lazonick notes, is why people who are not interested in a fair economy don’t actually want people to feel secure.
The bottom line is that as long as we stay locked into shareholder value ideology — where boosting stock price is all that matters — American workers will keep losing ground, and our overall quality of life will keep slipping. Lazonick notes that this deeply flawed mindset, popularized in the ‘80s when “greed is good” became Wall Street’s mantra, continues to dominate corporate boardrooms despite being exposed as a failure that ruins the long-term value of companies, fleeces workers, and harms society. It still goes largely unchallenged, even by many Democrats, who need to confront practices like stock buybacks head-on if they’re serious about improving American job quality.
Lazonick’s core message is straightforward: those massive corporate profits are not just private gains. They’re built on public investment and worker productivity. Taxpayer-funded research, public infrastructure, and a trained labor force all make them possible. So when companies play Wall Street games with profits and hoard rewards only for the top, it’s not just unfair—it’s a failure of the entire economic system.
For decades, workers have been told to tighten their belts, work harder, and wait for the gains to trickle down. But the gains already happened—they’re just going elsewhere, and tariffs won’t fix it. If we want an economy that actually works, we need to remember what it’s for: not just growth, but shared prosperity. Not just jobs, but better lives.
The money is there. And a big chunk of it is rightfully ours.
https://www.nakedcapitalism.com/2025/04 ... -that.html
Another plea for a moment frozen in time ignoring the historical circumstances. And an inability to recognise that capitalism evolves, and the impetus of that evolution is increasing profits. The Owners cannot settle for less, only more. A maxim of business is 'grow or die' and it applies from the micro to the macro. Yet these dingbats would make the tiger a vegetarian. Not happening. But I guess it feels good to mouth platitudes rather than face the contradictions of their class interest.
Anything But Communism!
How the American Economy Is Rigged to Serve the Rich, and Why Tariffs Won’t Change That
Posted on April 25, 2025 by Yves Smith
Yves here. William Lazonick has explained how financialization, particularly stock buybacks, share-price linked executive pay, and the outsized role and pay levels in asset management, particularly private equity and hedge funds, have been at least as destructive to middle and working-class standards of living as globalization.
By Lynn Parramore. Originally published at the Institute for New Economic Thinking website
For the last 40 years, millions upon millions of hard-working Americans have been clocking in, doing their part — and getting less in return. They are very upset, as well they should be. Wages have stalled. Job security’s a joke.
Yet corporate profits are sky high.
Just look at the scoreboard: In 2024, Apple raked in $93.7 billion, Alphabet (Google’s parent company) pulled in $100.1 billion, and ExxonMobil reaped $33.6 billion. Yet the workers powering these companies aren’t seeing much of the immense value they have created. Some of Alphabet’s contract workers only recently fought their way up to $14.50 an hour. That’s not even close to a fair share of over $100 billion in profit.
So where’s the money going?
As economist William Lazonick, an expert on the American business corporation, points out, it’s not going to the people creating the value. It’s going into stock buybacks, dividends, bloated CEO pay, and the war chests of hedge-fund activists. In 2024, Apple did $94.9 billion in buybacks, Alphabet $62.2 billion, and Exxon Mobil $19.6 billion. These big productive companies aren’t struggling—they’re thriving. But instead of reinvesting in workers or society, they’re juicing their stock prices and enriching the top.
Just look at General Motors (GM), where the United Auto Workers (UAW) staged a major, large, successful strike in September 2023—only to have GM do $11.1 billion in stock buybacks in 2023 and $7.1 billion in 2024. Instead of using that money to pay workers better or invest in things that would actually help the company grow—like new equipment, research, training, or EVs—the company spent it buying back its own stock in order to push up the stock price and make shareholders and top executives richer.
Most workers don’t realize how much is quietly being siphoned away. They might blame globalization—and sure, it’s part of the story—but they often miss the issue that tariffs won’t touch: executives using Wall Street tricks to pocket profits that should’ve gone to the workers who earned them and helped make the profits possible.
Tariffs promise to bring back well-paid jobs, but they ignore the core problem: even the jobs we do have, in some of the most profitable industries, still aren’t paying what they should—and haven’t for decades. And it’s not because the money isn’t there—it’s because of where it’s going. As Lazonick notes, “UAW leader Shawn Fain has been supportiveof Trump’s tariffs — but what he and his members should be railing against is the $18.2 billion that GM spent on stock buybacks in 2023 and 2024.”
Lazonick points out that it wasn’t always like this. In the mid-20th century, many American jobs came with decent pay, benefits, and social support for upward mobility—though, of course, those gains were mostly reserved for white men. Still, back then, wages rose with productivity. When companies did well, workers shared in the success. And corporations and the wealthy accepted high tax rates that helped educate the labor force. That link is now broken, largely because companies have been allowed to get away with playing Wall Street games that short-change workers.
Lazonick brings up an idea from economist William Baumol’s 2012 book The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t. Baumol pointed out something interesting: industries that produce goods—like factories making computers—can boost productivity over time, which helps lower costs. But service-based industries—like education and health care—don’t really have that option. A teacher still needs to spend about the same amount of time teaching a class, and a doctor still needs time with each patient. Even though they can’t speed things up the way machines in factories can, these workers still need to be paid competitive wages. That’s what drives up costs in services over time, and it’s what Baumol called the “cost disease.”
Not to worry, said Baumol. Our society can afford the education and health care we need by transferring the profits from the goods producers (such as Apple, Alphabet, and Exxon Mobil) to fund social services. But, as Lazonick points out in a forthcoming INET working paper on goods and services in the U.S. economy, the high profits of the goods producers have been funneled into buybacks and dividends that make the rich richer, who then transform their economic might into political power to demand even lower taxes. Meanwhile, most Americans experience deteriorating social services—which, with the Republicans in control, are now on the chopping block.
The result of extreme corporate financialization is that even in high-productivity sectors like manufacturing and tech, wages lag behind. Companies are more productive and profitable than ever, but the gains are being concentrated at the top. Take a new chip or drug—costly to develop, cheap to mass-produce, and easy to sell worldwide. That’s the promise of scalable tech: big profits with low unit costs. It’s paying off—just not for most workers.
So what should those profits be doing? Lazonick argues that in a healthy economy, the incredible profits generated by high-productivity companies shouldn’t be used to do buybacks and flow to shareholders—they should be reinvested in the productive capabilities of the labor force and in the provision of the high-quality social services that we all need.
That means paying workers their fair share and funding essential services like education, health care, public safety, environmental protection, and the arts—most of which aren’t, or shouldn’t be, driven by profit (though private equity companies are trying to squeeze profits out of them). Lazonick, building on Baumol’s insight, points out that we have the economic capacity to support all of this—the real question is, do we choose to? Because the point of an economy isn’t just to provide jobs so people can scrape by. It’s to raise living standards for everyone and ensure that prosperity is shared.
That’s why profitable companies should be sharing more of the gains with their employees. And that’s why the country needs a fair corporate tax rate. As Lazonick argues: “That’s where you get the money — you recognize those corporations are actually living off society, and they need to pay their workers more and pay their taxes so that we can give everybody the services that make life worth living and, by the way, keep the economy productive.”
And here’s the political punch: when people feel secure — when they have decent jobs, health care, and a future — they’re less likely to fall for fear-based politics. A fair economy supports a healthy democracy — which, Lazonick notes, is why people who are not interested in a fair economy don’t actually want people to feel secure.
The bottom line is that as long as we stay locked into shareholder value ideology — where boosting stock price is all that matters — American workers will keep losing ground, and our overall quality of life will keep slipping. Lazonick notes that this deeply flawed mindset, popularized in the ‘80s when “greed is good” became Wall Street’s mantra, continues to dominate corporate boardrooms despite being exposed as a failure that ruins the long-term value of companies, fleeces workers, and harms society. It still goes largely unchallenged, even by many Democrats, who need to confront practices like stock buybacks head-on if they’re serious about improving American job quality.
Lazonick’s core message is straightforward: those massive corporate profits are not just private gains. They’re built on public investment and worker productivity. Taxpayer-funded research, public infrastructure, and a trained labor force all make them possible. So when companies play Wall Street games with profits and hoard rewards only for the top, it’s not just unfair—it’s a failure of the entire economic system.
For decades, workers have been told to tighten their belts, work harder, and wait for the gains to trickle down. But the gains already happened—they’re just going elsewhere, and tariffs won’t fix it. If we want an economy that actually works, we need to remember what it’s for: not just growth, but shared prosperity. Not just jobs, but better lives.
The money is there. And a big chunk of it is rightfully ours.
https://www.nakedcapitalism.com/2025/04 ... -that.html
Another plea for a moment frozen in time ignoring the historical circumstances. And an inability to recognise that capitalism evolves, and the impetus of that evolution is increasing profits. The Owners cannot settle for less, only more. A maxim of business is 'grow or die' and it applies from the micro to the macro. Yet these dingbats would make the tiger a vegetarian. Not happening. But I guess it feels good to mouth platitudes rather than face the contradictions of their class interest.
Anything But Communism!
"There is great chaos under heaven; the situation is excellent."
Re: The crisis of bourgeois economics
The Havoc caused by Say’s Law
Originally published: The Havoc caused by Say’s Law on May 25, 2025 (more by The Havoc caused by Say’s Law) (Posted May 24, 2025)
JEAN-BAPTISTE Say, a French economist who wrote in the late eighteenth century, had formulated a law to the effect that ‘supply creates its own demand’, which meant that there could never be an inadequate demand for the aggregate of goods produced in any economy. His argument was as follows. Whatever is produced generates an equal amount of income among those associated with its production. This income is either consumed or ‘saved’ (i.e., not consumed). Whatever is consumed generates an equal amount of demand for the produced consumption goods, and whatever is ‘saved’ is either directly used for purchasing capital goods, or offered as a loan to those who wish to purchase capital goods, namely undertake investment, by borrowing. Whatever is ‘saved’ and whatever is invested are ultimately equalised through adjustments in the interest rate, so that through such adjustments whatever is produced gets ultimately demanded in the aggregate, and the capitalist economy has no reasons for not being at a state of maximum production, that is, at full employment. There may be demand-supply mismatches in particular markets, but never in the aggregate.
The problem with Say’s Law is that all demand out of incomes earned in the current period is seen to be for goods produced in the current period, whether for consumption or for adding to one’s wealth (i.e., investment). But if persons wish to add to their wealth in the form of money (and that would be the case if they hold their wealth partly also in the form of money), which is not a good produced in the current period (for instance if they wish to hold paper money out of their current incomes), then there is no reason why the supply of produced goods in the current period should create a demand equal to itself. In the C-M-C circuit, if persons do not wish to convert M into C, then there will be an overproduction of C, i.e., of produced goods. And any reduction in the money-price of produced goods in such a situation of insufficient demand, would only strengthen the demand for money as a form of wealth and hence not eliminate the over-production tendency.
Mainstream bourgeois economics which assumed Say’s Law, held that persons never wished to hold money as a form of wealth, that money was only a medium of circulation but never a form of wealth-holding. This however was an absurd assumption. It was not only empirically untrue, but also logically untenable, which is why Say’s Law was an absurd assumption to make for a capitalist economy. Karl Marx had been quite scathing about Say’s Law and about J B Say as an economist (whom he had called the “trite” Monsieur Say) and had expounded the possibility of over-production crises under capitalism.
Why, it may be wondered, are we talking about such arcane debates in economics, which were settled not only by Marx but resettled in the 1930s by the Keynesian Revolution in bourgeois economics at the time of the Great Depression, when to argue that a capitalist economy can never experience a deficiency of aggregate demand for produced goods was ludicrous in the extreme. Keynes wanted to save western capitalism from a Bolshevik-style revolution, and to do so, he recognised, one had to first admit its failures and repair the system to overcome them so that a revolution could be forestalled.
The reason we are talking about Say’s Law is because it has made a silent return to economic discourse, a return whose very silence makes it as influential as it is insidious. In fact the rationale for the entire neo-liberal economic order is based on assuming the validity of Say’s Law.
The intellectual groundwork for neoliberalism, and for jettisoning the dirigiste strategy that had been prevalent until then (in India the dirigiste strategy is often referred to as the Nehru-Mahalanobis strategy), was laid down in the early seventies. The argument was advanced that four east Asian ‘tigers’ namely South Korea, Taiwan, Hong Kong and Singapore, had shown remarkably high economic growth rates, much higher than countries like India pursuing dirigiste strategies; and that if other countries too abandoned dirigisme, or what the World Bank called their ‘inward-looking’ development strategy, and pursued ‘export-led growth’ instead, then they too could emerge as successful as these ‘Asian tigers’.
This was an absurd argument. If the level of world aggregate demand is expanding at a certain rate, then the output of all countries taken together cannot possibly expand at a higher rate. If the output of some countries is expanding at a higher rate than world aggregate demand, it is because the output of others is expanding at a lower rate. If the output growth of the hitherto slow-growers accelerates then that can only be at the expense of those who were hitherto growing rapidly. Hence to dangle the hope that all countries could grow as rapidly as the ‘Asian tigers’ if only they pursued an ‘export-led growth’ strategy was absurd; it amounted to ignoring the constraint of aggregate demand, namely to assuming Say’s Law. Behind the call to abandon the Nehruvian strategy therefore was an invoking of the absurd Say’s Law.
This invoking however was camouflaged, which is why it succeeded. The camouflage took the form of a ‘small country assumption’. A small country, precisely because it is small, can push out larger exports at the expense of larger countries without causing them damage on a scale that they would notice. For small countries therefore the assumption that they can export more if they wish, namely that they face no noticeable demand constraint, makes some sense, and is often made. But the neoliberal strategy of ‘export-led growth’ was sold to all countries by pretending that each of them could act as if it was a ‘small country’; this was utterly absurd, a flagrant case of the converse fallacy of aggregation, and a back-door entry for Say’s Law.
Of course, the success of the four Asian ‘countries’ was followed by more spectacular growth successes in China and south-east Asia; true, they were not necessarily examples of neoliberal strategy, nor of ‘export-led growth’ pure and simple. And to the extent that they had export successes, this was to a large extent because western metropolitan capital chose to locate plants on their soil for producing for the western metropolitan market; the counterpart of their success in other words was the slower growth of metropolitan capitalist economies, though not of metropolitan capitals, not to mention the fact that other third world countries were left out in the race. It was a race nonetheless among countries.
By falsely assuming Say’s Law, the ‘export-led growth’ strategy actually pitted countries, especially countries of the third world, against one another; for example, India could export more garments only at the expense of Bangladesh, and so on. This in turn meant that the more a country could squeeze its working population by giving them lower wages, extracting from them longer hours of work, and withholding legitimate payments from them through fraud, the more successful it would be in its export drive. Inequalising growth, or even poverty-generating growth, was thus built into the very logic of ‘export-led growth’.
Inequalising growth however ultimately meant a slowing down of the rate of growth of demand in the world economy and hence the onset of a crisis for the export-led growth strategy. Even before the pandemic, the decadal growth rate of GDP for the world economy as a whole had been the lowest among all the decades since the Second World War; and this growth rate has slowed down even further after the pandemic.
This strategy, apart from being ethically repugnant, since it apotheosizes cut throat competition among the oppressed people, has brought the world economy to a cul-de-sac. The only way that an economy of the third world can get out of this dead end is by activating the State to undertake larger expenditure to enlarge the home market. Enlarging the home market requires increasing the rate of agricultural growth (which puts more income in the hands of the peasants and agricultural labourers), raising the level of minimum wages (which puts more income in the hands of the workers), and increasing welfare state measures (which improves the real living standards of the entire working population); and it requires financing such spending through wealth and inheritance taxation. All this however would require imposing capital controls, especially on financial outflows, which in turn would necessitate trade controls. It would require, in short, abandoning the strategy of ‘export-led growth’ and hence overcoming the stranglehold of Say’s Law that has already done so much damage.
https://mronline.org/2025/05/24/the-hav ... -says-law/
"There is great chaos under heaven; the situation is excellent."
Re: The crisis of bourgeois economics
"Dark Computing" vs. "Dark Fibre"
Roger Boyd
May 29, 2025
In the run up to the early 2000s stock market crash which saw the Nasdaq go from 5,000 to below 1,000, there was a massive over-construction of optical fibre linkages. This lead to a colossal level of over-capacity and reams of unused “dark” fibre. Are we seeing the same mass corporate groupthink again with the colossal investments by the likes of OpenAI, Google, Meta, Apple, Microsoft and xAI? Will Nvidia become the new Cisco as an incredible growth in sales disappears into thin air as the buyers realize that there is simply not enough profitable demand to utilize anywhere near the compute power installed?
This all goes to the US model of AI that is a result of the monopolistic and extractive minded nature of the US corporate leaders; real innovation left long ago to be replaced with monopolistic and oligopolistic profiteering. The US model is to build a huge amount of AI processing power behind a big paywall, supported by intellectual property lawyers, through which the providers can charge monopoly/oligopoly profits as a limited set of firms capable of funding such gargantuan computing facilities. Such an approach will hold back the general societal adoption of AI due to the high prices being charged and restrictions placed upon use.
The problem for this model is that the Chinese competitors have set out to fundamentally undermine it with a strategy of low compute requirement AI models, low cost access to those models, and open source. This strategy sidesteps US restrictions on the export of high-end AI chips (and even with these Huawei is very competitive in the AI chip space), while also facilitating a rapid uptake of AI models by software application providers and business and government users. For society as a whole, the greatest benefit is through the widespread adoption of new AI technologies, not through a select few charging exorbitant fees and restricting usage. The Chinese strategy could be likened to “let a thousand flowers bloom” while the US way is “let a few flowers suck the nutrients from the rest”.
If things were left to their own devices the outcome would massively favour the Chinese strategy, with the massive investments of the US monopolists being shown to be huge errors of competitive judgement. But US monopolists will act like monopolists and are already pushing to have Chinese AI models and services, such as Deepseek, banned from the US on “national security” excuses. Given the proliferation of such low cost models in China, the US would end up having to ban all Chinese AI models. This of course would be good for the monopolists but awful for US competitiveness in general, as the rest of the world leave the US behind; a US that would become the East Germany of AI models (as with EVs etc.). There is also the question of how the US would be able to stop the usage of AI-derived tools from other nations that embedded Chinese open source.
On May 13th 2025, the US attempted to close the barn door after the Chinese AI horse had already bolted into the next farmer’s field. The US Commerce Department’s Bureau of Industry and Security asserted that the use of Huawei’s Ascend AI chips anywhere in the world violates US export controls, and warned about “potential consequences” for anyone using US AI chips for the training and inference of Chinese AI models. The former statement is an implicit acceptance that Huawei has sidestepped US technology controls by engineering a competitive chip for AI. The latter is an acceptance that Chinese AI models are at least on a par with US AI models. This is an act of desperation, not one of strength, and will simply drive the Chinese state to accelerate even more the effort to remove all dependency on US high technology as well as further damage US chip manufacturers. The glaringly obvious attempt to force the world into a US AI rentier monopoly will also make other countries question their dependence on US high tech goods and intellectual property.
At the same time, the wheels are starting to wobble on the US AI train as some companies have started to cut back on data centre investments, and an over supply of access to Nvidia high-end chips is being reported in China. Once the growth story fades and the Dark Computing phenomena becomes more and more visible, the previous investment and stock market bubble will rapidly becoming a self-feeding bust. A company such as Nvidia may have a p/e of “only” 36, but if the buyers go on strike the “e” will rapidly fall pushing up that ratio very fast. Capital spending by publicly traded telecomm companies went from about US$120 billion in 2000 to less than half that amount in 2002; that’s how fast revenues can crash and earnings crash a lot faster than that. Cisco was found to be famously funding much of its own growth through loans to companies that bought their hardware, a parallel may be between the very close relationship between Nvidia and Coreweave; with the former rescuing the latter’s IPO with a US$250 million investment. Then there is the dependency of OpenAI on funding from Softbank, a perennial picker of technology investment losers, to fund the continuance of its massive buildout; with OpenAI showing no reasonable path to profitability and Softbank already stretched in its ability to borrow to fund its first set of commitments to OpenAI.
With the inability to produce monopoly profits from their huge compute power investments, the attempted monopolists will be forced to write down those investments; creating large financial write offs. For the pure play AI players, such as OpenAI and xAI, their business models will be shown to be utterly invalid and their perceived financial value will rapidly dissipate.
Below is a good documentary on the 2000 “dot com” crash. If anything, the players involved are much more leveraged and the financial intermediaries much less trustworthy than in the earlier period. Since then we have had the 2008 GFC and the hidden-under-COVID 2019 GFC, with the US financial markets currently supported by very large US fiscal deficits and a colossal Federal Reserve balance sheet.
One more bubble in the long list of bubbles created by the mass deregulation of financial markets of the past few decades will have burst. The only way to redirect US corporate leaders back toward building real competitive advantage instead of brittle monopolies and oligopolies that suck the creative life out of the US economy, as well as crushing living standards for the majority, is to put the financial system back in its New Deal straight-jacket, ban both share buybacks and executive stock options, and very aggressively enforce anti-trust legislation. Of course, none of that will happen given the tight oligarch control of the US state. Instead, the US will continue to lag as a China that tightly controls the financial sector and disciplines corporate leaders when required goes from strength to strength.
https://rogerboyd.substack.com/p/dark-c ... dark-fibre
Roger Boyd
May 29, 2025
In the run up to the early 2000s stock market crash which saw the Nasdaq go from 5,000 to below 1,000, there was a massive over-construction of optical fibre linkages. This lead to a colossal level of over-capacity and reams of unused “dark” fibre. Are we seeing the same mass corporate groupthink again with the colossal investments by the likes of OpenAI, Google, Meta, Apple, Microsoft and xAI? Will Nvidia become the new Cisco as an incredible growth in sales disappears into thin air as the buyers realize that there is simply not enough profitable demand to utilize anywhere near the compute power installed?
This all goes to the US model of AI that is a result of the monopolistic and extractive minded nature of the US corporate leaders; real innovation left long ago to be replaced with monopolistic and oligopolistic profiteering. The US model is to build a huge amount of AI processing power behind a big paywall, supported by intellectual property lawyers, through which the providers can charge monopoly/oligopoly profits as a limited set of firms capable of funding such gargantuan computing facilities. Such an approach will hold back the general societal adoption of AI due to the high prices being charged and restrictions placed upon use.
The problem for this model is that the Chinese competitors have set out to fundamentally undermine it with a strategy of low compute requirement AI models, low cost access to those models, and open source. This strategy sidesteps US restrictions on the export of high-end AI chips (and even with these Huawei is very competitive in the AI chip space), while also facilitating a rapid uptake of AI models by software application providers and business and government users. For society as a whole, the greatest benefit is through the widespread adoption of new AI technologies, not through a select few charging exorbitant fees and restricting usage. The Chinese strategy could be likened to “let a thousand flowers bloom” while the US way is “let a few flowers suck the nutrients from the rest”.
If things were left to their own devices the outcome would massively favour the Chinese strategy, with the massive investments of the US monopolists being shown to be huge errors of competitive judgement. But US monopolists will act like monopolists and are already pushing to have Chinese AI models and services, such as Deepseek, banned from the US on “national security” excuses. Given the proliferation of such low cost models in China, the US would end up having to ban all Chinese AI models. This of course would be good for the monopolists but awful for US competitiveness in general, as the rest of the world leave the US behind; a US that would become the East Germany of AI models (as with EVs etc.). There is also the question of how the US would be able to stop the usage of AI-derived tools from other nations that embedded Chinese open source.
On May 13th 2025, the US attempted to close the barn door after the Chinese AI horse had already bolted into the next farmer’s field. The US Commerce Department’s Bureau of Industry and Security asserted that the use of Huawei’s Ascend AI chips anywhere in the world violates US export controls, and warned about “potential consequences” for anyone using US AI chips for the training and inference of Chinese AI models. The former statement is an implicit acceptance that Huawei has sidestepped US technology controls by engineering a competitive chip for AI. The latter is an acceptance that Chinese AI models are at least on a par with US AI models. This is an act of desperation, not one of strength, and will simply drive the Chinese state to accelerate even more the effort to remove all dependency on US high technology as well as further damage US chip manufacturers. The glaringly obvious attempt to force the world into a US AI rentier monopoly will also make other countries question their dependence on US high tech goods and intellectual property.
At the same time, the wheels are starting to wobble on the US AI train as some companies have started to cut back on data centre investments, and an over supply of access to Nvidia high-end chips is being reported in China. Once the growth story fades and the Dark Computing phenomena becomes more and more visible, the previous investment and stock market bubble will rapidly becoming a self-feeding bust. A company such as Nvidia may have a p/e of “only” 36, but if the buyers go on strike the “e” will rapidly fall pushing up that ratio very fast. Capital spending by publicly traded telecomm companies went from about US$120 billion in 2000 to less than half that amount in 2002; that’s how fast revenues can crash and earnings crash a lot faster than that. Cisco was found to be famously funding much of its own growth through loans to companies that bought their hardware, a parallel may be between the very close relationship between Nvidia and Coreweave; with the former rescuing the latter’s IPO with a US$250 million investment. Then there is the dependency of OpenAI on funding from Softbank, a perennial picker of technology investment losers, to fund the continuance of its massive buildout; with OpenAI showing no reasonable path to profitability and Softbank already stretched in its ability to borrow to fund its first set of commitments to OpenAI.
With the inability to produce monopoly profits from their huge compute power investments, the attempted monopolists will be forced to write down those investments; creating large financial write offs. For the pure play AI players, such as OpenAI and xAI, their business models will be shown to be utterly invalid and their perceived financial value will rapidly dissipate.
Below is a good documentary on the 2000 “dot com” crash. If anything, the players involved are much more leveraged and the financial intermediaries much less trustworthy than in the earlier period. Since then we have had the 2008 GFC and the hidden-under-COVID 2019 GFC, with the US financial markets currently supported by very large US fiscal deficits and a colossal Federal Reserve balance sheet.
One more bubble in the long list of bubbles created by the mass deregulation of financial markets of the past few decades will have burst. The only way to redirect US corporate leaders back toward building real competitive advantage instead of brittle monopolies and oligopolies that suck the creative life out of the US economy, as well as crushing living standards for the majority, is to put the financial system back in its New Deal straight-jacket, ban both share buybacks and executive stock options, and very aggressively enforce anti-trust legislation. Of course, none of that will happen given the tight oligarch control of the US state. Instead, the US will continue to lag as a China that tightly controls the financial sector and disciplines corporate leaders when required goes from strength to strength.
https://rogerboyd.substack.com/p/dark-c ... dark-fibre
"There is great chaos under heaven; the situation is excellent."
Re: The crisis of bourgeois economics
Lu Feng: "Industrial Socialism vs. Financial Capitalism" Part One
Karl Sanchez
Jun 02, 2025
Most Gym readers should know by now that the deindustrialization of the Collective West is due to the morphing of Industrial Capitalism to Financial Capitalism as Capitalism sought to increase its profits by moving its industrial plant to lower cost locations which resulted in the replacement of most industrial manufacturing jobs with service industry jobs, all of which was greatly facilitated by financial interests who sought to increase the level of rents they obtained. The major geopolitical contest as with the Cold War continues to be between two different modes of political-economy which is announced in the title: China’s Industrial Socialism versus the Collective West’s—primarily the Outlaw US Empire—Financial Capitalism. I’ve not included Russia in this, although its system is rather similar to China’s, plus the author of this long translated article tells everything from China’s perspective, and the saying in the title is his. His image and short bio:
[img]
The authors also call for:
"If the U.S. economy is to maintain a certain level of economic dynamism, especially leadership, for the remaining 20 years of this century, it will have to undergo a fundamental change. The goal must be the reindustrialization of the United States. In the face of the rapid decline in competitiveness over the past 15 years, most vividly expressed in the wave of factory closures that swept the country this year, a conscious effort to rebuild America's production capacity is the only real option. ”【3】
It seems clear that US miseducated economists brought back the Neoliberal model with them and tried to apply it to China. The demands made by Treasury Secretary Yellen for China to cease its “overproduction” comes from the same source. The fact that Classical Economics is no longer taught at US Universities means that students have no way of understanding how Capitalism actually evolved and certainly know next to nothing about Marxism except perhaps the negative narrative spun about him. I emphatically suggest reading or watching “Marx was a Free Marketeer” for it tells the truth about what was actually meant by the term free market and what Classical economists strove to attain.
https://karlof1.substack.com/p/lu-feng- ... -financial
(Part 2 follows tomorrow.)
Karl Sanchez
Jun 02, 2025
Most Gym readers should know by now that the deindustrialization of the Collective West is due to the morphing of Industrial Capitalism to Financial Capitalism as Capitalism sought to increase its profits by moving its industrial plant to lower cost locations which resulted in the replacement of most industrial manufacturing jobs with service industry jobs, all of which was greatly facilitated by financial interests who sought to increase the level of rents they obtained. The major geopolitical contest as with the Cold War continues to be between two different modes of political-economy which is announced in the title: China’s Industrial Socialism versus the Collective West’s—primarily the Outlaw US Empire—Financial Capitalism. I’ve not included Russia in this, although its system is rather similar to China’s, plus the author of this long translated article tells everything from China’s perspective, and the saying in the title is his. His image and short bio:
[img]
A short bibliography follows at the above link. He’s published many papers in English and has been interviewed by Guancha and its Observer companion several times over the years, a few of which you’ll see referred to in the text. The title of the article translates as if the contest is a done deal: “Lu Feng: The United States launched a showdown, what did China rely on to win the challenge of the century?” It ought to read, … What will China do… The article is very long and must be divided into two parts. I found the historical POV very refreshing and important since most of us in the West have been unexposed to other views for most of our lives. The insight into industrial economy is also fascinating as it details both the West and China. Here’s a key excerpt before we get into the text:Dr. Feng Lu is now an emeritus professor of economics at the National School of Development (NSD) at Peking University, China and once served as a former Deputy Dean of the School. He has studied extensively on the issues regarding China's open macro-economy, including exchange rate, external imbalance, capital return, food security and agricultural development etc. He published more than 40 academic papers in both Chinese and English journals, 6 academic books and numerous magazine articles in these areas.
Dr. Lu serves as an advisor or member of expert groups for various government agencies in China such as Ministry of Finance, Ministry of Human Resources and Social Security, Ministry of Agriculture etc. Dr. Lu was the founding editor of “China Economic Journal”, the official English journal for China Center for Economic Research at Peking University. He is now a member of Advisory Panel of ASEAN+3 Macro-economy Research Office (AMRO). Once being selected as one of “the Best Annual Professor in Peking University Campus” by students, Dr. Lu teaches the courses of Macroeconomics, Principles of Economics, and Managerial Economics at Peking University in recent years.
The Observer begins with a long prologue with an odd intro sentence I tried to make sense of before the text of the interview begins. Bolded italics are my emphasis:Once the concept of industrial socialism is placed in the context of the transformation of industrial capitalism into financial capitalism and the suppression of China's rise by US hegemony, its significance of the times is immediately revealed, a bit like suddenly defining China's position in the "blank" of world historical evolution.
"Despite the controversy, the substance of the U.S. economy can be traced in the direction that capital, in the form of financial resources and physical plant and equipment, has shifted from productive investment in our nation's basic industries to unproductive speculation, mergers and acquisitions, and overseas investment. What is left behind are closed factories, laid off workers, and many new ghost towns.”China's economy in 2025 has started with a post-pandemic [growth rate similar to that] before the start to the pandemic: GDP growth of 5.4% in the first quarter, 0.1 percentage points higher than in the first quarter of 2024, and at the same time, China's technological innovation has stirred up the global technology wave, pushing the balance of global power competition in China's favor.
In the face of Trump's crazy moves since taking office, especially the global stick of "reciprocal tariffs", technology embargoes, and more geopolitical moths that may emerge in the future, is China's economy, especially China's industry, ready? In the final year of the 14th Five-Year Plan, in the accelerated stage of economic transformation, how well has China's economic development, especially industrial development, been cultivated?
The Observer recently visited Professor Lu Feng of the School of Government of Peking University again to find answers to these questions. Starting from 2023, Professor Lu Feng, who has been focusing on the research of China's industrial and technological innovation mechanism for many years, will exclusively share his profound and incisive views on China's economy, China's industrial development and China-US competition with readers and friends of Observer.com every year.
These views not only come from profound theoretical deduction, but also from the visits and research of first-line industrial enterprises. Although it is not gentle and drizzly at times, it hits the nail on the head and is related to the trend and future of the country's economy. The following is a transcript of the conversation.
The discussion lasted about three hours and was about 28,000 words. For the convenience of readers, this article is divided into four parts:
1. What are the challenges facing China's economy?
2. Why can't Trump do the reshoring of manufacturing?
3. Why do you emphasize that China's industry cannot tie its own hands and feet?
4. Who will win the showdown between industrial socialism and financial capitalism?
1. What are the challenges facing China's economy?
1. The challenge we face: A new round of shocks may be coming
Observer.com: Let's start with the external environment of China's economic development, which mainly involves China-US relations. As soon as Trump took office, he pursued a dizzying variety of policies at home and abroad, especially the so-called "reciprocal tariffs" implemented around the world, which finally came to an end due to China's countermeasures and the United States' attempt to ban China's advanced computing chips globally. There is a lot of information on various interpretations at the moment, how do you judge it?
Lu Feng: Although I knew that Trump was not playing according to the rules, there were still surprises in what he did after taking office, such as making Canada the 51st state of the United States, annexing Greenland in Denmark, and regaining control of the Panama Canal. Then, while everyone expected Trump to wield the tariff stick again, when he put it into effect, the scope and rate of the U.S. government's import tariffs were so large that the whole world, even America's closest allies, was shocked.
Regardless of how different Mr. Trump's approach and style may be, his strategic goal is essentially the same as that of previous U.S. administrations: to preserve American hegemony. It's just that at a time when America's power is declining and in crisis, Trump's task is characterized by rebuilding American hegemony. How to reshape? My observation is that he first wants to smash the existing world economic system (which was also shaped by the United States) and pass on the cost of economic adjustment to all other countries, including allies; and then through high tariffs and other means to reverse the trend of deindustrialization in the United States, the so-called "reshoring of manufacturing"; At the same time, it is concentrating its efforts on suppressing the greatest "threat" to US hegemony – in the eyes of some US political elites, this "threat" is none other than China.
Mearsheimer, an American scholar of international relations, once said that there are only three places in the world that the United States is willing to shed blood for: Europe, the Middle East, and East Asia, because these are the three key regions that have a bearing on US hegemony. When Trump first took office, he did not immediately take action against China, as many people had speculated, but first proposed his solution to the Gaza problem, especially the direct holding of US-Russian talks, hoping to end the Russia-Ukraine conflict bypassing Europe.
Of course, what Trump thinks is one thing, and whether he can do it is another. But from a structural point of view, if the Middle East and the Russia-Ukraine conflict are resolved, then the United States can free up its hands to deal with the remaining one - East Asia, that is, to concentrate on dealing with China.
As soon as the Trump administration took office, in addition to increasing tariffs on Chinese goods and announcing a new round of export control measures on semiconductors to China, it also imposed fees and restrictions on international maritime transportation services related to Chinese ship operators and Chinese-built ships. Therefore, it seems to me that Trump's main direction of attack is China. To put it simply, the United States has opened up its posture to become an enemy of China, and this is the international background we are facing, and it is not diverted by our wishes.
Second, why can't Trump do the reshoring of manufacturing?
2.1 Manufacturing reshoring Trump can't do it: a generation can't make an industrial jump
Observer.com: Trump's core goal in office is to make America great again, and to use the tariff stick to promote the reshoring of manufacturing. Do you think he will be able to reach his goal?
Lu Feng: This question is related to the basic motivation of the United States to suppress China. The Trump administration (including the previous Biden administration) believes that the United States cannot reindustrialize without containing China's development. But the historical fact is that the industrial decline of the United States is recognized by academic circles as having begun in the early 70s of the 20th century, and it has been more than 50 years now. This process is driven by the United States itself, and no one else is to blame. Let's take a brief look back at history.
There are two stages in the process of becoming a world hegemon in the United States. The first stage was from 1870 to before World War I, when the United States rapidly became an industrialized country in the last three or four decades, and it was very large (if you only use the analogy of industrialization, this stage is equivalent to 40 years after China's reform and opening up). By the turn of the century, the United States was the world's largest industrial producer (and largest agricultural producer), surpassing the leader Britain (and subsequently Germany).
Driven by industrial power and interests, the United States launched a war against Spain in 1898 and occupied Spanish colonies such as Cuba, the Philippines, Puerto Rico, and Guam. The Spanish-American War marked the emergence of the United States on the global political stage as one of the world's great powers (imperialist powers). The First World War ended in 1918, and the United States only entered the war in 1917, although it was very late, but as soon as it entered the war, it was decided that the Entente led by Britain and France would defeat the Central Powers led by Germany and Austria, because the United States was too big.
Before World War I, Britain had been the hegemon of the whole world, as well as the financial hegemon. However, after the First World War, Britain changed from a creditor country to a debtor country, which shook the position of the pound, because Britain, which was already backward in industry, had to borrow money from the United States to buy arms. However, after the end of World War I, the European powers at that time did not recognize the status of the United States and considered it a hillbilly. The United States, which "can't play" the European powers in international politics, has retreated to isolationism.
The second stage was from World War II to the beginning of the Cold War, when the United States became the world hegemon. After the Japanese attack on Pearl Harbor, the United States declared war on Germany and Japan, and that day British wartime Prime Minister Winston Churchill said, "I can sleep well tonight." "Because for him, the entry of the United States into the war is a matter of victory. After entering the war, the United States mobilized its huge industrial system to switch to munitions, known as the "arsenal of democracy", and enabled the allies to crush the German-Italian-Japanese Axis with its astonishing industrial capacity. Therefore, industrial strength determines the outcome of modern warfare. Today, the US political circles are revisiting the past, hoping to restore the status of one dominant family.
An important historical fact to consider here is that until the outbreak of World War II, the United States lagged behind Europe in science, although it had long since had the largest industry in the world and was highly capable of engineering.
One of Hitler's "gifts" to the United States when he came to power was to force a group of European scientists into exile in the United States, and the war also caused many new European inventions to flow into the United States. For example, theoretical research on atomic energy was done in Europe, and the first experiment to prove nuclear fission was carried out in the United States by exiled European scientists, and finally the United States built the atomic bomb through the Manhattan Project. The aviation jet engine was first invented by Germany (Germany was far ahead in aerodynamic research) and the United Kingdom, during the war, Britain transferred jet engine technology to the United States in order to win the support of the United States, but the United States took a lot of effort to master, and it was not until the post-war that it was applied to aircraft. Radar technology was also transferred from the United Kingdom to the United States, after which the United States established a radiation laboratory at the Massachusetts Institute of Technology (MIT) to study the application of radar technology. The ballistic missiles developed by the United States after the war were designed by German scientists who designed the V1 and V2 rockets for Nazi Germany.
This fact reflects a historically proven sequence of development, and only by becoming an industrial power can it become a scientific power. This order has never been reversed in history, because only industrialization will create a demand for science and technology and the ability to invest.
Another historical fact that can attest to this sequence of development is that every wave of industrialization in the world begins with the production of products that already exist, and not with the production of new products that did not exist before.
The most iconic product of the British Industrial Revolution is cotton textiles, but cotton textiles were not invented by the British and have existed for a long time, and the innovation of the British is to produce cotton textiles with machines. In fact, the British Industrial Revolution began with the production of traditional products with machines. When the United States experienced large-scale industrialization in the late 19th century, major products and technologies such as steel, chemicals, and automobiles produced in the United States were invented by Europeans, and American innovation was the use of mass production methods, including the Ford assembly line. When Japanese industry began to hit the world market in the 70s and 80s of the 20th century, all the products it produced came from European and American inventions (although improved), and Japan's competitive advantage also came mainly from innovation in production methods (i.e., process or process technology), such as the Toyota production method.
This is not to say that completely new products will not appear, but that the invention of completely new products will not appear long after the industrialization of a country has begun. For example, the United States used the technological capabilities accumulated during World War II to develop new technology industries such as computers, semiconductors, and software in the 50s of the 20th century, and then Silicon Valley was born. It was the golden age of the American economy, with the advantages of traditional industry coexisting with the advantages of high-tech industry, and experienced a high rate of economic growth from after World War II until the early 60s.
Why does a country only produce completely new products long after industrialization? The reason behind this phenomenon is actually very profound: any major technological innovation that produces a completely new product, no matter what field it appears, needs the support of the entire industrial system. Thus, the precondition for major technological innovation is the formation of an industrial system, including the corresponding educational, financial and other supporting systems, and it takes time for these conditions to mature. Of course, initiating industrialization itself is not an easy task, and it often requires backward countries to make innovations in production methods, organizational forms, and systems in order to compete with leading countries in existing product markets.
2.2 Manufacturing reshoring Trump can't do it: The root cause of the decline of American industry is the pursuit of world hegemony
Observer.com: It is very interesting to find that from an industrialized power to a scientific and technological power, and then to de-industrialization, is this the inevitable law of the development of a large country? Why is America's once-powerful manufacturing sector in decline?
Lu Feng: To put it bluntly, the fundamental reason for the decline of American industry is the pursuit of world hegemony. Of course, this is a "long" process, and we can only briefly review it.
After the end of World War II, the United States set out to establish a liberal international economic order with the aim of ensuring that other countries would open their markets to the United States. After the start of the Cold War with the Soviet Union, this order or system had a strong geopolitical element, thus forming two pillars.
The first pillar was to help revive the economies of the Allies through the Marshall Plan, while also reversing the early postwar plans to turn West Germany and Japan into an agrarian nation. Although the Marshall Plan was intended to deal with America's postwar surplus of supplies or production capacity, all of America's allies at the time were in debt to the United States, and the only way to repay the debt was for those countries to be able to export to the United States and earn dollars to pay off the debt. As a result, the United States reversed its pre-World War II policy of high tariffs and protectionism and opened its domestic market to its allies. Of course, these allies must also open their markets to the United States. The second pillar was to provide security guarantees to the allies against the "threat" from the Soviet camp.
At this point, we must explain the US "grand strategy" thinking. The pursuit and maintenance of hegemony is the basic goal and logic of the US grand strategy after World War II, and all the debates among the US elite are not about this goal per se, but about which hegemonic strategy the United States should pursue. Among the different "versions" of the strategy, the "main theme" has always been the "primacy", which has the basic position that the United States can guarantee peace only if it maintains its overwhelming superiority over all other countries, because peace is the result of an imbalance of power. 【1】
The supremacy of the United States consists of four elements: 1) overwhelming military superiority, deep involvement in world affairs, ensuring that the oceanic regions on both flanks of the United States remain internally divided, and preventing the emergence of regional powers in Europe and Asia or Eurasia. 2) Provide security guarantees to allies and dissuade them from pursuing the path of independent development, in order to eliminate their incentives to rearm and re-emerge as challengers or competitors. 3) Integrate the world with the American system, continuously expand the scope of the liberal economic order, integrate more countries according to the conditions of the United States, and create optimal conditions for the penetration of American capital. 4) Strict prevention of the proliferation of nuclear weapons in order to guarantee the freedom of action of the United States (because the emergence of nuclear weapons has changed the nature of warfare). 【2】
In the liberal international economic order dominated by the United States, because the allies are dependent on both the American market and the United States for security, the United States has obtained "privileges": First, once those allies join the system, they cannot develop independently, which enables the United States to subdue countries such as West Germany and Japan, which have waged wars. Second, those allies have had to absorb the dollar, so that the United States, by virtue of its dollar hegemony, can pass on the costs and costs of any domestic economic adjustment to the allies.
By the 60s of the last century, the industry of Europe and Japan was rebuilt and began to compete with American industry. At that time, the United States made a big "stupid move", that is, to get involved in and expand the Vietnam War. This unpopular war greatly depleted the national strength of the United States, not only led to rising unemployment and inflation at home, but also fattened Japan through massive material purchases. In the end, the war was not won.
Beginning in 1968 (during the Vietnam War), the United States ran a trade deficit not seen since industrialization in the 19th century. In order to get rid of the dilemma of widening balance of payments deficits, plummeting dollars, and gold outflows, the Nixon administration announced in August 1971 that it would abandon the gold standard, stop converting dollars into gold, and impose a 10% import surcharge, which led to the collapse of the Bretton Woods system. The unilateral actions of the United States caused huge losses to the allies, which is known in history as the "Nixon Shock".
At a meeting, in front of the stunned Allied Treasury Ministers, then-US Treasury Secretary Connally uttered the "famous phrase": "The dollar is our currency, your problem." Looking back at history, the Nixon shock that smashed the Bretton Woods system started the process of financializing the American economy. In order to maintain its overwhelming global presence, the United States is increasingly spending more on military expenditures than the American economy can afford, and increasingly dependent on debt growth supported by the hegemony of the dollar.
By the 70s of the 20th century, Japan gradually gained an advantage over American companies in industrial fields such as steel, shipbuilding, machine tools, automobiles, semiconductors (memory chips), and consumer electronics. In the face of unfavorable competition, the U.S. industry experienced a wave of mergers and acquisitions and factory closures in the so-called "Rust Belt" starting in the late '70s and continuing throughout the '80s.
However, at that time, the new high-tech industries represented by Silicon Valley and the Boston area in the United States were also in a stage of vigorous development, and there was hope that new industries would replace existing industries. As a result, the appellations "sunset industry" and "sunrise industry" appeared in the American media, and these two concepts evolved into the concepts of the "old economy" and the "new economy" by the 90s.
There is no shortage of people in the United States, and I quote a best-selling American book published in 1982:
The authors also call for:
"If the U.S. economy is to maintain a certain level of economic dynamism, especially leadership, for the remaining 20 years of this century, it will have to undergo a fundamental change. The goal must be the reindustrialization of the United States. In the face of the rapid decline in competitiveness over the past 15 years, most vividly expressed in the wave of factory closures that swept the country this year, a conscious effort to rebuild America's production capacity is the only real option. ”【3】
"Mr. Han's observation is that China is doing the localization of equipment at every node of the process. It's just going to take a little longer to do it, but it's definitely going to be done, because China already has the capacity and conditions to do that. Therefore, Mr. Han believes that China is the only country in the world that can independently develop the semiconductor industry.”However, the political elite of the United States and the capitalist elite did not make such a choice, the former wants to maintain the hegemony of the United States in the world, while the latter wants to make more and faster money with the help of the hegemony of the dollar. Recently, Observer.com published an article by former Greek Finance Minister Yannis Varoufakis that recalls that incident very poignantly.
He wrote the central question facing the Nixon team was: "How can the United States maintain its hegemony when it is reduced to a deficit country?" To address this paradox, instead of adopting austerity policies that could trigger a recession and weaken the U.S. military, the Nixon team widened the fiscal deficit and trade deficit and made other countries pay for the U.S. deficit by reconstructing the cyclical system of global capital flows. This will require breaking the stranglehold on Wall Street since the New Deal, the wartime economy, and the Bretton Woods system, and loosening financial controls to avoid a repeat of the Great Depression. [Essentially what Hudson described in his Super Imperialism.]
The Carter administration continued this policy, while the more neoliberal Reagan administration deregulated finance across the board. As a result, American financial capitalists have found that they can use hundreds of billions of foreign capital to play a financial game, and the more the new system of supporting the export needs of Eurasian countries with the US deficit develops, the larger the scale of trade required to maintain this deliberately unbalanced global system. This is the impetus for American-led globalization. 【4】
Financial liberalization under the hegemony of the dollar has made the United States the only country in the world that does not have to make a difficult choice between "guns and butter", but it has also made the influence of finance, including the stock market, on the economy more and more, and the operation of American enterprises more and more subservient to the rules of the financial market, and the financial logic must disintegrate the industry that requires long-term investment. Thus, the financialization of the economy became a decisive force in the decline of American industry.
One only needs to look at the trajectory of the U.S. trade deficit to understand: the U.S. trade deficit was initially tens of billions (all denominated in dollars here), and then rapidly expanded to 100 billion after entering the 80s, and the trade deficit of U.S. manufactured goods also appeared during this period; Since then, the trade deficit has continued to widen, exceeding the trillion level by 2021.
Neoliberalism has given rise to the ideology of "maximizing shareholder value" in terms of corporate governance. As a result, the tide of economic financialization reversed the trend of separation of management and ownership in American industry since the end of the 19th century, with capital owners (shareholders) seizing corporate control from "insiders" who were originally independent of management rights (including leveraged buyouts, equity incentive plans, etc.), and Wall Street was busy with corporate mergers and spin-offs, and laying off employees in restructured companies to improve profits and stock prices.
At the same time, the 1980s saw the re-expansion of the United States in armaments (the Star Wars program) lead to the development of new high-tech industries, and the dollar became more and more powerful after decoupling from gold. After the collapse of the Soviet Union, the neoliberal international economic order expanded to the whole world, entering a period of globalization dominated by the unipolar hegemony of the United States. In an economic order that requires all countries to open their markets to American capital, American companies, in the form of multinational corporations, are increasingly outsourcing manufacturing operations to places with low production costs as long as they can increase profits. At that time, the United States had nothing to fear, anyway, it had the world's strongest military, the most advanced high technology and the omnipotent dollar, and it was good for the world to work for itself.
The 2008 global financial crisis, triggered by the subprime mortgage crisis in the United States, exposed the fundamental flaws of this model. Americans themselves have discovered the fragility of the American economy, including the polarization of rich and poor in society caused by financialization and deindustrialization. It is in this context that Trumpism emerged and gained a social basis, and its appeal lies in acknowledging that the fundamental problem of the US economy is industrial decline, but its fallacy is to blame others for the cause of its decline: all other countries in the world – including China and America's allies – have taken advantage of the United States (quite the opposite).
The truth of history is that the decline of American industry was of its own infliction. It is important to note that if the diagnosis of the problem from the hegemonic position is wrong, then the prescription is unlikely to be effective either. Today, Trump wields the tariff stick from the standpoint of maintaining American hegemony, but if this alone can revive American industry, the rooster will surely lay eggs.
2.3 The reshoring of manufacturing to Trump cannot be done, and China's industrialization did not develop through "industrial transfer".
Observer.com: Trump's plan is to raise tariffs to bring manufacturing back to the United States, and do you think this plan is unlikely to succeed?
Lu Feng: First of all, I think that the so-called "reshoring of manufacturing" is a loose concept, just like the "industrial transfer" that is popular in China. For many years, there has been a popular saying in Chinese society that China's astonishing development after the reform and opening up is due to the "international industrial transfer", which is wrong. Wrong concepts lead to wrong thoughts.
For example, the 2018-2019 U.S. trade war against China caused panic among the "elites" of Chinese society, and some economists discussed the "terrorist" prospect of the U.S. forcing industrial chains out of China. Only a few years later, it turned out that this fear was only the psychological feeling of these "elites": China is the main body of the world's industrial chain, and the trade war has made China's industrial chain more complete and powerful.
Industry or industry is not a movable object (such as plant, equipment, and production lines), but is essentially an organizational and social capacity, and capacity determines the effectiveness of physical capital. The key issue is that organizational capabilities are always endogenous and non-transferable. Therefore, any industry with a national character is developed, not "transferred".
Yes, investment from enterprises in developed countries can bring some "knowledge", but whether or not they can learn something from foreign capital depends entirely on whether there are national enterprises in the local countries that independently participate in competition and cooperation, that is, whether they have the ability to have a foundation. Otherwise, the establishment of local factories by multinational companies is nothing more than an "enclave", which has little to do with the local economic development except to provide some employment and tax revenue.
The late famous development economist Amsdam pointed out that foreign capital has never initiated the industrialization of a country, and they only enter after a country has developed to a certain extent, and the purpose is nothing more than to compete for the market. 【5】
After the reform and opening up, China also introduced technology and foreign investment, and later multinational companies set up factories in China. However, the key factor in China's ability to resist the negative effects of foreign investment (such as destroying local businesses) and to learn from it and turn it into its own competitiveness is that China is open to foreign investment on the basis of a nearly complete industrial system, which is the basis of China's capabilities.
Reform and opening up is a great cause, but there has never been a good thing in the world that you can develop and everything will be fine once you open up (otherwise the Philippines should be a developed country). Openness is a double-edged sword, which can promote one's own development, or it can be controlled by outsiders and hinder one's own development. Therefore, openness itself is at best a necessary condition for development, but it is not a sufficient condition. What are the sufficient and necessary conditions for development? What is the key to using openness for better development: The ability to grow on the basis of autonomy. Those who are capable can take advantage of the benefits of openness, and those who are incapable can be strangled to death by openness.
China's industrial system is endogenous, not "transferred". Having experienced China's "century of humiliation" and revolutionary wars, the founding generation of leaders knew the importance of industrialization to maintain national independence and economic development. Therefore, starting from the 50s of the 20th century, New China promoted industrialization in accordance with the requirements of a big country that can "stand on its own feet among the nations of the world," and its basic characteristic is to establish a complete industrial system.
What does "complete" mean? At that time, whatever industry in the world was going to be built, China was going to build any industry, including the semiconductor industry that was still in its infancy. The goal of industrialization also determined the direction of social development in China, such as China's comprehensive scientific research and the higher education system that today "produces" the world's largest number of science and engineering graduates.
In the 60s and 70s, China experienced twists and turns such as the Sino-Soviet split and the "three-front construction". During that 20-year period of self-reliance, despite all kinds of difficulties and mistakes, China continued to expand its industrial system and achieved technological achievements marked by "two bombs, one boat, one satellite". Of course, the Chinese have sacrificed the economic welfare of two entire generations in order to build a complete industrial system at a very low level of economic development. However, it is precisely because of this foundation that the economic development after reform and opening up has been able to achieve the achievements we see today.
Of course, some people do not understand or do not recognize the connection between the industrial foundation laid in the "first 30 years" and the economic development after the reform and opening up, especially when they think that China's development is based on "industrial transfer".
To demonstrate this connection, I will give a "small" example. Today, China's largest semiconductor equipment company, NAURA not only accounts for half of the industry's operating income but also has the widest product line. Among the 10 categories of integrated circuit equipment, it can provide almost all types of equipment except lithography machines and test equipment, and its product line is comparable to that of Applied Materials, the largest semiconductor equipment company in the United States, and more than any other domestic and international manufacturers.
In 2017, on the eve of the U.S. trade war against China, NAURA generated 2.223 billion yuan in revenue, what is the revenue in 2023? It is 22.079 billion yuan, which is almost 10 times that of 6 years ago (that is, before the trade war)! According to the performance report released by NAURA a few days ago, it will achieve a total operating income of 29.838 billion yuan in 2024, a year-on-year increase of 35.14%; net profit attributable to shareholders of listed companies was 5.621 billion yuan, a year-on-year increase of 44.17%.
In just 6 years, it has gone from being unknown to being among the world's top 10 semiconductor equipment companies (ranking 7th), where did such a company come from? The predecessor of NAURA was Qixing Huachuang, which was established by merging the equipment manufacturing department spun off from 6 factories (originally scheduled to be 7) in the process of state-owned enterprise restructuring at the end of the 90s of the last century. These equipment departments come from several electronics factories established by the Ministry of Electronics Industry in the Jiuxianqiao area of Beijing in the 50s of the last century, among which Factory 774 (the former Beijing Electron Tube Factory, the predecessor of BOE) has been developing and manufacturing semiconductor equipment since the early 60s. In 2017, Seven Star Huachuang merged with North Microelectronic Equipment Base to become today's North Huachuang.
Semiconductors are an industrial industry that has gone through detours in China, but it has a long history and its own heavy accumulation. Today's NAURA is a fact that all the employees from the chairman to the employees have been making semiconductor equipment since they joined the work, which reflects the "gene" of the company, which contains the knowledge, experience, skills and behavioral habits that can be formed after decades of accumulation. It is precisely because of such a capability base that once the blockade of the United States forced chip manufacturing companies to open their doors to domestic equipment suppliers, NAURA broke out. Therefore, even for industries that have been abandoned, the Chinese industrial system has always left a spark for them, and when the conditions are ripe, they can rekindle the flame. This is true for semiconductors, and it is also true for large aircraft.
Let me give you another example in passing. In February 2023, we interviewed a Korean semiconductor materials expert, Mr. Han (pseudonym), who was invited to work for a Chinese company after retiring in South Korea. I asked him if China could continue to produce large silicon wafers if the supply of equipment from abroad was completely cut off. He replied that if China does it itself behind closed doors, uses domestic equipment that still has a gap, and supplies it to Chinese customers, then there will be no problem; However, if it participates in international competition, it will lag behind the world's advanced level by about five years. I then asked, does he mean that he thinks China can make all the semiconductor equipment? His translation retells his answer in the third person:
End Part OneMr. Han explained that the industrial chain of the United States is incomplete, but there is no supply problem for the allies who rely on it; Japan is no longer good at chips, but it is strong in terms of equipment; South Korea's Samsung and Hynix are very strong in the field of chips, but South Korea has no strength in materials and equipment, and needs to rely on the global supply chain. He believes that South Korea has made strategic mistakes and is overly dependent on Japanese equipment. Therefore, his conclusion is very certain: China is the only country in the world that is localizing all equipment and all processes, and it will definitely be able to do so. The basis for the localization of all semiconductor equipment is China's independent and complete industrial system. In fact, more than two years have passed since that interview, and China's semiconductor industry has progressed faster than expected.
Back to the issue of reindustrialization in the United States. The U.S. government forced TSMC and South Korean companies to build factories in the United States, which is not industrialization. In 2017, during Trump's first presidency, Foxconn announced that it would invest $10 billion in Wisconsin to build a giant LCD panel factory and create 13,000 new jobs. Trump personally attended the groundbreaking ceremony at the time and called the Wisconsin campus invested by Foxconn the "Eighth Wonder of the World", but the project was later "unfinished", which fully shows that the industry cannot be "transferred".
After more than 50 years of decline, the social conditions of the United States industry–-the industrial structure, the employment structure, the infrastructure, the behavior of investors and workers, the corporate governance model, and the relevant laws–-have changed dramatically and can no longer meet the requirements of industrialization.
According to media reports, the conflict between TSMC and American employees is manifested in the fact that American employees have higher wages than Taiwan, but their skills and discipline are worse than Taiwan's. When a large number of people lose the social experience base of industry, except for high-tech, finance and other industries that require highly educated personnel, the general characteristics of the American working population for the manufacturing industry are high cost and low skills. In contrast, in China, during the booming stage of industry, the industrial labor force (including engineers and managers) was generally characterized by low cost and high skills, and at the same time, the social experience base of industry was constantly expanding.
As long as industry is not lost, when labor costs rise, it can still be offset by product innovation and technological advancements (such as the adoption of automation and intelligence), as many Chinese industries are doing.
What does it mean to lose industry? I'll give you an example. A few years ago, I read an article by an American scholar saying that twenty or thirty years ago, the United States abandoned the production of printed circuit boards (originally invented by Americans) because of its pollution and low added value. However, no one could have foreseen that today's circuit board would become a high-tech product because it would become so complex as the end product changed (think of today's precision multilayer circuit boards for smartphones).
The American scholar lamented that when the United States interrupted the process of participating in the technological advancement of circuit boards for a long time, it was almost hopeless to enter the industry—what kind of capital would be willing to endure recruiting high-cost, low-skilled personnel to learn to make circuit boards from scratch? In addition, if you do so, you will face an overwhelming advantage from strong competitors.
It is now clear that it will be more difficult for a deindustrialized country to re-industrialize than it was for the first time. Trump's four-year term alone will not solve the problems that have accumulated in the United States for more than 50 years, and no amount of higher tariffs will solve the fundamental problems.
Of course, China cannot afford to make fundamental mistakes on its own, especially not to tie its own hands and feet.
3. Why do you emphasize that China's industry cannot tie its own hands and feet?
3.1 China's industrial development can no longer tie its own hands: the development of emerging industries cannot replace traditional industries
Observer.com: Why do you keep emphasizing that China's industry "can no longer tie its own hands"?
Lu Feng: This brings me to the theme I want to talk about: if the United States wants to confront China, we must let go of its self-imposed restrictions on industrial development and economic growth -- China can only overcome the economic and technological suppression of the United States by relying on the overall strength of the industrial system.
When I say "self-restraint", I mean a system of limiting production formed under the influence of the "dichotomy" thinking. In last year's Observer.com article, I criticized the "dichotomy" thinking in detail, and I will briefly repeat it here.
The "dichotomy" thinking began to influence public opinion at the end of the high-growth phase (2000-2013), led by liberal economists. Their position is to view China's high economic growth in the first decade or so of the 21st century as "investment-driven," "extensively developed," and "overcapacity," and that high growth has hampered liberalization and marketization, which they consider more important than growth.
In order to negate high growth, they divide China's industrial system, which has made great contributions to high growth, into two parts: the first part is the traditional industry, which accounts for about 90% of the industrial added value, which belongs to the "old kinetic energy" that should no longer be developed; The second part is scientific research, informatization, and services, which should be the focus of future development, because that's what they see in the U.S. industrial structure. Therefore, the "dichotomy" thinking holds that the central issue of China's economy is no longer growth, but a "transformation" from an industrial structure dominated by the first part to a "transformation" dominated by the second part. In fact, the "dichotomy" is an anti-industrial current.
Under the influence of various factors, the "dichotomy" thinking has profoundly influenced economic policy in the past decade or so, and the transformation of replacing "old kinetic energy" with "new kinetic energy" has become the policy language. Once such a policy is put into practice, China has formed a system of limiting production, which uses administrative means to require "all localities to clarify specific tasks and specific goals, increase environmental protection, energy consumption, quality, standards, safety and other thresholds, system construction and law enforcement", and implement "de-capacity", production restrictions and shutdowns and transfers for traditional industries.
The "performance" of the extreme production restriction system is to brew the power rationing that affected the whole country in September 2021, but fortunately it was stopped by the Party Central Committee in time, and put forward the policy of "establishing first and then breaking". Even though the top management stresses that "the development of new quality productive forces does not mean ignoring or abandoning traditional industries," to this day, many traditional industries, especially basic industries, are still operating under the constraints of limited production (for example, the output of a certain product in the whole country must not exceed how much).
It seems clear that US miseducated economists brought back the Neoliberal model with them and tried to apply it to China. The demands made by Treasury Secretary Yellen for China to cease its “overproduction” comes from the same source. The fact that Classical Economics is no longer taught at US Universities means that students have no way of understanding how Capitalism actually evolved and certainly know next to nothing about Marxism except perhaps the negative narrative spun about him. I emphatically suggest reading or watching “Marx was a Free Marketeer” for it tells the truth about what was actually meant by the term free market and what Classical economists strove to attain.
https://karlof1.substack.com/p/lu-feng- ... -financial
(Part 2 follows tomorrow.)
"There is great chaos under heaven; the situation is excellent."