Of Hats and Rabbits, 1

1. Moose and Squirrel

“Hey Rocky, watch me pull a rabbit out of my hat.”


Six months ago the U.S. Federal Reserve put the Bear Stearns rabbit into JP Morgan Chase’s top hat by insuring the purchaser against possible loss on 97 percent of the Bear Stearns’ book— positions, obligations, outstanding trades– in mortgage back securities.

At the same time, the Fed opened a brand new window, the Primary Dealer Credit Facility, intending it to function in parallel to the Fed’s discount window to its member banks. Overnight loans at the NY Fed’s prime rate would be made available to the investment banks which were designated primary dealers in US Treasury securities. Collateral requirements were loosened to accept investment grade corporate securities, municipal securities, and mortgage and asset backed securities that could be priced by the dealer’s clearing bank.

That last bit was the dicey part. After years of “marking to market,” of steering their jolly pirate ship/party boat, the USS Leviathan, with an invisible hand across the green span of the world’s oceans, the lusty free marketeers of America had precisely no market for these mortgage backed securities and thus no way of pricing the items they most wanted to unload at the port of New York Fed.

With no way to price the securities that represented both asset and debt, there was no way within or without the Fed to refinance the debt. There was no way to recirculate the values that once were. And without circulation, there’s nothing. Finance is nothing. Refinance is everything.

The notational values existing only in the book entries of the investment banks could not be passed on. The buck had stopped all right. With that, the book was being closed. And burnt.

Meanwhile….meanwhile who didn’t, who couldn’t, experience a shiver of pleasure, of glee, of schadenfreude, viewing the pictures in the New York Times, the Financial Times, the Wall Street Journal, of the hundreds of thirty-something year old, bullet headed, over tailored, investment bankers stumbling out of their offices in Canary Wharf, in midtown, downtown, sans their company issued Blackberrysyour service has been discontinued– carrying their personal histories of pillage in cardboard boxes that read Iron Mountain?

Now, just maybe, now it will be possible to eat in a restaurant in Manhattan on a Saturday night without hearing them bellow like moose in the rut or chatter like squirrels amped on steroids, about their deals, their positions, their bosses, their companies.

Yesterday’s sharks just so much chum in today’s waters.

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A Brief Word

Six months after the Fed guaranteed Bear Stearns’ losses to JP Morgan Chase, six months into $500 billion in write-downs on the mountain of junk called “assets” with another trillion to go; after Fannie and Freddie got laid and the Treasury got scared; six months into overdue, seriously overdue, ‘I’m not kidding you are really late’ overdue, delinquency, and foreclosure; six months into a wasteland of cancelled IPOs, LBOs, credit lines, Ms&As, six months into the portfolio of photographs and streaming video showing all those young near and real MBA investment bankers, financial advisors, hedge fund floggers, structured investment vehicle dealers, specialty market makers, all dressed up with cardboard boxes in their arms with only one place to go –home, and that home overdue, seriously overdue, and I’m not kidding overdue– after all that IT HAS ONLY BEEN SIX MONTHS.

And after six months of incantations, jawbones, collateral easing, calming statements, rescue and resuscitation, of here epinephrine, of there defibrillation, the Fed and the Treasury had to let a patient go. The Lehman Bros died of complications.

In truth, it’s not medicine that the Fed practices, not even shamanism despite the hocus-pocus of interest rates. It’s triage. The Fed and the Treasury reviewing their own finances, assessing the criticality of their own health and that of the life-blood of the financial markets, the short-term “repo” markets, decided that their own credit ratings, their own abilities to operate with and in the money markets outweighed Lehman Bros rescue.

In the long-run for capitalism, the short-term is all there is. Finance is nothing. Re-financing, and re-re-financing is everything.

Much more to come

Address all comments to: sartesian@earthlink.net

The Shipping News, 2

Ships On The Ocean

So I’d like to know
Where you got the notion
To…rock the boat
(Don’t rock the boat, baby)
Tip the boat
(Don’t tip the boat over)
–The Hues Corporation

1. In 1997 the currency and financial crises that swamped the export-driven NIEs of Asia and the Pacific soon revealed themselves to be just one face of that many faced coin of the capitalist realm, overproduction. The secret to money, after all, is contained within the secret of the commodity and not vice-versa.

The over-accumulation of industrial assets became, as it always does, the overproduction of commodities and declining profits. Failure to realize expanded value in the circulation of commodities necessarily reproduces itself in the devaluation of the means of production and the means of circulation. The secrets to accumulation and trade are in the secret of the commodity and not vice-versa.

By 1998, the shipping industry had absorbed, painfully, a 33% decline in asset values. Earnings per vessel declined. For the entire decade, the annual earnings per year average $4.2 million. Things were to get better, as they sometimes do. By 2000, the annual earnings had increased to $7 million.

Things were to get worse, as they always do, before they got better again, as they sometimes do. By 2004, earnings had recovered to $11 million per vessel per year, and 2008 estimates are for earnings of $13.7 million. Except estimates are often optimistic and early, and sometimes wrong.

2. 2oo6 was a very good year for the maritime trade; 2006 was a very good year for capitalism in general. In fact 2006 was the peak year for the recovery of capitalism, for its profitability, from the 2001/2002 contraction. The secret to maritime trade is in the secret of profitability and not vice-versa.

The UN’s Review of Maritime Transport 2007, reporting on 2006 performance, noted that value of world merchandise trade had grown by 8%, twice the rate of growth of world GDP. Seaborne good tonnage increased to 7.4 billion tons with ton-miles increasing 5.5% as longer haul south-to-south trade increased.

The world maritime fleet increased 8.6%, exceeding the previous record for increase of 7.2% in 2005, Total fleet capacity measured 1.04 billion deadweight-tons (dwt). Oil tanker capacity increased 8.1%, dry bulk carrier increased 6.2%, and these 2 categories represent 72% of fleet tonnage. The highest growth in tonnage was recorded by the container ship segment which grew 15.5% to represent 12.3% of fleet tonnage.

The average vessel age declined to 12 years, with that of tankers at 10 years, container ships at 9.1 years.

“Productivity” measures, however, absorbed the impact of the record deliveries. Tons carries per deadweight ton of capacity declined to 7.3 and thousand ton-miles operated per dwt declined to 30.1. The surplus tonnage increase to 10 million dwt, with tanker surplus at 1.4% or 4.5 million dwt and dry bulk carriers at .6%, or 2 million dwt. Still, hardly anything to worry about. In 1990 surplus rates for the world maritime fleet measured at 9.7 percent.

The greatest growth in tonnage and ships was recorded in the sector that has been recording the greatest growth for more than 20 years, container shipping. Container shipping has grown from 7.4% of total dry cargoes in 1985 to 24% in 2006. Since 1988, container shipping capacity (measured in TEUs–twenty-foot equivalent units) has increased sevenfold. At the start of 2007, the container fleet capacity had increased increasing 16.2% over 2006 to 9.4 million TEUs. More than 1/3 of this fleet is less than 5 years old.

And, in 2006 for the first time since 2001, the increase in capacity exceeded the increase in the world’s container trade which grew 11.2% to 1.13 billion TEUs.

3. A very good year was 2006. Shippers took delivery of almost 2400 new vessels, a record 71 million dwt, 20% above the 2005 mark.

Nothing inspires growth like growth; nothing inspires spending like spending. The bourgeoisie, see nothing in those floating fixed assets in good, or nearly good times, except an increased revenue stream; seeing nothing but clear sailing and a bigger wave ahead/behind; never seeing the deadweight in all those deadweight tons until the seas have dried up; never missing their water until their ships run high and dry, continued to fill the order books of shipmakers.

While deliveries slowed in 2007, orders for new shipping did not. In 2007 tonnage on order for container ships tripled from the 2006 level; tonnage on order for oil/refined product tankers nearly tripled; for dry bulk and general cargo carriers doubled. Since construction times from order to delivery are from 1 to 2.5 years, the merchant fleet will more than double between 2006 and 2010 as the generallow average age of the existing fleet means break-up rates (the process of tearing down obsolete shipping) will not impact overall capacity.

For the bourgeoisie to make so dramatic a statement of confidence in world-wide liquidity, and the accelerating growth rates for trade, it is of course more than fitting that such increased purchases were made right as growth in trade is decelerating and lines of credit are drying up. More than fitting, it is in fact the increased purchases, the increased expenditures on these floating fixed assets that are the means for circulating capital, that drives international capitalism from expansion to contraction, from expanded reproduction to declining rates of return.

No more and no less than the increased price of oil reapportions profits to, does more than channel the profits, more than canalize the revenue streams of all other industries, to the petroleum majors, but also measures the overproduction of the means of production, measures the inability of capital to realize a mass of profit quickly enough to offset a fall in the rate of return, the increased freight rates of the maritime shippers are more than a response to increased operating costs, increased fuel costs. Increased maritime rates measure a declining rate of return on investment brought about by the very “over-investment” in the industry’s real assets.

In 2005, total world import values transported by the maritime fleet increased 13.4%, while the freight revenue from these shipment increased 31.2 percent. The average freight tariff for advanced countries amounts to 4.5% of the value of the goods in shipment. For developing countries, the ratio is 7.7% of the value. For the period 1990-2000, the tariff ratio had dropped 22% for the developing countries, only to begin moving upward again in 2004. For the advanced countries the tariff ratio has remained essentially unchanged.

The relative higher rates for developing countries are directly a factor of longer dwells (loading/unloading) at ports with lower throughput capacities. The inequity in development then refracts, and perpetuates, itself in a penalty, a microcosm of unequal exchange.

The price inflation of shipping rates cannot offset the declining rate of return for the industry. It will instead bring the over-investment, overproduction of fixed assets with longer and slower rates of return into painful relief, as there will be “too many” ships on the ocean, too many ships in the construction yards, too many ships on the order books, too many ships in the list of collateralized loans.


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Summer Reading

Way back when… Thirty-four years ago, A. Solzhenitsyn was allowed to leave the then Soviet Union and reap the usufructs of advanced capitalism. Around that same time, Solzhenitsyn’s Letter to the Soviet Leaders appeared in print and those who actually read, rather than promote, his work learned just how right the Soviet leaders were to send this master of literary banality packing.

Way back when, when the predecessor of The Wolf Report, Nightwatch, appeared in print on actual paper, I wrote an appreciation of sorts of the man, and the circumstances that brought the man to his new home.

Way back when, Nightwatch prided itself on featuring regularly, in its every most irregularly scheduled publication, obituaries, marriages, births– “transitions” that in their absurdity, venality, false propriety most clearly illuminated the darkness at the heart of modern capitalism. What a Difference a Day Makes, and made, way back when.

The Solzhenitsyn report was written in that vein, with that intent, but its length, which is to say, and singularly concentrated attack, required that it appear as a separate piece.

I never thought much more about Solzhenitsyn, not to mention my most unliterary criticism of the man, but my former collaborator on Nightwatch, noting the death and the outpouring of appreciations offered in tribute to the now stuffed literary lion suggested I reproduce it here, where it may be preserved, like Solzhenitsyn himself, and ignored, like Solzhenitsyn himself, eternally.

So…edited [in brackets] and abridged, here comes, there goes:

A Five and Ten Cent Baby in a Million Dollar Store, Fall 1974

While capitalism exports credits, grain, technology, and complete industrial plants to the USSR, the Stalinist bureaucracy returns the favor by exporting minerals, some natural gas, and some unnatural gas in the person of Aleksandr Solzhenitsyn, to the capitalist countries. Somebody’s getting a raw deal along with the raw materials. It sure isn’t Solzhenitsyn. He stands to make a cool million off his exile. It isn’t the bourgeoisie. They will get their percentage of the gate. It isn’t the Soviet bureaucracy. [Solzhenitsyn’s exile goes right to their bottom line as a plus]. But Solzhenitsyn is a total liability for human emancipation. Once again, Stalinism has forced the working class to carry the burden and the debts of Stalinism’s own deformity.

….A “dissident” in the USSR, Solzhenitsyn became a “champion of freedom,” a “defender of artistic truth.” Now that Solzhenitsyn is out, so is the truth. The champion of freedom is an organic reactionary….His struggle is nothing but the slavish praise for the historical poverty of Russia. The real crime of the Russian Revolution, according to Solzhenitsyn, was disturbing the sanctity of that poverty.

Hard on the heels of Solzhenitsyn’s arrival in the West came the publication of his Letter to the Soviet Leaders in which he fuses his literary and political purposes into one– the slavation [intentional reversal of letters] of Russia from the “horrors” of modernism and for the spiritual regeneration through a return to the past. Holy Russia is Solzhenitsyn’s cause, but how little he knows of earthly Russia and how much less he understands. Of the Russian Revolution, its advance and decline, of this single most important event in all of modern history, he knows nothing and detests everything. In this, Solzhenitsyn is a perfect example of petty Russian cretinism. Solzhenitsyn claims Marxism broke the tranquility and strength of Holy Russia, [catapulting] it into the clutches of a profane world. … nothing so evil could have grown up in the natural soil of Holy Russia, the revolution was imported from the West.

Solzhenitsyn employs Spiro Agnew’s criteria of social development, Malthus’ principles of political economy, and Teilhard de Chardin’s philosophy as he argues that Russia is doomed to destruction of the bureaucracy maintains its ideology of “economic growth” and “international revolution.” A moron always stands on the shoulders of other morons but that does not mean he will be able to see past his own noses, especially when the eyes are crossed and the brain is addled.

The “ideology” of Marxism can only bring calamity after calamity for Holy Russia argues our Calamity Jane. The calamity will be war with China… and then Russia, like the West will collapse in the calamity of economic “over-development.” Solzhenitsyn’s solution to these calamities is “zero-economic growth.” Modern technology, large scale industry and agriculture, world trade, cities, and even babies must be renounced. The underdeveloped countries, who don’t have all that much to renounce, must employ “small-scale technology, simple machinery, and increased manual labor to insure their purity. Well, it just so happens that much of the underdeveloped areas have existed on just that diet and those rations for 200 years and see how good life is there? …1974 is making the idea of zero economic growth a reality. In the first half of 1974, the US GNP actually declined 4.1% and the rest of the world isn’t far behind. So let’s hear it now. Is everybody happy? Is the world any “cleaner,” any less strapped for wealth?….If Solzhenitsyn really hates economic expansion, he should love the Stalinists whose desperate need for technology already obsolete in the West reveals just how backward they are.

It is economic growth that Solzhenitsyn views as the greatest calamity of all, for it disrupts everything dear to his backward little heart. How he longs for the good old times of the good old time villages with their good old time Orthodox churches, their good old time Black Hundreds, their good old time smallpox and typhus, their good old time wife-beatings and illiteracy. And all this nostalgia from a man born in 1918. What a true novelist’s memory to remember the joys never experienced. How poetic he waxes as he dreams of the resurrection of the small towns made for “people, horses, dogs” (not necessarily in that order). Solzhenitsyn’s five year plan calls for the construction of these charming little outhouses all Russia with transportation provided only by horses and battery-powered electric motors……

Intellectual poverty always extols the virtues of physical poverty. The real positive outcome of Solzhenitsyn’s un-development of the USSR will be the Christian salvation of the Russian people who suffering will once again produce that chorus of moans and groans that are music to the ears of every priest. Solzhenitsyn performs a service here in articulating religion’s inherent need for absolute immiseration of human life. Poverty may be murder on the body, but it’s gangbusters for the spirit.

Marxism opposes and uproots poverty and religion, and both at once. For this reason, Solzhenitsyn finds Marxism more intolerable than Stalin’s labor camps where both poverty and religion flourished. Solzhenitsyn never read Marx, but that’s no drawback. Stalin never read Marx, Mao Tsetung never read Marx, most Marxists haven’t read Marx….Solzhenitsyn calls Marxism a “primitive, superficial economic theory, it declared that only the worker creates value and failed to take into account the contribution of organizers, engineers, transportation, or marketing systems.” Like capitalism, Marx never ignored the role of engineers or advertising agents, but like capitalism, Marx knew that only the proletariat created surplus value. In 1972, US Steel’s executives were bemoaning the fact that only one-third of their employees was involved in actual production. The company’s top heaviness, they complained, devoured profits before they were realized.

…Economic development drags in its wake the possibility of concrete human freedom. Solzhenitsyn despises that freedom above everything else. He craves “authoritarianism with love.” Solzhenitsyn wants a Czar, nothing more and there is nothing less. It is no accident that Solzhenitsyn’s books as well as this letter reek with a secret admiration for Stalin, who after all, provided his own brand of “authoritarianism with love.” How Solzhenitsyn must have embraced and even fondled his imprisonment in the labor camps. Those were the days that come closest to the good old days he desires for the future. “Authoritarianism with love,” cries Solzhenitsyn. “Long live the chains!” cried the Spanish guerrillas… when they threw Napoleon’s troops out of Spain and restored the conditions of their own slavery. “Long live the chains!” echoes Solzhenitsyn

So what could the Soviet bureaucracy do with dear Aleksandr? Trial and imprisonment. But Solzhenitsyn obviously was mentally incompetent and unfit to stand trial. A mental ward? But Solzhenitsyn was already insane and an idiot to boot. Shoot him? but to do that the Stalinists would have had to reverse fifty years of policy and actually fire a shot in defense of the proletarian revolution. Solzhenitsyn had to be exported, and the bourgeoisie eagerly accepted him, COD.

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The Shipping News

1. High and Dry

Dragged along in the wake, or pushed ahead by the wave, of increased oil prices, that is to say dragged and pushed by the US war/recovery program, the Baltic Dry Index, measuring daily hire costs for ocean going dry bulk cargo vessels, broke away from its historical baseline and began an intractable climb to measure, in 2008, 800% above its 1997-2003 average.

It wasn’t a steady climb– what could be “steady” in capital’s world of shaky disequilibrium, of constant tremor? Fear and greed, after all, don’t lend themselves well or often to steadfastness. The index quintupled in 2004, dropped 70% in 2005, climbed 600% in 2007 before falling 50% only to double again in the first quarter of 2008, falling again 22% off its peak.

In dollar terms spot market daily rentals for Capesize (the largest) dry bulk carriers are at $156,000 or 500% above the January 2006 mark. Panamax (of a beam, length, and draft not exceeding the capacity of the Panama Canal lock system) rates nearing $71,000 per day, stand 400% above the January 2006 price.

Meanwhile.. and there’s always a meanwhile, from 2006 through most of 2007 hire costs for oil tankers declined, 20% for VLCC class ships (200,000 + deadweight tons), 25% for Suezmax (120,000-199,000 dwt), and 35% for Aframax (up to 119,999 dwt) class tankers. Then… and there’s always a then, the oil price boosts caught hold, and in 2008 rates began to climb. For the VLCC class, despite the recent climb, these rates are still 33% below their 2004 peak.

Although certainly of benefit to shippers, this wave of petrodollars and petroprices pushing through the channels and locks of capitalism is not exactly the rising tide that lifts all boats. The increased costs of transportation are both product and producer of disruptions in capital’s ability to maintain expanded reproduction. Profit apportioned to the transportation systems through price inflation are a deduction from the profitability of capitalist reproduction as a whole. “Circulation sweats money from every pore,” wrote Marx, and he was right; but when the costs of the circulation absorbs the money being excreted, capitalism breaks out in a cold sweat.

2. One If By Land…

For the capitalist economy as a whole, or in particular, the movement of commodities to and through the markets for exchange is not qualitatively different from the movement of the materials required for production of the commodity within the production process itself. There can be no expansion of capital, no reproduction of capital; there can be no expansion of production without improving the circulation of the capital within the specific production processes. Volume, distance are not just physical characteristics of production and exchange, but also components of cost and cost is managed through efficiencies in time.

After the end of the war of 1812, US capitalism began its development. The volumes, direction, value and means of commerce, foreign and domestic, were substantially altered. The expansion of production and revenues from merchant-capital/slaveholder alliance of colonial and post-colonial period was threatened and surpassed by the expansion of free-soil agriculture to the west and the “free labor” manufacturing in the east. The development of a reciprocating domestic market established in the exchange of products between free-soil farming, and the manufactured products of “free” wage-labor in the states north of Chesapeake Bay, required, and produced, besides the US Civil, sustained improvement in the means of transportation.

In 1816, a report of the US Senate noted that domestic freight charges measured $9 per ton per 3o miles. The report noted that rate was 100 times the rate charged by European shippers for the transatlantic trade of goods between the two continents. At the US domestic rate, the price of wheat would double every 218 miles of transport; that of corn every 135 miles.

By 1822, with the development of the canal system, river barges, and intra-coastal shipping, haulage rates had declined to 12 cents/ton mile, a decline that was partly product, partly producer of the general price deflation of the time.

Until 1850, it was improvements in waterway borne freight haulage that had the greatest impact on ton-mile costs. However, by 1851 rail freight costs had dropped to 4.05 cents a ton-mile. Domestic production and trade expanded so quickly, however, that the canal, river boat and barge, and rail systems were all required to meet these needs regardless of relative efficiency. This was a rising tide that kept some old boats afloat.

In 1860, canal and rail handled equivalent volumes of freight, but duration in transport (“dwell”) times for goods shipped by rail were 1/3 of the times for canal and barge shipments. The average freight costs for rail shipments had dropped to 2.2 cents per ton-mile. Remember that number.

3. Not So Long Ago

In 1980, the US Congress passed the Staggers Act, effectively deregulating the rates that railroads could charge for the shipment of goods. Rate deregulation was no stand alone program for the railroads, but rather the mechanism for sanctioning abandonment of “non-performing” assets, severe reductions in track mileage and employment levels. Economic contraction, rather than the 19th century expansion, inaugurated the new “golden era” of the railroads with bankruptcies and consolidations.

Rates per ton-mile charged by the railroads began a sustained decline. For corn, rates dropped from 3.73 cents per ton-mile in 1981 to 2.53 cents per ton-mile in 1992 to 2.06 cents in 2000. During the same period rates for wheat declined even more dramatically, some 60%, to 2.59 cents per ton-mile. Rates for soy dropped 55% to below that 1860 mark of 2.2 cents per ton-mile.

Clearly, deregulation did not produce the decline in rates, as competition can produce price-efficiencies only to the degree that the components of capitalist production, constant and variable, animate and inanimate, are altered to sustain and expand profit.

And altered those components were. Railroad employment declined approximately 40% between 1990 and 2000, eclipsing the 33% increase in hourly compensation rates. Between 1990 and 1995 annual gross capital expenditures increased 65%, dropping back 10% by 2000 despite an increase of 50% in net railroad operating income. The all-important rate of return on investment declined to 6.5% from 1990’s 8.1 percent.

The improved productivity factor of revenue ton-miles per mile of railroad, ton-miles per employee, revenue per employee, sustained the decline in haul rates.

After 2000, all these indexes, rates of return, revenue ton-miles per track mile, total revenue, net revenue from operations, net railroad operating income, gross capital expenditures moved up and down in a narrow band… until 2005. Then in 2005, all began to move markedly upward, as the industry continued its “rationalization.” Pushed, pulled by oil prices, railroads like the rest of the US industry increased its rate of expenditure on fixed assets. The assessed value of private fixed assets for the entire transportation industry, which had increased only 3% between 2001 and 2003, grew 8% between 2004 and 2006. Railroads fixed assets increased 6% between 2004 and 2006. Ton-mile rates, however, did not decline. The golden age was over. The black golden age ruled all. Rates increased and have exceed 2.5 cents per ton-mile for grain transport.

If price is the mechanism for apportionment of profit in capitalism, then increasing price indicates an apportionment based on a decline in the ability of capitalism to reproduce profitability as a whole for its entire network. The rising tide lifting the boats, the surge in profits, is in fact an ebb tide, pushing back into an ocean of overproduction.

Next– Two If By Sea: Ships On The Ocean

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Virtual Paper, 3

A vision appeared to Fastow, the enslaved prince of the off-balance-sheet investment vehicle. A ghost, the ghost of Ken of Enron, although unrecognizable as his former self, wrapped as he was in a cloak of witness protection:

Spoke Fastow, ” Are you not dead, Sir Ken?”

The ghost answered, in a voice electronically distorted as required by the terms of agreement, “No. I live on. Everywhere. And forever. I live on in asset backed securities, in credit default swaps, in PIK bonds. I am Everyman and Everyman’s banker.”

Fastow sobbed, ” While I waste away in minimum security.”

Softly, Ken placed a comforting hand on Fastow’s trembling shoulder. “My son, you are the Galileo of the new age, serving your time because you were ahead of it.”

1. The hard landing of the US economy after the capital investment expansion of 1992-1999 reproduced itself spectacularly, and as a spectacle, with the destruction of the World Trade Center. Not so much as event as a package, September 11 was the perfect combination of distraction and destruction where the action became secondary to the commentary on the action; where image was not as important as the replay of the image, the packaging and repackaging of the image; where life and death crawled along the bottom of a video feed; where everything you need to know was learned off a flat screen.

Multi-million dollar aircraft, financed by loans syndicated, subscribed, and secondarily marketed, flying on fuel twice as expensive, crashing into the most expensive commercial cubic footage in North America…thus was the conflict between the means and relations of production broadcast and rebroadcast, both a terrorist act and the creation of a new market, the market called homeland security.

Accidents never happen in a perfect world, and if September 11 hadn’t existed, the bourgeoisie would have invented it. Overproduced to the point of catastrophe and then some, the miserable, excruciating, vicious dialectic at the core of capitalism, the reduced rate of return, bought itself compensation in the destruction of assets, organic and inorganic.

2. So if capital fashioned for itself an inferno in the stairwells of the north and south towers, the class of capitalists determined to rise from those ashes not as a phoenix, but as a chickadee, hoarding, storing, restraining growth.

Private fixed investment was throttled. Having grown 60% in the period 1994-2000, investment declined the next three years. By 2006, annual investment was only 12% greater than the 2000 mark.

The restraint on growth was measured in ways other than gross investment amounts. Everything in capital is measured by more than just gross amounts. Anything that has significance to the bourgeoisie obtains its significance, its worth, as a relation, a ratio. So the ratio of domestic private investment to fixed capital consumption indicates both a rate of replacement and a rate of reproduction.

In 2000, the ratio of gross domestic private fixed investment to fixed capital consumption measured 1.69. In 2003, the ratio had dropped to 1.43, and in 2006 the mark was 1.44.

And the bottom line was….? Of course, it was the bottom line itself. Net operating profits which in 2000 measured 7.65% of sales, which measured 4.3% in 2001, which measured 5.4% in 2003, recovered to 7.1% in 2006. Profitability restored, eventually. But better late than never, right?

Profitability restored eventually, reproduction restrained was the headline, but not the full story. The full story was the increased ratio of consumption of assets. The full story was increased output per hour per manufacturing worker despite the restraint of investment, a 31% increase between 2000 and 2005 equal to the increase during the investment boom of 1995-2000. The full story was declining unit labor costs.

When, and if a commodity’s exchange value is realized as a profit, the profit exists as a relation not just to the costs of the production of that commodity, not just in relation to the necessary labor-time for its reproduction. The profit exists as a relation to the total profit materialized from all of capital’s exchanges ; the profit exists not as a profit unto itself, but only as a proportion, a ratio of the profitability of reproduction as a whole. So underlying the restricted reproduction of capital, the return to profitability, the hoarding of cash is the aggrandizement of greater and greater shares of that profit by the oil industry.

3. When in 1997, the major US petroleum companies, participating the US Energy Information Agency’s Federal Reporting System (FRS), reported profits equal to 1/7 of the total profits of US manufacturing companies; whey they reported a rate of profit (defined as net income plus interest divided by total invested capital) of 14.7 percent, a rate higher than that of US manufacturing companies, all across boardrooms in Houston, and Chicago, and White Plains, Los Angeles, refrains of “Happy Days Are Here Again” were heard.

What difference a day makes, or a year. By 1998, their good thing was gone, with profits down by 60 percent, net income at only 5% of US manufacturing totals, and the profit rate cut in half.

But along came Jones, Jones being OPEC and in 1999 the oil majors started their long march back. By 2000 net income exceeded the 1997 mark and measured at 16% of the total for US manufacturing. The rate of net income to invested capital also reached 16%, a level above that of US manufacturing.

In 2002, it was the same old song as profits shrunk with the overproduction of natural gas and the collapse in prices. And this time, the petroleum majors had plenty of company as net income dropped approximately 20% for U.S. manufacturing companies.

What the oil industry couldn’t do without OPEC, and what OPEC couldn’t do alone, could and was done with the full faith and credit of the government of the United States and its military through its destruction of Iraq.

With prices of petroleum climbing, FRS companies’ net income doubled between 2003 and 2005, and climbed another 10% in 2006. U.S. manufacturing net income increased 33% in the same period, increasing another 20% by 2006. In that year, FRS net income equaled 28% of that for all US manufacturing. For every year 2003, 2004, 2005, 2006, the ratio of net income plus income to total invested capital of the FRS companies exceeded 14%, reaching approximately 22% in 2005 and 2006. For every year, the FRS rate exceeded that of all US manufacturing by a minimum of 40%. But most important of all, in 2006 the net income ratio for US manufacturing declined by more than a quarter, while that of the FRS majors remained steady.

Oil claimed and expanding share of a declining rate of profit. Cash was king. And oil was his sceptre.

4. If, and there is no if about it, Bush is the idiot spawn of an idiot president and an idiot first lady, namely Reagan and Thatcher, reprising what was venal and vicious on an even grander more venal, more vicious stage; if the oil price increases of 2003-2007 are the idiot replay of the price increases of 1979 and 1980; if, and there is no if about this either, Greenspan was the idiot spawn of Volcker and Ayn Rand; then and there is no if about this, the mortgage crisis of the 21st century is the idiot spawn of the Savings and Loan Crisis of the late 1980s, reprising that on a grander and more petty scale.

It was, after all, the Reagan era that joined death squad capitalism and the destruction of fixed assets in holy matrimony, turning the 80s into the lost decade for Latin American and for the working class everywhere.

It was, after all, the Reagan era that made margin, leverage, and liquidation the three kings.

And what did this mean for the financiers ? The once purveyor’s of paper, now hucksters of the book entry? That army of well-dressed locusts who had been taught, who believed that cash was trash, provided they got theirs first? Many of whom only remembered Reagan from his funeral?

Corporate loan issuance between 2000 and 2004 declined approximately 22%. With that came the “redirection” of finance capital, a change in the focus of the locust. In 2000, mortgage lending and corporate lending amounts were nearly equivalent. In 2002, however, mortgage volume had practically doubled while corporate had withered away. The mortgage amounts loaned were some 60 times the corporate aggregates. In 2005, corporate borrowing had increased, but was still only 70% of its 2000 level. Mortgage borrowing had increased 260% from its 2000 level. Total amounts outstanding for the mortgage sector had doubled between 2000 and 2006 to ten trillion dollars, while the corporate sector had expanded by 27%, with that expansion coming in 2005, 2006, preceding and precipitating the decline in the rate of net income to capital invested.

Confronted with reduced accumulation, which looks to finance like reduced borrowing, but with excessive cash flows from corporations restraining investment (and the ghost of petro-dollars past), finance capital sees its own reproduction in segments, layers, tranches of asset backed securities and sees that as more than just an apportionment of profit, it sees in the exchange of the representation of an asset as a security as the source of profit itself.

Then, of course, capital runs up the inside of the cage of its own making. The asset class required for continued securitization must be refinanced for expansion despite its declining profitability. Loss, the simple destruction of assets, is and becomes the reproduction of capital in all its miserable complexity.

5. It is not default, bankruptcy, failure of a sector, of a “rating,” that alone constitutes the predicament of capitalist reproduction. It is the general devaluation of all values that is so essential to the circuits of capital, and so frightening to the owners of the private property called capital. In that devaluation of value, that destruction of assets, capital and its owners, hear the hard charging footsteps of history; they catch a glimpse of their own mortality. In every FORECLOSURE sign punched into a loan, every offer for which there is no bid, all the supply with no demand, there is in fact the opposition of NEED to EXCHANGE, of social ownership of the means of production to private property.

We are at the start of this devaluation process.

June 20, 2008

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Virtual Paper, Part 2

The Long and the Short of It

3. “The short-term outlook is grim. The capital markets are in total disarray.”

The short and long of it boils down to this: For capital, production is useless; capitalism is the production of uselessness. Use only exists as a pack animal, a vector, a mule for the appropriation and realization of surplus value. That realization occurs, when it occurs, in the markets, in exchange, in the exchange value not of any particular commodity, but in the exchange values of all commodities. “Circulation,” writes Marx, “sweats money from every pore.” And the capital markets are supposed to be the biggest steam bath of them all.

But given that production has no use in, of, or for social need, and only in private exchange, the purpose of capital can only be in the reproduction of the terms of exchange, in the expansion of the markets; in the reproduction of the instruments of production as private property always and ever seeking its “value” in the market, and the reproduction of labor as wage-labor, yielding that value, that packet of time as money, beyond its own maintenance, yielding surplus value.

And so there we have it, the long and the short of it: Production has no value except as it augments expanded reproduction; exchange has not value except as it augments expanded exchange; and finance has no value except as it augments refinancing.

With their Structured Investment Vehicles, their Asset Backed Commercial Paper, their Collateralized Debt Obligations, their Collateralized Mortgage Obligations, their Credit Default Swaps, their Repurchase Obligations (REPOS), with all that and more, the bourgeoisie, true to themselves, financed to engage in refinancing. Circulation was sweating money; and the fevered brow, the damp hands, the soaked-through shirts, dripping foreheads were exuding the liquid and the liquidity of this book-entry life.

Except…… except the bourgeoisie were driven, and drove themselves, to borrow in the short-term, utilizing obligations with defined terms, in maturity times and values, to finance and refinance expanded purchases of long-term obligations, with extended maturity times and “mark to market” variable values.

The rates of the profit in the short-term available through this process are inherently thin. In fact, profit itself is not used to measure, to finance the reproduction of these “borrow short, purchase long” transactions. Cash flow, the volume and rate of payment prescribed in the long-term securities such as mortgages, at the base of this pyramid becomes the crucial factor in refinancing existing loan agreements, securing new loan agreements, and squaring the circle all over again.

Leverage, the assumption of debt to expand the potential pools of payment, to bring the rivulets of cash flow together into a current strong and fast enough to keep the wolf from the door is the vital process to these circuits of capital. And leverage, the assumption of debt, changes everything.

When there is disturbance in the cash flow, in the rate or amounts of underlying repayments, the processes of circulation is disrupted, and the sweat from every pore that was so sweet to the purveyors of virtual paper turns cold. Then leverage, meeting the demands of leverage, turns liquidity into liquidation. Then leverage transforms value into devaluation. Leverage changes assets into debits, deficits, burdens.

When the reduced rates of profit inherent in capitalist expansion yield less profit available for reallocation to the banks and bankers, brokers and traders, through their marvelous markets, circulation seizes up in the imperfect reflection of the problem at the heart of capitalist production.

When that happens, then leverage identifies, makes identical, capitalist reproduction and the destruction of all assets, all prospects for social development, and all this to preserve the uselessness of capitalist production. In Baghdad. In New Orleans. And on Wall Street.

And that is the real long and short of it.

S. Artesian 031708

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Next: Virtual Paper 3, Origins and Reappearance

Virtual Paper, Part 1

The markets are dead.– credit strategist, Lehman Brothers.

1.(We’re not that lucky)

Woozy and boozy in the waning days of the second four year term of the idiot son of an idiot father, that is to say George W. Bush as sired by Ronald Reagan, US capitalism staggered across the stage of global finance, looking and sounding like Britney Spears at the MTV music awards– bumping into everything, knocking over food and drink, spraying blood and filth on those conga-lined up to feast, and swap more than spit, at the pig’s trough called leverage. The biggest of the big bulls in the China shop, bulked up on steroids, growth hormones, and off balance sheet investment “vehicles,” had changed, but not overnight, into a regular bear on the Chinese shopping network, and the Chinese shop floor.

Reeling under its weightless cargo of strips, tips, tranches, zeros, coupons, CDSs, CMOs, CDOs, CLOs, ABCPs, ARMs, SIVs — in one word junk, but junk packaged in an infinite variety of ways, the bankers carioced their way through that wacked out Minny Mouseketeer’s repertoire, beginning and ending the show with their favorite lyric: “Oops, I did it again.”

Juiced and jacked, the whole gang, Merrill and Lynch, Bear and Stearns, Morgan and Chase, Citi and Corp, Northern Rock, CIBC and RBS and UBS and Credit Suisse and BNP and Paribas and Commerzbank had proclaimed themselves masters of the Enron universe, earning that right by their conjugal visits paid to Andy Fastow.

“Give us a place to sit, a keyboard, and a broadband connection, and we’ll move the earth,” they, these new asset-backed Archimedes had proclaimed just before falling flat on their faces; just before bouncing up again like a dead cat.

2. Appearance of the Problem

(Size does matter)

Headlines were made in June 2007 when hedge funds organized and spun off by Bear Stearns reported massive trading losses on their portfolios of mortgage backed securities. The headlines, however, like the hedge funds, were days late and dollars short.

In September 2006, US banks were reporting a marked slowdown in demand for housing loans. The reports were, as reports often are, less than thorough in describing the significance of the slowdown. Residential stakes account for one-third of US banks’ nine trillion dollars in assets.

The US mortgage market, valued in 2006 at approximately 11 trillion dollars, containing 1 trillion dollars worth of sub-prime mortgages, had been tapped to collateralize the issuance of 2 trillion dollars worth of securities. The bankers, commercial and investment, ever cognizant of the need, not for compliance with any standards or requirements, but rather for the appearance of compliance, moved these financial instruments, these “conduits,” these “vehicles” off their balance sheets into “arms length,” “stand alone” status, thus preserving, with a wink and a nod to the heroes of leverages past, Milken, Boesky, Regan, Keating, Knapp, Leeson, Lay, Skilling, and of course, St. Andrew the Martyr, their “compliance” with Tier 1 capital requirements.

Standards, requirements, tiers..like money, capital requires all these to function, to form a “base” for exchange, and just as it does with money, capitalism succeeds in debasing all. Debasement of financial instruments is part of the devaluation of all values inherent, necessary to the maintenance and advancement of decrepit capitalism.

March 15, 2008 S.Artesian

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Brazil 5

“…Two essential premises of the capitalist system were present in the new sugar enterprises: the production and circulation of commodities. But the fundamental base was lacking: the wage-worker. Thus we have the slave system, but slavery for the production of commodities destined for the world market. It differed from the capitalist production system not only in the form in which killing working hours were imposed, but also in the impossibility of constantly revolutionizing production methods, an inherent part of capitalism.

From the end of the sixteenth century we find sugarmills in the Spanish Antilles with a work force of one hundred slaves and a production capacity of 10,000 arrobas (115 tons) per harvest and grinding season–that is, a yield of 100 arrobas per Negro, which was the Cuban average maintained up to the beginning of the 19th century. Here is the most palpable and definitive proof of the impossibility of technologizing production on the basis of slave labor– a fact made tragically clear by Cuban sugar enterprises.”

Manuel Moreno Fraginals, The Sugarmill, Monthly Review Press, 1976.

1. So far from Cuba on a straight line, so close to Cuba via the triangle trade with Africa; fed, like Cuba, with the streams of slave labor from the great peoples of the Congo, of Angola, of west, and central sub-Sahara ; so tied to the world market by the very relations of land and labor[– the plantation, the great house, the manor, the slave barracks–] made simultaneously obsolete and essential by the country[–Britain–] that turned the world market into the engine for the reproduction of capitalism; so integral in its isolation, its backwardness, to emerging modern capitalism in the 18th, 19th centuries; so representative of the failures of the established bourgeoisie everywhere in the failure of its own bourgeoisie to establish itself, Brazil is everything capitalism was, and was not, is and is not, and most of all will never and can never be. Brazil is the living compounding of the contradictions of capital; capital engaging, and engaged by, shaping and shaped by, its absorbing and being absorbed by its own pre-history.

2. Capitalism defines itself, in the abstract and the concrete, by its specific organization of labor as wage-labor– detached, free, useless labor, which has value only in its capacity for exchange; only in its ability to reproduce itself as wage-labor. That reproduction is a relation between classes; between property and means of production organized as a specific form of private property, property that only exists to reproduce itself in the exchange with wage labor. And at origin, modern capitalism depends upon the relations of land and labor.

Having established those specific relations of land and labor anywhere, it is never automatic nor inevitable that modern capitalism will be capable of establishing those same relations everywhere, anywhere, and at any given time. The relations of land and labor are, after all, products of class struggle, and where the outcomes of class struggle are never guaranteed to conform to the “pure,” “essential,” requirements of the mode of production. Profit, and property, are a sloppy, dirty, fuzzy business, and in the pursuit of immediate profit, capital accommodates, embraces, and strengthens the archaic forms that were yesterday’s ways of doing business, but business nonetheless. This embrace, accommodation is in fact nothing other than the affinity, affection, kinship capital as private property feels for private property as a mechanism for controlling, maintaining, disciplining labor and laborers, whether wage or slave. This is in fact nothing other than another manifestation of the conflict between relations and means of production; between private property and social production; between use and exchange value; between reproduction and profit; between laborers and owners that haunts capital and drives it from place to place on the globe, and forward and backward in time and development.

3. And so Britain, having established its most modern, classic capitalism, plays its leading role backwards –preserving the empire of Portugal at home and in Brazil against the reproduction of, not the French Revolution, but the sterilized French Revolution; against, not the overthrow of capitalism, but the establishment of capitalism.

In preservation of its markets, and its position in the world markets, to protect its private property, British capital was willing, eager to protect Portuguese quasi-feudal mercantilism; in its “rule” of the oceans, providing a maritime limousine, a sedan chair with sails, to rescue the Portuguese “emperor” from the armies of Napoleon; to protect the estate from the blunted bayonet of that revolution that had turned landed property into paper for the burning of the home fires; to preserve one man’s meat, the consolidation of capitalism in the British Isles, from that same man’s poison, the consolidation of capitalism on the continent of Europe. If only Louis Capet had been closer to Calais and further from the Commune….

And once landed in the backwater jewel of his crown, the emperor remains, refusing the summons of the Cortes in Lisbon; that first of the futile attempts to graft a quasi-representative head backwards onto the ass of the ass of landed property, mercantilism, and subsistence agriculture large and small. The emperor declares Brazil his throne, his empire.
And in this declaration is the secret to the Brazil– its declaration of independence is a slaveholders’ trick; its nationalism a reaction, a response triggered by the weakened virus of a dead revolution, designed to preserve private property in all its obsolescence.

The “empire” of Brazil is built upon the fragmentation, isolation of property, production, and property owners. Brazil’s contribution to the progress of the world market is its maintenance of its isolation, backwardness; its inability to produce a class capable of transforming relations of land and labor.

4. The political and economic struggles of the late 19th and early 2oth centuries are defined by this, the legacy of this confederation of private property holders; of coffee growers, merchants, manufacturers, cattle ranchers. Not so much a nation organized around the great organizing principle accumulation, Brazil is a brittle amalgam. Rather than yielding a class organized around its individual need to maximize profit by reproducing itself as a class, and its means for extracting profits, on an expanding scale, Brazil produces conspiracies, lieutenants, cowboys, gauchos.

The “domestic market,” usually thought of, supposedly functioning, as a highway for the reciprocal development of agriculture and industry, in Brazil is nothing more than trails, paths for mules, oxen, cattle to make their way slowly from ranch to plantation to city. Time, that is to say the time of reproduction; urgency, that is to say the expulsion of labor from the production process in order to aggrandize more labor power are of little meaning and less value to an economy dominated by the enduring legacy of slavery. The world market, the advancement of capitalism, depends first and last, on particular, localized, backwardness.

5. Whatever security Brazil had achieved in its isolated function as the world’s supplier of coffee, was stripped away in 1930 by the general collapse of the world markets. Bankruptcy tends to focus attention on the all problems of the expansion and reproduction of value, even as it reduces all solutions to that of immediate payment. The fundamental problem of Brazil’s economic development converged and refracted capital’s international predicament: how to expand the arena for the aggrandizement of wage-labor, without triggering the struggle for the emancipation of all labor that is inherent in expanding capitalist development.

The “solution” for capital in all its iterations is infinite variation on a single theme: “Order and Progress. Progress Through Order. No Progress without Order. Order Always, Progress On Occasion.” The secret to Brazilian nationalism is in just that primacy of order over progress, just that imposition of a “national” order against a social revolution.

The “revolution” of 1930, product of the international capitalist contraction, brings Vargas to power, in the overture and coda to the fractured symphony of order and progress; modern Brazil emerges as the product of capital’s own backwardness, its own need for order over progress. Vargas’ “New State,” product of the transient, fading capitalist expansion of 1937, incorporates the state power, the military, the church, in securing for the industrial bourgeoisie the subjugation of the workers; securing order and “allowing” for progress in capitalist expansion, bringing Brazil into greater synchronicity with the trends of overall capitalist development– urban migration, capitalization of agriculture, and, of course, world war.

Vargas is all the Brazilian bourgeoisie could ever hope for, dream of, and dread; a substitute for Napoleon, a pre-Peron Peron.

It is with Vargas that Brazil begins to assume its place as another model of advanced capitalist underdevelopment.

6. The forces unleashed by the “order and progress” of the new state, of war, of increasing industrialization, urban migration, were then, as they are always, a threat to the private property of agricultural and industrial production.

Constrained by the poverty surrounding its existence and origin, Brazilian capitalism finds its every expansion a trigger to social upheaval, protest, class struggle. In the countries of advanced capitalist underdevelopment, even modest expansion of the means of production becomes acute overproduction, where labor mobilized and shaped as wage-labor is a threat to all the existing social relations of property.

It was against that mobilization that the Brazilian military undertook the overthrow of Goulart and introduced the miracle of “savage capitalism.” The starvation wages and death squads are price of “order and progress.”

From this miracle comes even greater integration of Brazilian capitalism into the international order. If Vargas, was the pre-Peron Peron, Brazil after Goulart has a great national vision as something other than a post-Argentina Argentina; Brazil sees itself as the pre-China China.

S. Artesian, 11/18/07
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Brazil, 4

1. If the religion of the captains of the captaincies, the donees of the donatarios (and it would be both linguistically incorrect and historically accurate to add– the bandits of the bandeirantes) proclaimed that their god had fashioned them after its own image, then that god was a Hobbesian. The Iberian sons of the Hobbesian god were all of a type and cut from the same cloth, the cloth being that of sharkskin suits worn and the type being that played by Joe Pesci as Nicky Santoro in Casino– nasty, brutish, short.

Brazilwood, followed by sugar cane, followed by gold, followed by coffee, followed by rubber, the history of Brazil through the 18th and 19th centuries is the history of a slaveholders’ confederacy.

2. In the second half of the 18th century, the Portuguese monarchy, a century late and a few million reis short, was having second thoughts about playing second fiddle and third string to the British concert masters. The king saw in Brazil both lever and fulcrum to, if not move the world, at least make a move in the world markets.

In 1755, the monarch appoint Marques de Pombal as his secretary for overseas dominion. No Necker, but no fool, Pombal introduce a series of measures designed to secure the empire for mother country.

Pombal could do no better and no worse than mimic the mechanisms for aggrandizement that his mentors/rivals, the British, had already found inadequate to the task of transforming wealth into value. He provided royal charter to merchant companies, which companies with charter, cross, cutlass in hand, would cut the royal household in on the rewards of mercantilism.

Pombal also encouraged the establishment of local manufacture in Brazil and the diversification of agriculture. But most of all, Pombal encouraged the triangle of trade– monopoly, mercantilism, monarchy. He closed all of Brazil’s ports to all foreign shipping.

The merchant’s, the monarch’s, the monopolist’s capital rested on the planter, the plantation, the great house; and the plantation rested on slave labor– the labor to harvest and process the sugar cane, dig and process the gold, to collect the coffee beans. The “particularism,” the parochialism of the semi-feudal state, of the monarchy, is reproduced in the parochialism of the Brazilian captaincies. Merchant capital exploited, more than exploited, required the extension of parochialism, the maintenance of the great house, against the establishment of a “nation,” a domestic market, against relations of land and labor that would dethrone monarch, monopoly, and merchant.

S.Artesian 061107

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