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29 September 2022

Zombie capitalism is unravelling

This crisis is a symptom of a broken model that relied on ultra-low rates to compensate for anaemic growth.

By Yanis Varoufakis

This is no sterling crisis. It is a crisis of British capitalism caused by 40 years of underinvestment and deindustrialisation, exacerbated by chronic reliance on speculative bubbles and triggered by Liz Truss’s extravagant kindness to Britain’s wealthy.

While all eyes are on the fall of the pound, the real drama revolves around the Bank of England’s interest rate. Typically, a developed country’s exchange rate rises when its government announces its intention to borrow big. Foreseeing a rise in interest rates, speculators rush into the currency to take advantage. However, precisely the opposite happened after Kwasi Kwarteng’s (not-so) mini Budget last week because of a dirty secret known to almost everyone: British capitalism is even more addicted to low interest rates than the United States or continental Europe.

In view of the UK’s high inflation (9.9 per cent), its record current account deficit (8.3 per cent of GDP) and its low foreign exchange reserves the Bank of England cannot steady the bond market, or the pound, by buying government bonds – as it announced on Wednesday – or pounds. These desperate moves can only buy a little time. Before long the Bank will need to raise its base interest rate to at least 6 per cent to bring money markets into equilibrium. Such a rate, however, would kill the corporate zombies on which the British ruling class depends for its existence, not to mention the house price levels on which the Tories have built their electoral dominance. That’s why the pound’s slide is merely a symptom of a deeper crisis of post-1979 British capitalism, not its epicentre.

The Thatcher insurgency was ultimately a political project to deindustrialise Britain while encouraging the City of London to create mountainous paper wealth by financialising council houses and public utilities. Fully aware that she could not emulate Ronald Reagan’s borrowing – lacking the exorbitant privilege of the dollar – Margaret Thatcher’s growth strategy involved controlling public debt while letting private debt rip – the opposite of what Truss is doing today.

Under Thatcher, chancellor after chancellor unshackled the City while keeping a tight rein on the Treasury – primarily through inhuman cuts to social benefits, the NHS, education and all the other services that gave people a modicum of control over their lives. Mounting private debt did not frighten ministers because, unlike today, they had three reasons to welcome sky-high interest rates: the relatively low levels of private debt they inherited; the government’s mortgage relief scheme (now gone); and, crucially, the availability of so many council houses and public utility (gas, electricity, water) shares to dump into the City’s financial cauldron at below-value prices.

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The Blair and Brown years saw financialisation accelerate further in sync with the breakneck speed at which Wall Street spawned its infamous derivatives. While Labour ploughed a substantial portion of the UK’s tax receipts from Big Finance into the NHS and social services, the process of underinvestment in productive capital continued. Then the 2008 crash burst the bubbles in which Britain’s ruling class had invested so much since 1979.

Almost immediately the Bank of England, along with the US Federal Reserve and every other major central bank, rushed in to refloat the City and Wall Street. At the same time, in an absurd attempt to compensate for their largesse, they imposed austerity on the majority of their people – more so in some countries than others but, nonetheless, universally. The result was the elimination of what little actual investment was taking place. Why would big business invest its central bank monies when the little people out there were broke? Why not just buy back shares so as to boost share-linked bonuses and buy splendid houses, art and yachts?

David Cameron and George Osborne’s Britain was, of course, not the only economy where socialism was lavished on the financiers while the majority of people were subjected to austerity. What distinguished Britain from continental Europe was that financialisation started earlier in the UK and penetrated much deeper into the fabric of an economy that had been purposely deindustrialised. Thus the Bank of England’s post-2008 money creation zombified the UK economy far more than the German or French economies.

Then came the pandemic. Central banks reacted to the spectre of capitalism’s implosion with more money printing on behalf of the same financiers who gave it to the same CEOs to buy back more of their shares. However, to avoid starvation during the lockdowns, some of the freshly-minted money had to be handed over to furloughed workers. As the lockdowns artificially choked the supply of goods and services, the little people got some of the central bank money to spend, demand rose and, hey presto, inflation was back.

The crisis that is now taking its toll on sterling has been, in this sense, a long time coming. It harks back to 43 years of class war against working Britons, four decades of underinvestment and, crucially, 13 years of monetary largesse that turned the City, former utilities and mortgage owners into low-interest rate addicts.

What broke the dam were the handouts lavished on the rich by a Prime Minister and Chancellor who pretend to model themselves on Thatcher but who, in reality, are trying to do the impossible. You cannot pursue Reaganomics without a modern-day Paul Volcker, the former chairman of the Federal Reserve, able and willing to print the world’s reserve currency and to raise interest rates, if necessary, to 20 per cent.

UK interest rates will, undoubtedly, rise and the pound will recover. But many of the ruling-class zombies will be destroyed. A new inequality will rise within the British bourgeoisie – between rentiers who managed to reduce their debt liabilities in time and others who did not. Meanwhile, the UK’s working class, the young and pensioners will suffer a disastrous decline in their prospects. Two more years of this government will guarantee that the next one will not be able to mend the wreckage left by Thatcherism’s latest metamorphosis. 

[See also: What the UK’s financial crisis means for your pension]

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