Obscene amounts of money

IssueDecember 2011 / January 2012
News by Milan Rai

The 30 November strikes by 24 unions in Britain (the biggest for several generations), the protests in Greece and Spain, the global wave of Occupy camps, and the student protests are all caused by the way that governments are reacting to the financial crisis of 2008.

Governments could have chosen to respond by tightening regulation on reckless financial institutions, by redistributing wealth and power and by protecting the poor and the vulnerable from the crisis. Instead, governments have chosen the opposite path, deepening inequality.

In September, the Institute for Policy Studies reported that, in the US, a quarter of the 100 largest companies paid more to their chief executives in 2010 than they did in taxes to the US government.

For example, arms manufacturer General Electric made profits of $5bn in 2010 – just in the US. Through the use of 14 tax haven subsidiaries, GE reduced its tax bill to almost nothing, and actually creamed off $3.3bn in federal income tax refunds.

Their chief executive, Jeff Immelt, was paid $15.2m.

Boeing, manufacturer of the Apache helicopter, the F-15E Strike Eagle jet fighter and other technological marvels, paid $13m in US federal taxes in 2010, and paid $13.8m to chief executive Jim McNerney.

On US pre-tax revenues of $4.3bn, Boeing seems to have paid taxes at a rate of 0.3%. (Boeing also managed to reap a net tax refund from states and localities of $137m.)

Also in September, the High Pay Commission here in Britain reported that the average bonuses for directors at the largest 350 companies quoted in the stock market have increased by 187% since 2000. Total pay packages for company executives in the FTSE 350 have gone up by 700% since 2002. By contrast, pay levels for the average worker in Britain have risen by only 27% over the past decade.

Boosting inequality

Despite the financial crisis, many companies have done very well since 2008. Corporations are sitting on vast reserves in cash and cash-equivalent assets: $2.6 trillion in Europe; $2tn in US non-financial companies; and perhaps $1tn in Asia apart from Japan. Cash now accounts for 7.1% of all company assets, the highest level since 1963, the FT observed in September.

Part of this cash pile derives from the Labour government’s “solution” to the financial crisis: “quantitative easing” (QE).

In 2009-2010, the Bank of England magically created £275bn out of thin air, and used it mainly to buy back government bonds from banks and other financial institutions. The US went in for two bursts of QE (QE1 and QE2), totalling $2.4tn worth of bond purchases during 2009-2011.

Bonds are normally sold by governments as a way of borrowing money.

To put it simply: when an investor buys a government bond at a certain price, the bond is a promise to re-pay that money on a specified date in the future, plus a certain amount of interest. The government gets cash up front, but has to repay the loan later.

QE meant reversing this process, so that the government, instead of borrowing money by selling bonds, pumped cash into Britain’s financial institutions by buying their long-term bonds.

The financial institutions then used that freed-up cash mainly to buy stocks and shares.

In August, City of London economist Dhaval Joshi, of BCA Research, observed: “The evidence suggests that QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it.”

Joshi points out that in the US and the UK, where QE was used in a major way, real wages (adjusted for inflation) have fallen; but in Germany, where QE was not used, real wages have risen.

QE pumped more money into the stock market, increasing company revenues and profits, so the rich get richer; but ordinary workers have not been able to secure wage rises that keep up with inflation, and claimants are suffering cuts to the benefit system.

In the two years 2008-2010, Joshi notes, real wages and salaries in the UK have fallen by £4bn, but company profits have risen £11bn: “The spoils of recovery have been shared in the most unequal of ways.”

Thus the boom in luxury goods. In November, luxury trench coat and designer handbag retailer Burberry reported a 41% increase in its net profit for the first half of its financial year.

The luxury goods market is projected to have grown this year by 7% in Europe and by 8% in the US. Globally, the luxury goods market is forecast to have grown by 10% to $257bn.

Meanwhile, according to Saga, pensioners in the UK have lost 20% of their money since the 2008 through inflation and low interest rates.

Recently retired pensioners are estimated to be receiving £4,245 a year less than if they had retired just before the credit crisis, largely because of the effects of QE.

Boosting hunger

Billions of dollars of US QE2 cash was used by investors (speculators) to chase profits in the commodity markets in late 2010, accelerating a surge in the price of food and other raw materials.

Quantitative easing not only increased inequality in the rich North, it also increased hunger in the Global South.

Increasing food prices were critical to the Arab Spring unrest. The Tunisian uprising began in a rural area, the Syrian uprising began in a key wheat farming zone, and in Egypt the high price of bread was a critical issue as the protests began, points out Rami Zurayk, an agronomy professor at the American University of Beirut.

The Guardian pointed out in June that the banks have enjoyed a “triple-whammy of profit streams” from the injection of QE money into the commodity markets.

Firstly, banks made money selling complex “commodity derivatives” as a way of allowing pension funds and other investors to pump their spare QE money into the commodities markets.

Secondly, banks loaned out their own QE cash to miners and other resource companies enjoying the commodity price boom, earning vast sums in interest.

Finally, banks have also become speculators in their own right, investing QE cash in commodity markets to make profits directly.

Rich vs poor

In summary: the government is responding to the financial crisis by cracking down on the public sector, sparking revolts by workers, students and claimants. In the financial sector that caused these problems, there is a much more lenient apprach: billion-pound bail-outs, a sharp lack of effective regulation, and a multi-billion-pound handout called “quantitative easing”.