When the Mid-Year Economic and Financial Outlook was published a great deal of attention was given to rising commodity prices contributing to a minimal deficit and promising a future of budget surpluses. Despite this having little to do with the actions of any politicians, it was celebrated, true to form, as evidence of the capabilities of the Albanese-Chalmers government. It is the dogma of the all the smart and sensible that there is reinforcing relationship between good economic management, budget surpluses and positive social outcomes.[i] So too the recent news of declining ore prices has produced the corresponding gnashing of teeth.
I think this can be explained partially by the deep idiocy of mainstream economics. At a basic level we can say that mainstream economics doesn’t understand capitalism. Mainstream economic commentators tend to read surface phenomena and take them as evidence of things being either good or bad – growth, productivity, debt, inflation. Rising growth means good, rising debt means bad – the reverse is true etc.
Chalmers himself but forward this logical non sequitur about debt and positive social and economic outcomes:
The 2023‑24 Mid‑Year Economic and Fiscal Outlook (MYEFO) is all about responsible economic management because that’s the best way to put downward pressure on inflation and ease cost‑of‑living pressures.
This responsible economic management has helped engineer an historic turnaround in the Budget position, but we know there’s more work to do. (2024)
Since the mantra of reducing debt is so often used as a reason for increasing misery it is very understandable that proletarian forces and partisans for a dignified life[ii] respond by declaring the whole thing is just bullshit. And whilst there is plenty of bullshit being thrown around, we can’t ignore the real role state debt plays in the reproduction of capitalism.
I am generally convinced by the argument that Paul Mattick Jr makes that state debt has grown 1) as a necessary response to the declining profitability of capital and to ensure its social reproduction 2) that the size the state expenditure also functions as a further drain on this profitability at the same time (The Return of Inflation: Money and Capital in the 21st Century, 2023). Added to this I previously attempted to put forward a different explanation of the structural logic to the role that state debt plays in the reproduction of capitalism. I argued that state debt functions as an asset in financial markets and works as the keystone of these markets, both as profitable and safe assets and importantly as the benchmark against which other assets are priced.
Recently whilst reading The State of Capitalism by Costas Lapavitsas and the EReNSEP Writing Collective (2023) my attention was drawn to a comment about the role that state bonds play in the repo market and the importance of this market to contemporary financialised capitalism.
The argument runs something like this: since the late 1970s capitalism has become financialised, firms tend towards seeking finance not from banks but from open money markets (though there is a split between a US/UK model and a Germany/Japan one) and one of the ways they do this, especially for short term financing, is via repo loans. This is when a firm sells an asset to another firm with a legal agreement to buy it back within a short period of time at an agreed price. Its effectively a way of lending money short-term.
Lapavitsas et al. write:
It is vital to note that the repo market pivots on the state. Public loans are the most important form of collateral, and, if they are in short supply, the repo market begins to malfunction. Furthermore, central banks intervene heavily in repo markets to regulate the overall liquidity of the financial system as well as to influence the short-term rate of interest. In these respects, the repo market reflects the tight interweaving of state, banks, and shadow intermediaries that has become particularly prominent during the last decade. (p. 47)
A paper from 2015 by the Reserve Bank of Australia revealed that about 85% of repo loans in Australia were government securities (p. 4).
This seems more evidence that for capitalism as a system, what is important isn’t paying off state debt but managing it as an asset: ensuring that it remains an attractive and functioning as an investment and continues to secure the overall operation of finance and thus of capitalism.
Arguably there is a need here for more clarification about how this works in practice. The reef that I’m facing is how much are the participants in the state and market aware of this function and act accordingly and how much these processes work themselves out behind their backs[iii] through the movement of prices? My general position is that a) capitalism as a system works through the pressures and operation of prices despite and regardless of the opinions of its participants b) mainstream economic thought can’t see beyond the surface to understand what is going on anyway!
Let me pose a hypothesis for future investigation:
States borrow. This debt exists as bonds which double then as tradeable assets. The price of assets is determined not only by a state’s current ability to meet existing debt but also by the operation of the financial markets which also reference the health of the bonds in relation to credit ratings and market ‘opinions’ – with a preference for bonds that are seen as stable and trustworthy. States are driven to act in ways to manage their debt by the pressure of the market and this works to ensure state bonds function as assets and keystone of finance. When states can’t meet their debt obligations this can trigger, or exacerbate, more serious system wide crises.
A way of getting an insight into how much planners for capital are conscious of how these processes operate or if they are only conscious of how the process operate on them, would be just making more time to read the reams of dead trees produced by the national and international bodies for capital.
MMTers will respond that states do not need to borrow but can create money unlinked to bonds. My retort is well perhaps in an alternative capitalism by not this one. And it is less likely that a political movement for MMT capitalism could be created than a social movement to replace capitalism overall. Key to my argument is that as important as the state is for the reproduction of capitalism the state is also simultaneously subordinate to capitalism as a world-system.
But perhaps we can start to frame the radical understanding of debt no longer as a battle between fiscal responsibility and state provision, but rather in the stakes it deserves: a conflict between financialised capitalism and lives worth living.
Bibliography
Costas Lapavitsas and the EReNSEP Writing Collective. (2023). The State of Capitalism: Economy, Society and Hegemony. London; New York: Verso.
Mattick, P. (2023). The Return of Inflation: Money and Capital in the 21st Century. London: Reaktion Books.
Reserve Bank of Australia. (2015). Central Clearing of Repos in Australia: A Consultation Paper. Retrieved from Reserve Bank of Australia: https://www.rba.gov.au/publications/consultations/201503-central-clearing-of-repos-in-australia/pdf/201503-central-clearing-of-repos-in-australia.pdf
The Hon Dr Jim Chalmers MP Treasurer. (2024, February 23). 2023-24 Mid-Year Economic and Fiscal Outlook. Retrieved from treasury.gov.au: https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/2023-24-mid-year-economic-and-fiscal-outlook
[i] However, Paul Mattick details as the reality of capitalism continues to diverge from the assumptions of economics even some of the most committed have started to waiver (2023, pp. 10-11)
[ii] Go with me here, I continue to try out alternatives to ‘The Left’
[iii] https://readingcapitalsydney.wordpress.com/2010/07/31/stuff-happens-behind-our-backs/
With Sober Senses 