financialization

Menace on the Menu: The Financialization of Farmland and the War on Food

By Colin Todhunter


Republished from Countercurrents.


Between 2008 and 2022, land prices nearly doubled throughout the world and tripled in Central-Eastern Europe. In the UK, an influx of investment from pension funds and private wealth contributed to a doubling of farmland prices from 2010-2015. Land prices in the US agricultural heartlands of Iowa quadrupled between 2002 and 2020.  

Agricultural investment funds rose ten-fold between 2005 and 2018 and now regularly include farmland as a stand-alone asset class, with US investors having doubled their stakes in farmland since 2020.  

Meanwhile, agricultural commodity traders are speculating on farmland through their own private equity subsidiaries, while new financial derivatives are allowing speculators to accrue land parcels and lease them back to struggling farmers, driving steep and sustained land price inflation. 

Top-down ‘green grabs’ now account for 20% of large-scale land deals. Government pledges for land-based carbon removals alone add up to almost 1.2 billion hectares, equivalent to total global cropland. Carbon offset markets are expected to quadruple in the next seven years. 

These are some of the findings published in the new report ‘Land Squeeze’ by the International Panel of Experts on Sustainable Food Systems (IPES), a non-profit thinktank headquartered in Brussels. 

The report says that agricultural land is increasingly being turned into a financial asset at the expense of small- and medium-scale farming. The COVID-19 event and the conflict in Ukraine helped promote the ‘feed the world’ panic narrative, prompting agribusiness and investors to secure land for export commodity production and urging governments to deregulate land markets and adopt pro-investor policies.  

However, despite sky-rocketing food prices, there was, according to the IPES in 2022, sufficient food and no risk of global food supply shortages. Despite the self-serving narrative pushed by big agribusiness and land investors, there has been no food shortage. The increased prices were due to speculation on food commodities, corporate profiteering and a heavy reliance on food imports.  

At the same time, carbon and biodiversity offset markets are facilitating massive land transactions, bringing major polluters into land markets. The IPES notes that Shell has set aside more than $450 million for offsetting projects. Land is also being appropriated for biofuels and green energy production, including water-intensive ‘green hydrogen’ projects that pose risks to local food production. 

In addition, much-needed agricultural land is being repurposed for extractive industries and mega-developments. For example, urbanisation and mega-infrastructure developments in Asia and Africa are claiming prime farmland.   

According to the IPES report, between 2000 and 2030, up to 3.3 million hectares of the world’s farmland will have been swallowed up by expanding megacities.  Some 80% of land loss to urbanisation is occurring in Asia and Africa. In India, 1.5 million hectares are estimated to have been lost to urban growth between 1955 and1985, a further 800,000 hectares lost between 1985 and 2000, with steady ongoing losses to this day.  

In a December 2016 paper on urban land expansion, it was projected that by 2030, globally, urban areas will have tripled in size, expanding into cropland. Around 60% of the world’s cropland lies on the outskirts of cities, and this land is, on average, twice as productive as land elsewhere on the globe.  

This means that, as cities expand, millions of small-scale farmers are being displaced. These farmers produce the majority of food in developing countries and are key to global food security.  In their place, we are seeing the aggregation of land into large-scale farms and the spread of industrial agriculture and all it brings, including poor food and diets, illness, environmental devastation and the destruction of rural communities.  

Funds tend to invest for between 10 and 15 years and can leave a trail of long-term environmental and social devastation and serve to undermine local and regional food security. Returns on investments trump any notions of healthy food, food security or human need. 

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The IPES notes that, globally, just 1% of the world’s largest farms now control 70% of the world’s farmland. These tend to be input-intensive, industrial-scale farms that the IPES says are straining resources, rapidly degrading farmland and further squeezing out smallholders. Moreover, agribusiness giants are pursuing monopolistic practices that drive up costs for farmers. These dynamics are creating systematic economic precarity for farmers, effectively forcing them to ‘get big or get out’. 

Factor in land degradation, much of which is attributable to modern chemical-intensive farming practices, and we have a recipe for global food insecurity. In India, more than 70% of its arable land is affected by one or more forms of land degradation. 

Also consider that the Indian government has sanctioned 50 solar parks, covering one million hectares in seven states. More than 74% of solar is on land of agricultural (67%) or natural ecosystem value (7%), causing potential food security and biodiversity conflicts. The IPES report notes that since 2017 there have been more than 15 instances of conflict in India linked with these projects. 

Nettie Wiebe, from the IPES, says: 

“Imagine trying to start a farm when 70% of farmland is already controlled by just 1% of the largest farms – and when land prices have risen for 20 years in a row, like in North America. That’s the stark reality young farmers face today. Farmland is increasingly owned not by farmers but by speculators, pension funds and big agribusinesses looking to cash in. Land prices have skyrocketed so high it’s becoming impossible to make a living from farming. This is reaching a tipping point – small and medium scale farming is simply being squeezed out.” 

Susan Chomba, also from the IPES, says that soaring land prices and land grabs are driving an unprecedented ‘land squeeze’, accelerating inequality and threatening food production. Moreover, the rush for dubious carbon projects, tree planting schemes, clean fuels and speculative buying is displacing not only small-scale farmers but also indigenous peoples. 

Huge swathes of farmland are being acquired by governments and corporations for these ‘green grabs’, despite little evidence of climate benefits. This issue is particularly affecting Latin America and sub-Saharan Africa. The IPES notes that some 25 million hectares of land have been snapped up for carbon projects by a single ‘environmental asset creation’ firm, UAE-based ‘Blue Carbon’, through agreements with the governments of Kenya, Zimbabwe, Tanzania, Zambia and Liberia. 

According to the IPES, the ‘land squeeze’ is leading to farmer revolts, rural exodus, rural poverty and food insecurity. With global farmland prices having doubled in 15 years, farmers, peasants, and indigenous peoples are losing their land (or forced to downsize), while young farmers face significant barriers in accessing land to farm. 

The IPES calls for action to halt green grabs and remove speculative investment from land markets and establish integrated governance for land, environment and food systems to ensure a just transition. It also calls for support for collective ownership of farms and innovative financing for farmers to access land and wants a new deal for farmers and rural areas, and that includes a new generation of land and agrarian reforms. 

Capital accumulation based on the financialisation of farmland accelerated after the 2008 financial crisis. However, financialisation of the economy in general goes back to the 1970s and 1980s when we witnessed a deceleration of economic growth based on industrial production. The response was to compensate via financial capitalism and financial intermediation.  

Professor John Bellamy Foster, writing in 2010, not long after the 2008 crisis, states: 

“Lacking an outlet in production, capital took refuge in speculation in debt-leveraged finance (a bewildering array of options, futures, derivatives, swaps, etc.).”  

The neoliberal agenda was the political expression of capital’s response to the stagnation and involved four mechanisms: the raiding and sacking of public budgets, the expansion of credit to consumers and governments to sustain spending and consumption, frenzied financial speculation and militarism. 

With the engine of capital accumulation via production no longer firing on all cylinders, the emergency backup of financial expansion took over. Foster notes that we have seen a shift from real capital formation in many Western economies, which increases overall economic output, towards the appreciation of financial assets, which increases wealth claims but not output.  

Farmland is being transformed from a resource supporting food production and rural stability to a financial asset and speculative commodity. An asset class where wealthy investors can park their capital to further profit from inflated asset prices. The net-zero green agenda also has to be seen in this context: when capital struggles to make sufficient profit, productive wealth (capital) over accumulates and depreciates; to avoid crisis, constant growth and fresh investment opportunities are required.  

The IPES report notes that nearly 45% of all farmland investments in 2018, worth roughly $15 billion, came from pension funds and insurance companies. Based on workers’ contributions, pension fund investments in farmland are promoting land speculation, industrial agriculture and the interests of big agribusiness at the expense of smallholder farmers. Workers’ futures are tied to pension funds, which are supporting the growth and power of global finance and the degradation of other workers (in this case, cultivators).   

Sofía Monsalve Suárez, from the IPES, states: 

“It’s time decision-makers stop shirking their responsibility and start to tackle rural decline. The financialisation and liberalisation of land markets is ruining livelihoods and threatening the right to food. Instead of opening the floodgates to speculative capital, governments need to take concrete steps to halt bogus ‘green grabs’ and invest in rural development, sustainable farming and community-led conservation.” 

Unfortunately, ordinary people cannot depend on ‘decision-makers’ and governments to bring about such change. Ordinary people themselves have always had to struggle for change and improvements to their lives. Groups across the world are fighting back, and the IPES report provides some inspiring examples of their achievements. 


Readers can read the IPES report here

The author specializes in food, agriculture and development issues and his two recent books on the global food system can be read here.

Capitalist Immiseration, the Trump/Biden Effect, and the Fascist Tide

By Colin Jenkins

Things under Trump were not good for most of us. Same can be said for Obama and the Bushs, Clinton and Reagan, and so on. Things under Biden will not be good for most of us. Why? Because capitalism is not designed to be good for most of us. We are its commodities. Our lives are bought, sold, used, abused, disregarded, and discarded when no longer needed. We are not only alienated “appendages” of productive machinery, as Marx once brilliantly noted, but we are all-encompassing conduits for the upward flow of profit. Our labor, our existence, our lives, our actions, every move we make are all geared in a way to direct money to a minority class that sits at the top – the capitalists. This has never been more evident than with the advent of social media, where even our basic social interactions with one another are now monetized for the benefit of tech industry executives and their shareholders.

In the current era of neoliberalism, globalization, financialization, and automation, our lives have only become more expendable. Our labor is not needed as much anymore. Machines are filling that void. A fully globalized labor pool has, once and for all, put the international proletariat on the same track. We are now all in a race to the bottom. This isn’t to say the global South no longer falls victim to colonialism and imperialism (because it still does), but rather that a fully globalized economy has now set the former industrialized working classes in the imperial core on the same path as the super-exploited working classes of the global South. It is only a matter of time before this total immersion is realized. The combination of a broadening labor pool and rapid increase in technology has made machines (Marx’s “constant capital”) more prevalent and, in turn, human labor (Marx’s “variable capital”) obsolete in many industries. In a humane system, this would be something to celebrate, as people would be increasingly liberated from tasks that can be done by machines, thus freeing us up to spend more time with our families, communities, and to explore our creative and productive capacities away from capitalist coercion. Unfortunately, in an inhumane system like capitalism, which recognizes us as nothing more than commodities, it leaves us in a state of desperation – as “appendages” desperately seeking productive machinery to attach ourselves to so that we can properly serve our capitalist overlords.

Many of us are aware of the Oxfam reports that have come out over the past decade, especially those which highlight global inequality. A glance at their yearly analyses shows us the disastrous effects of a global capitalist system that has run its course, and in doing so has gone from the “predatory phase of human development,” as Thorstein Veblen once referred to it, to a seemingly full-blown cannibalistic stage of human regression:

  • In 2010, the 388 richest individuals in the world owned more wealth than half of the entire human population on Earth.

  • By 2015, this number was reduced to only 62 individuals.[1]

  • In 2018, it was the 42 richest individuals.

  • In 2019, it was down to only 26 individuals who own more wealth than 3.8 billion people.[2]

These numbers paint a damning picture, but do not necessarily illustrate the most important point: that Marx’s theory of immiseration is being realized. In other words, at a closer look, we can see the claim that “capitalism has lifted people out of poverty” is simply not true. Rather, as inequality has risen due to unfathomable amounts of wealth being funneled to the top, the lives of billions of people worldwide have worsened. Proponents of capitalism would like us to believe this is not a zero-sum game, or even worse that “a rising tide lifts all boats,” but in an era dominated by fiat currency, where wealth is represented by mere numbers in a computer program, created arbitrarily by capitalist governments, it is the wealthiest individuals who determine the value of that currency. And when a handful of individual capitalists command wealth in the hundreds of billions, it is clear that the 4.2 billion members of the global proletariat who must survive on less than $7.40 a day exist in a state of extreme poverty. In true zero-sum fashion, as more wealth has concentrated at the top, more poverty has developed among the bottom. In fact, between 1980 and 2015, the number of people living in this state of poverty increased by one billion.[3] And this does not begin to assess the new realities of the working classes within the imperial core, such as the United States, which have been artificially buoyed by unsustainable credit and debt schemes for the past three decades, all while real wages have stagnated, living-wage jobs have plummeted, and costs of living have skyrocketed. It is only a matter of time before this entire house of cards, which has been constructed and maintained to keep capitalism and extreme wealth inequality in place, comes crumbling down. This fragile arrangement is being tested like never before, as 40 million Americans are facing eviction, food pantries are being strained, and anywhere from a third to a half of working people in the US cannot pay their bills. The capitalist class knows their system is on the brink — not because of the pandemic but more precisely due to its historical trajectory and limitations — and are now tasked with maintaining their cushy positions at the top in the aftermath. In other words, as capitalism comes to its inevitable conclusion, they prefer a controlled demolition.

Governments, politicians, and international agencies have been put in place during the post-WW II era to maintain the global capitalist system and force it on peoples everywhere, whether through resource extraction or by opening new markets. Since the collapse of the Soviet Union in the late 1980s, capital has run roughshod over the world. Now, as we move toward the middle of the 21st century, it has run its course.  In the US, Presidents, Senators, Congresspeople, Supreme Court justices, politicians, and technocrats have one primary purpose in the system: to maintain the status quo by serving capital. Or, as James Madison once said, “to protect the minority of the opulent from the majority.” In these times, this means stomping anticipated unrest. It means overseeing this process of immiseration and degradation, and ensuring it takes place in an orderly way. Tangible examples of this are the US government (via the Federal Reserve) giving capitalist institutions upwards of twenty trillion dollars under the guise of “quantitative easing” and “stimuli” over the past decade, while at the same time pushing austerity measures, militarizing domestic police forces, and brutalizing working-class folks in the streets. Joe Biden has spent his life serving capital with this blueprint. He is a known commodity to capitalists and has served them well. And, as expected, he has already begun stacking his administration with corporate lackeys who have dedicated their lives to serving power by making the rich richer and the poor poorer (because the latter is required for the former). 

As bad as Trump was, especially regarding his rhetoric that emboldened millions of white supremacists nationwide, he was a bit of a wildcard to the capitalist ruling class (despite being a member of it). He was driven primarily by ego and has spent his entire life on the other end of this relationship between capital and the state, feeding politicians from both parties to serve his interests. He was unpredictable. He got into pissing matches with anyone and everyone, bucked military advisers, challenged media, and kept people guessing. He has no ideology, no belief system, no substantial opinions on anything. He loves himself, his money, his power, and anyone who loves him back; and he has learned over the course of his uber-privileged life (which was literally handed to him on a silver platter) that manipulation is the key to all of this. If there's one skill that he has, it's the ability to persuade others without really saying much. So, he built up a loyal following, especially among the petty bourgeoisie, a sector of society that has historically served as the embryo for fascism. In the US, this demographic is dominated by middle-aged white men who similarly had privileged lives handed to them upon birth. Granted, many have used this privilege to actually work their ways to increased financial success (unlike Trump, who has never had to work), but also many who are feeling the increased pressures being brought down on them from the same era that has catalyzed Trump’s rise – the neoliberal, globalized, late stage of capitalism, which has created unprecedented instabilities throughout the socioeconomic spectrum, especially in regards to race and class inequities. Trump spoke to these people as a last line of defense for that “great white America” in their heads. However, he did not instill the same amount of trust in the bourgeoisie. So, while the transition from capitalism to fascism is already here in many respects, the capitalist class is still not fully prepared to cement the move. To them, Trump was both ahead of the game and too loose to oversee the final transition. That — with the help of Joe Biden, Kamala Harris, and the Democrats — will come in the relatively near future, as a more polished version of Trump waits in the wings to accept the torch in this perpetual, right-wing slide of lesser-evilism that has dominated bourgeois politics for the past four decades.

Thus, the focus on Trump as some sort of aberration has always been dangerous. Because he was not created in a vacuum. He was created through four decades of neoliberalism – which has been characterized most importantly by a fusion of corporate governance, the very ingredient that Mussolini once referred to as a prerequisite to fascism – corporatism. This is the final stage of capitalism, and it is upon us. Both political parties are facilitators of this transition, with Democrats serving as a center-right buffer to obstruct any significant formations of socialism from the left, and Republicans as the forerunners of this fascist realization. Like any process, it is happening gradually, with mistakes, mishaps, regenerations, improvements, and steadying mechanisms. Both parties interplay in this process, learning from one another (often unknowingly), giving and taking in a reciprocal unity that represents capital and their class interests, which must be guaranteed a place at the table when the transition is fully realized. This takes time. And unseating Trump, with all of his liabilities, was part of this process. A Biden-Harris administration will bring more stability to the transition, allowing the capitalist class time to regroup and steady the ship, and allowing the army of petty-bourgeois white supremacists time to foment in the shadows, patiently awaiting the new and improved Trump to follow. The next Trump will be more grounded in ideology, more strategic, more under the control of the capitalist class as it continues to perfect corporate governance. And with Biden and the Democrats running interference for their far-right counterparts, by obstructing and repressing socialist movements from below, the transition will continue. Because the only two possible outcomes from capitalism are socialism or fascism, and the capitalist class will do everything in its power to avoid the former, thus embracing the latter.

The fact that a record number of Americans turned out for this latest presidential election is concerning because it suggests that not enough people understand the path we are currently set upon is a one-way street. We can not and will not be steered in a safe direction, no matter which politicians or presidents we choose. And while a few credible arguments can still be made for participating in bourgeois elections, especially within certain localities, this collective delusion that places a premium on voting remains a formidable obstruction to systemic change. Quite simply, the change we need will not come from voting. If anything, our continued faith in a system that was designed to fail us only delays our collective liberation. The fact that wealthy people, billion-dollar corporations, entertainers, athletes, mass media, and politicians themselves go out of their way to push massive “get-out-and-vote” marketing campaigns on us should give pause to anyone. This delusion benefits them. And it harms us. It will take a critical mass of proletarians to take a stand and push for systemic change. This means confronting the capitalist power structure, its immense wealth, and formidable death squads head on. This will require a significant increase in class consciousness, which in turn will lead to wholesale divestment from bourgeois politics, elections, and all politicians from the two capitalist parties, even those described as “progressive.” Shedding this delusion is crucial. And we are running out of time.

 

 

Notes

[1] January 18th, 2016. An Economy for the 1%. Oxfam. Boston, Massachusetts: Oxfam America. (https://www.oxfam.org/sites/www.oxfam.org/files/fileattachments/bp210-economy-one-percent-tax-havens-180116-summ-en_0.pdf).

[2] Elliot, Larry. January 20th, 2019. World’s 26 richest people own as much as poorest 50%, says Oxfam.” The Guardian, March 5th.

[3] Hickel, Jason. 2015. “Could you live on $1.90 a day? That’s the international poverty line.” The Guardian, March 5th

A Brief Inquiry into the History, Logic, and Spatiality of Financial Derivatives

By Jacob Ertel

Capitalism, at its most elemental, is a system of inherent volatility. The character of this volatility is contingent on how a state's political-economic institutions are able to mitigate risk by facilitating the movement of capital. How and where this capital moves is paramount in crisis obviation. Capitalism tends towards a range of interrelated crises-democratic, economic, political, social-but central to them all is the ongoing accumulation of surplus-value. The central risk here is that competition will result in an excess of capital relative to available opportunities to reinvest it. This excess can take a range of forms, from commodities, to money, to labor power (i.e., unemployment). States may attempt to resolve crises of overaccumulation in two ways. The first involves devaluating capital through inflation, commodity gluts on the market and falling prices, diminished productive capacity, and/or falling real standards of living for workers. The second method, known as the 'spatial fix', entails developing new markets in which to invest excess capital.[1] These terrains are often conceived as untapped geographical markets that may be turned into new centers of production, thus allowing for a temporary displacement of overaccumulation. Though productive forces remain indispensible to any mode of accumulation, advanced capitalism today may be characterized above all by an ongoing 40 year shift towards the primacy of the financial sector and the predominance of circulation over production.

Whereas the motive of the production process is the extraction of surplus-value through the exploitation of labor, the circulation process itself does not create value; instead, its profits generally derive from the redistribution of surplus-value. [2] This fundamental shift (the specifics of which will be discussed below) exposes more individuals and firms to financial risk than ever before. While capital seeks out new productive markets for reinvestment in all modes of capitalist accumulation, with financialization have come new kinds of spatial fixes that cohere with the unproductive, fictitious, and redistributive logic of circulation. As both social and historical constructions, the structures that facilitate the displacement of risk undergo periods of relative strength and weakness according to the dynamic between an economy's productive capacity and its exposure to risk. [3] When productive capacity is diminished, speculative capital flows increase as investment shifts from productive to financial capital in the attempt to ensure stability against currency devaluation. With the advent of derivatives, however, risk is not only circulated faster and further, but commodified itself. Building on financialization and derivatives literature, this essay suggests that we may understand derivatives as a spatial fix in their own right, which paradoxically both displaces and amplifies risk. Despite important qualitative differences from older, more established strategies of crisis displacement, however, derivative-based spatial fixes exemplify a core dynamic central to all forms of capitalist accumulation. It will be argued here that while on one hand financial derivatives constitute the separation of the sphere of circulation from the sphere of production and thus from physical localities, they are simultaneously inextricable from them. This tension between production and circulation may in part account for the unique form of contemporary capitalist accumulation.

This essay is divided into four sections. The first section addresses the technical aspects of derivatives: what they are, how they work, and some of the different forms they may take. The second section will present an abridged history of derivatives spanning from their agricultural origins to their current use in financial markets. The third section explains how derivatives are unique from other financial instruments, and asks what these differences indicate for the state of the global economy more generally. The final section analyzes derivatives with regard to two critical concepts in geographical political economy: spatio-temporal fixes and time-space compression.


What Are Derivatives?

At the most general level, a derivative may be understood as a kind of financial contract used to expose counterparties to fluctuations in the market price of an underlying commodity, asset, or event. [4] They may also be thought of as "bilateral contract[s] that [stipulate] future payment and whose [values are] tied to the value of another asset, index, or rate or, in some cases, depends on the occurrence of an event." [5] Whereas other financial instruments may involve an exchange of principal or title, derivatives exist in order transfer value between parties based on an underlying price change or event. In so doing, derivatives exist "to bind and blend different sorts of 'particular' capital together" [6] through securitization and risk commodification. A derivative contract entails that the claim on the underlying asset or the cash value of that asset must be executed at a definite time in the future. Capital is moved until the contract is settled. As opposed to insurance instruments, which protect individuals from risk by requiring policyholders to buy in with some sort of collateral (an 'insured interest') that they could lose in the context of the issuance of the policy, derivatives do not require this kind of collateral; anyone can trade in derivatives regardless of their relation to the underlying asset.[7] As such, derivatives operate solely according to these bilateral contracts between parties with differing perspectives on or vulnerabilities to risk. [8] This is the core feature of derivatives: that a plethora of risk may be traded independent the underlying asset. This development now often comes in form of cash settlement, which frees counterparties from delivering the underlying asset.[9] Cash settlement allows various characteristics of a commodity, asset or security to be separated and traded. In financial derivatives contracts, transactions are purely monetary and do not entail any change in ownership of the underlying assets. [10] Derivatives are assigned a notional value according to the multiplication of its spot price by the number of units of the underlying asset stated on the contract. [11] Pricing derivatives is determined by a rate of interest, specifically the London Interbank Offered Rate (LIBOR). LIBOR is set by an amalgam of banks in the derivatives markets, and is made through the evaluating the average of interest rates submitted by each of these banks daily. [12]

Derivative contracts are supposed to offset volatility in financial markets by separating assets themselves from their price's volatility. [13] This separation constitutes a way to hedge the risks endemic to financial speculation, as speculators believe they can diminish their exposure to volatile asset prices. Because any potential failure to execute a contract at full notional value may be hedged through another derivative contract (valued according to perceived chance of execution of the initial derivative contract), the aggregate value circulating through derivatives contracts is grossly disproportionate to the price of all the underlying assets being traded for. [14] Despite this risk-exacerbating practice, derivatives are generally considered relatively inconsequential to capitalist economies. Because they are not a "real input in the production process nor a means of conveying wealth," and since they "fixate on short-term capital flows rather than longer-term investment," traditionally liberal economic views do not take derivatives seriously as a global threat to the banking system, even with their ability to concentrate a large amount of leverage on a single instrument. [15] Yet whereas they are often considered economically marginal and unrelated to the real economy, in fact derivatives have become the largest industry in the world, such that they themselves are becoming key sites of asset price determination rather than the other way around. [16] What these more traditional views miss, then, is that derivatives are in fact related to the real economy, despite their relative degree of separation from the production process.

Derivatives can be traded either in regulated exchanges or 'over-the-counter' (OTC). Exchanges include institutions such as the London International Financial Futures Exchange and the Chicago Mercantile Exchange. Whereas derivatives traded on exchanges require money as collateral and for extra margin payments to be made against adverse fluctuations in the market, OTC derivatives are entirely unregulated. [17] Unlike exchange-traded derivatives, which entail a finite transfer of payment between parties, OTC derivatives contracts are kept open through clearing houses that continuously circulate debt instruments. The market for OTC derivatives has expanded drastically in recent decades, bringing with it new forms of risk and volatility. OTC derivatives are cheaper and more flexible than exchange-traded derivatives, but also they carry a higher degree of risk and are not easily sold to third parties due to their relative lack of liquidity.[18] This means that during volatile periods OTC derivatives are more likely to adversely impact the entire financial system. Yet OTC trading has been on the rise despite this predicament, with nearly one third of trading taking place in dealer-to-dealer transactions, and with each transaction tied to at least one dealer bank as a counter party. [19] Dealer banks are highly concentrated, with fifteen to twenty dealers controlling bulk of OTC trading globally.[20] The boom in OTC trading may be exemplified best by the growth of hedge funds, the participation of financial wings of major corporations, and the involvement of commercial and investment banks. [21] All of this signals an increasing predominance of the financial sector of the economy over the productive sector. It also points towards greater susceptibility to economic instability, as the "default by a major institution, a shift in the prices of derivatives in financial markets sufficient to undermine the viability of a major institution, or the inability to net out obligations and receipts" could all trigger a system-wide crisis. [22] With less productive capital overall in the era of financialization, greater exposures to risk likewise threaten the longevity of the productive sector itself, which is now thoroughly integrated into the financial sphere. Taking on greater risks through trading in derivatives raises the likelihood that the investor will profit or lose money. Large losses can result in bankruptcy, engulfing the various individuals, banks, and institutions that lent money to them and exacerbating systemic risk. [23] In this sense, we may begin to better understand the paradoxical connectedness between the 'real' economy and financial markets.


Different Types of Derivatives

Most derivatives traded today take the form of forwards, futures, options, and swaps. The oldest and most intuitive type of derivative is a forward. Briefly, a forward is a contract between two parties codifying the obligation to buy or sell a particular quantity of an item at a fixed price or rate and a definite future point in time. Foreign exchange forwards, for example, obligate both parties to exchange agreed upon amounts of foreign currencies at a specified rate at a future date. These rates are generally traded 'at par' or 'at market,' meaning the value of the contract at the time it is traded is zero and no money need be traded at the contract's initiation. This means that the market value of the contract is zero, but parties can decide to post collateral as a means of insuring the terms of the contract.[24] Because they are specialized according to specific needs, forwards are relatively limited derivatives contracts, and may involve high search costs to find parties with opposite needs (i.e., exposures to risk). [25] Forwards' binding of parties to exchange may also lead to inconveniences for one or both parties after the contract is actually entered into. If one party defaults, significant legal fees may be required to secure the forward price, and this risk prompts both parties to monitor one another's respective viability.[26] Contract terms are often standardized in order to avoid some of these potential issues. Forward contracts that are standardized, publicly traded, and cleared through a clearing house are referred to as futures. As opposed to forwards, futures are traded on organized exchanges and are largely substitutable for one another, which allows for greater trading volume and contributes to higher market liquidity. This new liquidity may improve the price discovery process, or how reflective market prices are of key information.[27]

As opposed to forwards and futures, option contracts allow the buyer or holder (also called the long options position) to buy or sell the underlying asset in the future. More specifically, buyers are purchasing the right to buy or sell the asset at a particular price (known as the strike price) either at a particular date (known as a European option) or at any time between the option's initiation until its expiration date (known as an American option), and can be traded on individual stocks, stock indexes, and even through futures contracts themselves. [28] Options to buy and sell are known as calls and puts, respectively. Buying and selling on options is somewhat trickier than with forwards and futures; if the spot market price of a stock exceeds the strike price during the window in which the option could be exercised, then the holder may buy at a lower strike price by exercising the option. In this case, the option's value would be the higher market price. If the market price remained below the strike price during the period in which the call option could be exercised, however, then the option would expire worthless. [29] An option's price is often a reflection of market interest rates, the time to its maturity, the historical price volatility of the underlying asset, and the proximity of the underlying asset to its strike price. [30] As with other types of derivatives such as foreign exchange forwards, options can concern financial rather than real commodities. For example, interest rate options provide insurance against increases and deceases (caps and floors) and hikes and drops (collars) in interest rates. Cap options create a ceiling to protect against hikes in interest rates, while floor options create a minimum rate to protect against a potential fall in rates. [31] Options are predicated on the tension between selling short and going long. If someone who does not own the underlying asset sells it through a derivative contract in anticipation of buying it back at a lower price or in the open market at whatever price prevails, they are selling it 'short'. Short-selling produces tremendous exposure to risk. As Henwood notes, "short-selling exposes the practitioner to enormous risks: when you buy something-go long, in the jargon-your loss is limited to what you paid for it; when you go short, however, your losses are potentially without limit." [32] Brokers hypothetically are expected to evaluate clients' credit rating in order to justify short-selling, but this practice is not highly regulated.

More recently, derivatives markets have turned towards the proliferation of swap contracts, which differ somewhat from forwards, futures, and options. A swap contract is perhaps most reflective of the contemporary usage of derivatives, constituting an agreement between counterparties to 'swap' two different kinds of payments, each calculated by applying an interest rate, exchange rate, index, or the price of an underlying commodity or asset to a notional principal.[33] Swaps usually do not require the transfer or exchange of the principal. Uniquely, payments based on swaps are done at regular intervals throughout the duration of the contract. In other words, whereas exchange-traded derivatives involve actual claims on an underlying assets, swaps do not; instead, the swap is between two sets of cash flows, which are usually destabilized by positions in other securities such as bonds or stock dividends.[34] Swaps can take several forms. A 'vanilla' interest rate swap, for example, involves one series of payments based on a fixed interest rate and another based on a floating interest rate. A foreign exchange swap entails an opening payment to purchase a foreign currency at a specified exchange rate, and a closing payment selling the currency at a specified exchange rate. A foreign currency swap consists of one set of payments derived from either a long or short position in a stock or index, and another set derived from an interest rate or other equity position,

amounting to a combination of a spot and forward transaction. [35] Currency and interest rate swaps have become especially important in recent decades. The former allows investors to hedge principle and interest payments in one currency against a preferred currency, while the latter allows borrowers to arbitrate between component markets of the international bond market. In this respect, swaps have played an instrumental role in controlling for short-term risk and thus making international bond markets particularly attractive for global investment. [36]

While each type of derivative contract is uniquely structured, they all share important commonalities. Derivative contracts can be settled either through the physical delivery of the underlying asset or through cash settlement with adjustments of margins on financial differences. Cash settlements allow for agents uninvolved in either production or the use of the underlying assets to speculate. Today cash settlement is more common, as most derivatives no longer involve the transfer of a title or a principle; instead, they create price exposure by conjoining their value and a notional amount or principal of the item form which the contract derives.[37] Taking a price position in the market while only putting up a small amount of capital used allows the investor to leverage, making it cheaper to hedge and speculate. Here derivatives are able to cover hedgers' risks on the spot market covering losses or compensating gains. [38] In speculative transactions with derivatives, however, an agents' position does not correspond to the spot market, and is thus exposed to greater risks in price variation.[39] A similar dynamic applies to arbitrage transactions, which occur simultaneously on the spot market and in the derivatives market. Arbitrage transactions, however, involve parties attempting to profit by exploiting price differentials, thus creating the opportunity for gains without risks. [40] All of this shows us that derivatives are used by a wide range of actors (investors, corporations, banks, etc.) to protect themselves against forms of risk. International agencies and banks use derivatives to hedge their loan portfolio positions, and transnational corporations use them to reduce their exposure to risk, with many creating financial divisions to actively speculate in derivatives markets. [41] Investment banks may also trade in derivatives for corporate clients, with the aim of boosting their liquidity by hedging positions in an inter-bank market.


An Abridged History of Derivatives

Some accounts of derivatives date their origins to biblical times in the form of agricultural consignment transactions. While derivatives trading can also be traced to 12th century Venice (exchanges on agriculture), late 16th century Amsterdam (forwards and options on commodities and securities), and 18th century Japan (futures on warehouse receipts and rice), modern derivatives trading began officially in 1849 when a group of grain merchants created the Chicago Board of Trade (CBOT).[42] The Chicago Board of Trade was originally designed to coordinate "geographically dispersed agricultural markets." [43] Through its legal framework for standardizing the classification of grain trading, it became the central hub in the United States for pricing grains. The CBOT's centrality during this period was facilitated by the development of new networks of railways and telegraphs in the US, which consequently enabled the CBOT to become first institution with a highly liquid futures market for grain contracts.[44] In so doing, the CBOT set the stage for a new kind of financial system in the late twentieth century, with the first formal set of rules governing futures contracts in forged in 1865. [45] Many farmers initially objected to the CBOT because they believed their products were priced too far away from the point of production. Such prices soon became essential for farmers, processors, and traders, however. As Muellerleile explains, "as grain commerce became more integrated with circuits of credit and capital, and more dependent upon risk-management tools such as futures contracts, the flow of price information became a prerequisite for cash crop farming."[46] This integration into growingly expansive flows of capital allowed the consistency of the price mechanism to become a measurement of the strength of the grain industry, which the US Congress declared in the national interest in 1922.[47]

With the onset of the Great Depression, however, the government adopted a more stringent role towards financial speculation (though the agricultural sector was excluded from this approach). The financial legislation put in place by the New Deal would form the bedrock for these new regulatory efforts, most particularly the Banking Act of 1933, which comprised of Regulation Q (the imposition of ceilings on savings deposits and interest rates that could be paid on time), the Glass-Steagall Act, and the creation of a national deposit insurance system facilitated by the Federal Deposit Insurance Corporation.[48] By the 1970s, however, the Chicago exchanges began to apply their methods for pricing agricultural futures to urban financial instruments. State institutions began to more heavily regulate speculation, marking its first serious effort to do so since 1936. [49] The Chicago Mercantile Exchange created the International Money Market in 1972, which allowed for trading in currency futures and paved the way for more abstract contracts. [50] This development in part signified the dissolution of the boundary between agricultural futures and finance, aided by the expansion of the Chicago Mercantile Exchange's (the second largest exchange in Chicago) entrance into new products. [51] Chicago exchanges influenced the passage of the 1974 Commodities Exchange Act that expanded the definition of a commodity from several agricultural products (in the 1936 Commodities Exchange Act) to all goods, articles, services, rights, and interests that can be dealt in futures contracts. [52] At the same time, Congress granted the Chicago Futures Trading Commission (CFTC) sole jurisdiction over futures trading, disallowing any other federal agency or state government entity or law from interfering with the development of futures markets.[53] The CFTC and its related state financial agencies saw it as their duty to promote the spread and hedging of risk, including by the range of non-financial corporations that had traded in derivatives to shield themselves from fluctuating commodity prices, interest rates, and floating exchange rates with the demise of the Bretton Woods Agreement in 1971. [54] These developments were also aided by technological and conceptual innovations during the 1960s, as more economists began to claim that the US stock market was fully efficient in responding to all publicly available information and could be modeled with reasonable accuracy. [55] The popularization of the Black-Scholes pricing formula, for example, changed the character of speculation from advising on option prices to calculating mispriced options or assets, empowering traders to invest on market mispricings with large amounts of borrowed money. [56] Today hedge funds carry out these activities, pooling wealthy clients' investment contributions to arbitrate and trade in derivatives. [57] By the late 1970s in the midst of a crisis of stagnant economic growth and inflation, the Treasury decided it could stabilize currency by raising interest rates to encourage foreign holdings in US Treasury bonds and allowing for the exchange of derivatives on US debt brought to bond markets by the New York Federal Reserve.[58] This move provided the foundation for an unprecedented internationalization of derivatives markets.


Derivatives and Financialization

Derivatives trading has expanded to global proportions since the 1980s. The industry's growth may be attributed most centrally to the development over-the-counter trading for financial derivatives, which corporations utilize to protect themselves from volatility in interest and exchange rates, and which speculators use in their efforts to predict trends in financial markets.[59] The proliferation of financial derivatives during this period is a less frequently discussed but critical component of broader patterns of neoliberal financialization beginning with the gradual dissolution of the Fordist-Keynesian accumulation regime beginning in the late 1960s and taking off in the early 1970s. Keynesianism had provided a unique way of managing risks through stimulating consumer demand with demand-side policy. Its decline gave way to a flexibilization of price relations and the growing importance of market processes in managing financial matters, leading to an influx in derivatives trading. [60] With the deregulation of capital flows, Nixon's move to decouple the US dollar from the gold standard, and the 1973 OPEC oil shocks, price volatility increased in the early 1970s and paved the way for the internationalization of trade investment, exposing firms to greater degrees of risk. With the end of the fixed exchange rate system of Bretton Woods, Panitch and Gindin explain, "the derivatives revolution was crucial to the stabilization of currency markets…and was also immediately linked to the internationalization of the US bond market, which was occurring at the same time as the development of the separate Eurodollar market." [61] More simply, the growth of financial derivatives markets was a requisite for avoiding capital devaluation in a period of economic tumult. The growth of the multinational firm during this period demonstrates the attempts made to mitigate the new volatility endemic to a globalizing derivatives market. [62]As the US bond market opened up, foreign investors began maintain greater holdings in US Treasury securities, above 21 percent by the 1980s. Paradoxically, this uncertainty, "amid the volatility of commodity prices and rising short-term interest rates, actually enhanced the attractiveness of Treasury bills for international investors, who recognized the depth and liquidity of the US bond market despite all the hand-wringing about declining US economic power and strength."[63] Here we can begin to trace a theme of global integration into the financial derivatives market, underpinned by the US dollar-trading on international bonds implicates investors in the volatile movements of currency and interest rates. With investors able to swap various floating and fixed exchange rate obligations in order to better fit their perception of the market direction, the changes in currency levels and interest rates that had traditionally slowed markets down (investment in bonds denominated in suboptimal currencies were deemed too big a risk) began to play a different role in the global economy. [64]

Like the Fordist-Keynesian accumulation regime before it, financialization is a stage of capitalism fraught with contradictions. The term 'financialization' itself is heavily debated, with disagreements over its periodicity, its coherence with or distinctiveness from neoliberalism, and its most essential characteristics. For our purposes here, Kippner's definition is useful. For her, financialization refers to "a broad-based transformation in which financial activities (rather than services generally) have become increasingly dominant in the US economy over the last several decades."[65] The 'financial' here "references the provision (or transfer) of capital in expectation of future interest, dividends, or capital gains," as opposed to productive capital that arises from the production and trade of commodities.[66] This shift towards finance, beginning in the 1970s and expanding in the 1980s and 1990s, provided the state with a means for displacing the rigidities of the Fordist-Keynesian accumulation regime. This displacement occurred first and foremost in the deregulation of domestic financial markets throughout the 1970s, which gradually reduced restraints on the flow of credit. [67] Concurrent spikes in interest rates (most notably Federal Reserve Chair Paul Volcker's 1981 hike, more notoriously known as the "Volcker Shock") in order to restrain the economy in the absence of regulation on the supply of credit also emerged as a response to deregulation. These higher interest rates attracted remarkably high levels of foreign capital into the US economy, thus allowing for a drastic expansion of domestic financial markets and helping to tie the global economy to the floating US dollar. As strict monetary policy became the preferred tactic for stabilizing US currency during this time (resulting in rising unemployment), the Federal Reserve turned to a greater extent to the market, expanding credit at the same time as it increased interest rate volatility. [68] Above all, however, it was the deregulatory moves of the 1980s-removing controls that had restricted interest rates payable on savings deposits-that shaped the course of financialization. [69]


Financialization with Derivatives

Deregulation increased the price of credit while extending it to a broader constituency.[70] The incorporation of US multinational commercial banks into derivatives trading-in addition to Wall Street-based investment banks-should not be overlooked here. (Whereas investment banks create liquidity by dictating the terms of trading of securities, commercial banks do so by transforming deposits into longer-term assets.) [71] With the first significant derivative bond swap in the early 1980s between IBM and the World Bank, banks such as J.P. Morgan used overseas operations in London to bypass the regulations previously put in place by the Glass-Steagall Act and take advantage of growing derivatives markets. After executing the first credit default swap in the early 1990s, derivative contracts accounted for over half of Morgan's trading revenue. [72] Because derivatives are able to conjoin a variety of forms of capital and convert fixed and floating rate loans and currencies, Panitch and Gindin note, these markets were "able to meet the hedging needs not only of financial institutions (which exchanged 40 percent of all swaps among themselves), but also of the many corporations seeking protection from the rapidly evolving vulnerabilities associated with global trade and investment." [73] By the time the Clinton administration took power in 1993, Streeck explains, financial deregulation had "made it possible to plug the gaps resulting from deficit reduction, by means of a rapid extension of loan facilities for private households at a time when falling or stagnant wages and transfer incomes, combined with rising costs of 'responsible self-provision', might otherwise have jeopardized support for the policy of economic liberalization." [74] This shift may be understood as a kind of 'privatized Keynesianism,' [75] in which the public debt taken on by the state during the Fordist-Keynesian accumulation regime is transferred onto consumers in the form of individualized debt relations in tandem with a dissolving social safety net. This extension of credit to compensate for slipping wages and benefits effectively redistributes capital upwards.[76] With the state shifting debt-driven consumption from public financing to private, credit-based consumption, government debt comes instead from low receipts, or limits to taxation, while corporate interests are empowered to make increasing demands on the state. [77]

Arguably the central paradox of financialization is that while financial institutions, markets, and assets "can secure the return of value in particular instances," they "cannot guarantee the systematic augmentation and return of value in the aggregate." [78] As opposed to a wage labor relation, in which a fixed amount of capital is guaranteed to a capitalist according to the rate of surplus-value extracted from a worker and marks a contribution to the overall amount of real capital in circulation, financial markets operate in the sphere of circulation and can only either redistribute capital or create fictitious value. Financial markets begin to malfunction when the expansion of monetary value across an economy can no longer be guaranteed by participants in financial transactions. Here we can better understand a central contradiction of derivatives: they exist to offset or control this risk but ultimately increase it. Despite this paradox, it is not difficult to understand why derivatives have grown over the past nearly-four decades. They provide investors, corporate treasury departments, and bank risk management departments with the advantage of being able to hedge risk as a measure of insurance against adverse fluctuations in the market. [79] Moreover, they can provide signals to larger financial markets, which could ostensibly reduce uncertainty and unequal access to information. Derivatives also allow investors to more cheaply diversify their portfolios, as managers are able to expose themselves to derivatives according to a larger number of shares. Furthermore, derivatives operate on leverage and are thus cheap to trade in.[80] A liberal economic perspective might claim that derivatives are incapable of affecting the price of underlying assets in conditions of perfect market competition, and that they simply provide greater economic stability by spreading risk between different agents in the market; in reality, however, asymmetric access to information and imperfections in the instruments themselves open markets up to greater degrees of systemic risk. [81] In bypassing the sphere of production, surplus-value in production is replaced by essentially zero-sum casino bets, manufacturing risk through a social logic of mutual indebtedness.[82]


What's New About Derivatives?

As the field of financialized economic activity incorporates greater numbers of people through the financialization of risk, capital circulation becomes decoupled from the labor process. [83] Whereas the labor process relies on the extraction of surplus-value in the sphere of production, financialization means that the appreciation of fictitious capital becomes autonomous relative to productive appreciation, as tradable financial instruments are valued according to expected income flows and discounted by an interest rate. [84] On the other hand, however, this process should be understood as a means of integrating the workforce into financial channels and is thus actually semi-dependent on productive capital. Carneiro et al. assert that the advent of derivatives constitutes a new form of accumulation entirely, which they call the 'fourth dimension'.[85] While historically this fourth dimension of capital has developed in tandem with capital in its monetary form, it also "progressively constitutes an autonomous force in the process of capital appreciation when deep and liquid markets freely negotiate stocks of wealth." [86] In other words, this fourth dimension is linked to the changing role of derivatives in the 1970s, along with fundamental changes in the international financial and monetary systems allowing for more rapid accumulation over greater distances.[87]

At this point it is necessary to clarify two related yet distinct issues. One is the process of financialization, the other the growth of derivatives trading. Carneiro et al. assert that derivatives markets constitute a unique form of accumulation because capital appreciation occurs independent of initial investment. This is markedly different from credit-based capital appreciation. Since the 1970s financial relations have dominated economic policy-making, pushed more individuals into debt, and formed a new mode of accumulation characterized by falling profit rates and real wages, persistent unemployment, and mediocre growth in productive sectors. Yet within financialization, derivatives signify an even greater abstraction of capital from the process of accumulation. [88] Carneiro et al. explain this as "a difference in the nature of the gain from the operation," jettisoning the "need for money as a means of appreciation, or its advance in the beginning of the process." [89] This means that though "money is still an end to the process of valorization," it "loses its relevance as a vehicle of valorization, as well as the credit system." [90] This form of accumulation is intrinsically speculative-gains from derivatives transactions come simply from a bet on a price movement by an asset that is not owned by the speculator. Despite this fundamentally unique character of derivatives, however, it would be unfair to claim that derivatives are actually entirely independent of the production process. When changes in risk perception generate price-adjustments in the market in the form of the inversion of bets and settlements of contracts, "social relations of property and credit are again essential to ensure liquidity and solvency of agents involved in these markets, revealing the real social relations of power, property, and money that appeared previously only in a veiled manner."[91] The remainder of this report will detail the relation between the spheres of production and circulation vis-à-vis derivative-based accumulation.


Derivatives, Time-Space Compression, and Spatio-Temporal Fixes

Though the derivatives market is the most liquid in the world, it is also highly vulnerable to systemic crisis. Of particular concern is that derivatives may be based on practically any asset, including worker debt. As Lapavitsas explains, "these derivatives could be thought of as synthetic bonds," or "securities promising to pay the holder a return (interest) out of a variety of payments made by the workers which are pooled and then divided."[92] Workers' payments on, for example, housing and consumer debts, would entail a payoff for the holder of a given derivative security who has a claim on that personal debt. Despite their separation from the sphere of production, derivatives are in the final instance contingent on it. Labor thus becomes an extension of financial services themselves, vulnerable to risks entailed by the circulation and realization of capital, which it simultaneously empowers through deferred wages and relies upon in order to access necessities such as education and retirement costs. [93] Those that make up the productive sector are both incorporated into and dependent upon these circuits of realization.

Understanding derivatives' functionality helps us evaluate the specificities of contemporary capitalism's tendency towards crisis. As derivatives markets are predicated on the mitigation of risk, it is crucial here to consider how derivatives fit with established theories of capitalist crisis. One of the most notorious theories on this count is David Harvey's 'spatial fix.' Harvey explains that competition between capitalists leads to an uneven accumulation of capital, which threatens the reproduction of both capitalist and working classes. To recall from earlier, this threat takes the form of an excess of capital relative to available opportunities for profitable reinvestment (also known as overaccumulation). Overaccumulation manifests through a surplus of commodities, money-capital, and/or labor power. [94] There are two solutions to this problem. The first involves the devaluation of capital through inflation, gluts of commodities on the market and falling prices, productive capacity culminating in bankruptcy, and falling real wages and standards of living. This solution is not optimal for capitalists. The second solution, however, involves lending surplus capital abroad to create productive powers in new regions. This latter option is the crux of the 'spatial fix'. Crises are temporarily resolved because rates of profit in these new regions incentivize a flow of capital and raise the rate of profit in the system as a whole. The problem here is that higher profits entail an increase in the tendency towards overaccumulation; moreover, this now takes place on an expanding geographical scale. As Harvey writes, "the only escape lies in a continuous acceleration in the creation of fresh productive powers. From this we can derive an impulsion within capitalism to create the world market, to intensify the volume of exchange, to produce new needs and new kinds of products." [95] While capital is ultimately limited through productive capacity (only so many goods can be produced and circulated), derivatives-as instruments whose value is only derived from the asset underlying them-may represent a way of circumventing real barriers to accumulation.

According to Harvey, an irresolvable tension emerges between the devaluation of domestic capital due to international competition (apropos the development of new export-driven regions), and the internal devaluation of capital in these regions (as constrained development also limits international competition and blocks opportunities for profitable export). Productive forces in new regions constitute a competitive threat to the country that introduced the spatial fix, whereas limited development in new productive centers hinders international competition and reduces profitable opportunities for capital export, thus leading to an internal devaluation of capital with immobile overaccumulated capital. [96] Geographical expansion allows overaccumulated capital to be invested into labor surpluses and for the development of primitive accumulation processes in these exterior regions as an alternative to devaluation. Though the spatial fix applies mostly to overaccumulation resulting from competition in the sphere of production, overaccumulation itself is not limited to this dimension of capitalist relations. Beginning in the 1970s, for example, overaccumulated manufacturing capital in cities-in tandem with the influx of capital due to higher petroleum prices-garnered an excess of speculative capital that could not be used to boost industrial production. [97] This speaks to a crucial tension between speculative and productive capital, as this juncture required the freeing of speculative capital from the production process by creating a separation between new derivative instruments and their underlying assets. It is thus argued here, then, that derivatives markets constitute their own paradoxical form of a spatial fix, especially as the underlying assets become currency-related.

Crucial to the spatial fix embodied by derivatives markets is the time-space compression endemic to capitalist accumulation and financialization more dramatically. During the 1970s this dynamic took the form of organizational shifts in production that undid the managerial tendencies of Fordism, generating a more fluid and decentralized mode of production.[98] At the same time, technological innovation during this period allowed for a faster and more geographically distantiated financial sector. With an expanded reach, however, comes an increased tendency towards volatility; the shortened length of time capital takes to move across space facilitates more short-term gratification, but compromises states' ability to engage in long-term planning. This limitation means that financial institutions must either adapt quickly to rapid market shifts, or find ways to control volatility themselves.[99] The rapid and expansive movement of capital under financialization represents a paradox for Harvey, as "the less important the spatial barriers, the greater the sensitivity of capital to the variations of place within space, and the greater the incentive for places to be differentiated in ways attractive to capital," all of which leads to increasingly uneven development "within a highly unified global space economy of capital flows."[100] Though Harvey's "globalized space economy" still primarily refers to the sphere of production, the flexibilization of the financialized accumulation regime entails a fundamental shift in how value is represented as money: "the de-linking of the financial system from active production and from any material monetary base calls into question the reliability of the basic mechanism whereby value is supposed to be represented." [101] In other words, the productive sphere loses power relative to the financial.

Here it is necessary to question more precisely how the migration of capital from the sphere of production to the sphere of circulation may constitute a spatial fix. Bob Jessop, a critic of Harvey, argues that for however important the spatial fix, Harvey's focus on "the production of localized geographical landscapes of long-term infrastructural investments that facilitate the turnover time of industrial capital and the circulation of commercial and financial capital" [102] cannot adequately account for the movements and contours of capital under financialization. By examining spatial fixes solely in terms of the contradiction between the unstable movement of productive capital in the form of profits for reinvestment and the fixity of concrete assets with particular times and places, Jessop explains, Harvey elides a discussion of "the different forms of spatio-temporal fix in relation to the different stages or forms of capital accumulation, nor their articulation to institutionalized class compromise or modes of regulation." [103] While production entails a profit motive (the creation of surplus-value through relations of exploitation), the profits resulting from circulation derive not from any value it creates, but rather from its capacity to redistribute surplus-value. Jessop writes of the importance of 'time-space distantiation'-not just compression-in a globalizing world economy, or the expansion of political-economic relations across time and space such that they may be coordinated over greater distances and scales of activity. [104] For him, the twin dynamics of compression and distantiation indicate that "the power of hypermobile forms of finance capital depends on their unique capacity to compress their own decision-making time…whilst continuing to extend and consolidate their global reach." [105] This tension is present within any individual or interconnected circuit of capital, depending as they do on the relationship between "a physical marketplace and a conceptual marketspace." [106] Despite the altered character of these spatial barriers to accumulation, however, physical territory remains essential to the circulation of capital, as it is contingent on static ensembles in which the means of production and organization necessitate the extraction of surplus-value. [107]

Derivatives markets exhibit a unique spatio-temporal in relation to contemporary capitalist accumulation. As Bryan and Rafferty write, "derivatives, through options and futures, establish pricing relationships that 'bind' the future to the present." [108] Like Harvey's spatial fix centered on productive capital, derivatives markets may be viewed as a spatial fix in and of themselves in their attempt to hedge risk and stave off devaluation as more individuals and institutions become exposed to financial risk. Corporations trade in derivatives markets in order to handle their exposure to risks in a sea of variable rates and prices. Ensuring the value of money is key, and the spatial displacement constituted by derivatives (into cyberspace or digital space, as it were). It purports to facilitate this process in several respects. First, derivatives constitute a unique form of money by providing a universal measure for asset value across space, despite their dependence on nationally-based unequal levels of contestability. [109] In other words, derivatives are ultimately based on US norms of risk value and conceptions of secure financial claims. Second, derivatives markets aim to allow for the limiting of exchange- and interest-rate risks for corporations and for comparing various risk management strategies across time and space, though this may increase systemic volatility even these new strategies do not immediately drain productive capacity. [110] Finally, banks or other financial institutions might engage in securitization and over-the-counter trading in order to mitigate the uncertainties of profiting from credit money. As Soederberg explains, over-the-counter trading on securitized derivatives, particularly credit default swaps, "facilitates temporal and spatial displacements that allow banks to shift loans off the balance sheet by selling them to outside institutional investors, such as pension and mutual funds." [111] By spreading risk and shifting risks on to others, these institutions are able to at least temporarily protect themselves.

Here we encounter some problems, however. In particular, the dominance of credit makes it especially difficult to ensure the quality of money. This is especially true when it is less profitable to expand value production than to provide credit and profit through interest rates. [112] This is what Jessop means when he writes of "a fundamental contradiction between the economy considered as a pure space of flows and the economy as a territorially and/or socially embedded system of extra-economic as well as economic resources and competencies." [113] When capital is able to quickly exploit resources in one area without contributing to their reproduction and then move elsewhere to replicate this kind of circulation, it is compromising the sphere of production and thus the strength of the dollar. The sphere of circulation is particularly vulnerable when debt enmeshed in the web of speculation becomes irredeemable or the gap between the value of credit and that of real money becomes too wide. [114] However, the increasing use of securitization and derivatives markets as a risk management strategy has made regulating banks for capital adequacy unable to guarantee seriously limiting risk exposure. This is why in 2008 the key US financial institutions (the Fed and Treasury, as well as the Bank for International Settlements) all shifted to the same models for assessing risk as the largest banks, in the hope of accessing regulators' "fire codes."[115] Competitive pressures between big banks in derivatives and securities markets can lead to an indifference to these regulative warnings, thus further widening the gap between fictitious and real value. [116] When this occurs, the glut of fictitious values (in the form of privately created credit money) contributes to inflation and devalues currency. This problem was most severe in the crisis of 2008, when the American International Group (AIG)-a financial institution that provided insurance for other financial institutions on the creditworthiness of their derivative holdings-was ultimately unable to honor its insurance contracts and protect against loss.[117] Banks extending mortgages to borrowers turned to commercial banks in order to fund the loan, which would then sell the loan to government-sponsored enterprises such as Fannie Mae. These institutions consolidate a range of mortgages and sell the resultant mortgage-backed security (MBS) to an investment bank, which repackages the MBS according to its needs and issues other derivatives such as collateralized debt obligations (CDOs) to be bought by other lenders, banks, or hedge funds.

The link to the sphere of production is again crucial here. As Wolfson explains, "at the base of this complicated pyramid of derivatives might be a subprime borrower whose lenders did not explain an adjustable-rate loan, or another borrower whose ability to meet mortgage payments depended on a continued escalation of home prices. As the subprime borrowers' rates reset, and especially as housing price speculation collapsed, the whole house of cards came crashing down." [118] Derivatives do not require ownership of the underlying asset, so it is possible to speculate-via credit default swaps with an insurer-on the chance of default on a security without owning it. This property of derivatives means that the volume of insured securities can increase quickly and significantly, such that a relatively small quantity of securities can be insured at a much higher amount.[119] Since consumer credit can circulate only as a claim over a share of future profit, or surplus-value and depends on the stability of creditors to pay their loans, asset-backed securitzation has developed in order to ultimately ensure the quality of real money for speculative interests. [120] The time-space compression that occurs through derivatives trading "entails new actors, new strategies and the continual inversion of time and the expansion of virtual space to continue to fund claims on the fictitious value of credit."[121] It is clear, then, that derivatives are ultimately reliant upon productive capital. And while price fluctuations might trigger financial crises, the fear of devaluation due to an overaccumulation of capital is still at the crux. Because of the global scale of derivatives, it is not just the American state that must ensure the stability of the dollar, but any marginal economy, as a means of guarding against a downturn in their own currency value.[122]


Conclusion: Towards a Typology of Spatial Fixes

This paper has attempted to explain derivatives' instrumental properties, their historical development, and their distinct role in both mitigating and exacerbating crises. The basic premise argued that derivatives markets act as a kind of spatial fix in and of themselves, one that maintains several properties of Harvey's spatial fix of productive capital but that also differs in important ways. In summing up, then, this paper will provide a brief typology of spatial fixes in order to provide some clarity to the question of how these spatial fixes differ analytically.

We can think here of three kinds of spatial fixes. First is Harvey's spatial fix, which pertains to productive capital only. Second are financialized spatio-temporal fixes. These fixes are unique in their supplying of fictitious capital. Last are derivative spatio-temporal fixes which, like financialized spatio-temporal fixes, ultimately are dependent upon the sphere of production (in the sense of its effect on interest rates and exchange rates), but operate abstractly in digital OTC markets and move at an unprecedentedly rapid speed. While maintaining many of the properties of financialized spatio-temporal fixes, derivative spatio-temporal fixes constitute their own category because of their separation from an underlying asset. What unites these three forms of spatial fixes is that they are used in order to solve the problem of overaccumulation, yet ultimately contribute to greater systemic risk. What differentiate them are their respective degrees of separation from the sphere of production and, equally important, how they modify the circulation of capital according to spatial parameters. Each type of spatial fix also affects those linked to them in unique ways. For example, a spatial fix of productive capital mitigates a crisis of overaccumulation by opening up productive markets in new regions, or expanding the means of production. This affects capital by increasing the rate of profit in the system as a whole by incentivizing the flow of capital to these regions and trading on the world market, which ultimately tends again towards overaccumulation. A financialized spatio-temporal fix, in contrast, works by extending fictitious capital to individuals and institutions in exchange for later interest payments. Finance capital may be deployed in tandem with productive capital in order to build industry, procure assets, or pay for goods and services. At the same time, fictitious capital is by nature unproductive and thus its extension can be characterized as a mode of debt-driven accumulation. We can understand this process as a spatio-temporal rather than simply a temporal one because finance concurrently reshapes the landscape for productive capital while maintaining speculative interest due to stable currency. Of course, when expectations are too optimistic and a speculative bubble pops, debts are not repayable and financial institutions experience severe losses. [123]

Derivative spatio-temporal fixes are unique in their ability to commodify risk itself, thus "transform[ing] the temporal horizon of circulation-centered capitalism." [124] Derivatives constitute a fundamental shift in the operations of speculative capital and the internationalization of risk. [125] Whereas financial spatio-temporal fixes constitute a debt-driven accumulation tactic, derivative spatio-temporal fixes commodify the inherent relationship structured by that debt, and may be used for hedging, speculation, and leveraging across infinite space. This movement entails particular political consequences that are unlikely to recede on their own. As risks to capital are speculated on rather than altered and the globalization of risk is further insulated from political pressures, [126] crises such as that of 2008 will continue. Understanding the proliferation of these fixes to capitalist crisis is crucial if we are to consider viable alternatives.


References:

Aquanno, Scott. "US Power and the International Bond Market: Financial Flows and the Construction of Risk Value." In American Empire and the Political Economy of Global Finance, edited by Leo Panitch and Martijn Konings, 119-134. New York: Palgrave Macmillan, 2009.

Bryan, Dick and Michael Rafferty. Capitalism with Derivatives: A Political Economy of Financial Derivatives, Capital, and Class . New York: Palgrave Macmillan, 2006.

Bush, Sarah Breger. "Risk Markets and the Landscape of Social Change: Notes on Derivatives, Insurance, and Global Neoliberalism." International Journal of Political Economy, Volume 45 (2016): 124-146.

Carneiro, Ricardo de Medeiros, Pedro Rossi, Guilherme Santos Mello, and Marcos Vinicius Chiliatto-Leite. "The Fourth Dimension: Derivatives and Financial Dominance." Review of Radical Political Economics, Volume 47, Issue 4 (2015): 641-662.

Crouch, Colin. "Privatized Keynesianism: An Unacknowledged Policy Regime." The British Journal of Politics and International Relations, Volume 11, Issue 3 (August 2009): 382-399.

Dodd, Randall. "Derivatives Markets: Sources of Vulnerability in US Financial Markets." Financial Policy Forum, Derivative Study Center (May 2004): 1-25.

Harvey, David. The Condition of Postmodernity: An Enquiry into the Origins of Cultural Change . Oxford: Wiley-Blackwell, 1991.

Harvey, David. "The Spatial Fix - Hegel, Von Thunen, and Marx." Antipode, Volume 13, Issue 3 (1981): 1-12.

Henwood, Doug. Wall Street: How It Works and for Whom. New York: Verso, 1997.

Jessop, Bob. "The Crisis of the National Spatio-Temporal Fix and the Tendential Ecological Dominance of Globalizing Capitalism." International Journal of Urban and Regional Research, Volume 24, Issue 2 (June 2000): 323-360.

Krippner, Greta. Capitalizing on Crisis: The Political Origins of the Rise of Finance . Cambridge: Harvard University Press, 2012.

Lapavitsas, Costas. Profiting Without Producing: How Finance Exploits Us All. New York: Verso, 2013.

Mackenzie, Donald and Yuval Millo. "Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange." American Journal of Sociology, Volume 19, Number 1 (July 2003): 107-145.

Martin, Randy. "What Differences do Derivatives Make? From the Technical to the Political Conjuncture." Culture Unbound, Volume 6 (2014): 189-2010.

Muellerleile, Chris. "Speculative Boundaries: Chicago and the Regulatory History of US Financial Derivative Markets." Environment and Planning A, Volume 47 (2015): 1-19.

Panitch, Leo and Sam Gindin. The Making of Global Capitalism: The Political Economy of American Empire . New York: Verso, 2013.

Soederberg, Susanne. Debtfare States and the Poverty Industry: Money, Discipline and the Surplus Population . New York: Routledge, 2014.

Streeck, Wolfgang. Buying Time: The Delayed Crisis of Democratic Capitalism. New York: Verso, 2014.

Tickell, Adam. "Dangerous Derivatives: Controlling and Creating Risks in International Money." Geoforum, Volume 31 (2000): 87-99.

Wolfson, Marty. "Derivatives and Deregulation." In Real World Banking and Finance, 6th Edition, edited by Doug Orr, Marty Wolfson, Chris Sturr, 151-154. Boston: Dollars and Sense, 2010.


Citations

[1] David Harvey, "The Spatial Fix - Hegel, Von Thunen, and Marx," Antipode, Volume 13, Issue 3 (1981): 7.

[2] Costas Lapavitsas, Profiting Without Producing: How Finance Exploits Us All (New York: Verso, 2013), 4.

[3] Scott Aquanno, "US Power and the International Bond Market: Financial Flows and the Construction of Risk Value," in American Empire and the Political Economy of Global Finance , ed. Leo Panitch and Martijn Konings (New York: Palgrave Macmillan, 2009), 121.

[4] Randall Dodd, "Derivatives Markets: Sources of Vulnerability in US Financial Markets," Financial Policy Forum, Derivative Study Center (May 2004), 1.

[5] Ibid, 643.

[6] Dick Bryan and Michael Rafferty, Capitalism with Derivatives: A Political Economy of Financial Derivatives, Capital, and Class (New York: Palgrave Macmillan, 2006), 13.

[7] Sarah Breger Bush, "Risk Markets and the Landscape of Social Change: Notes on Derivatives, Insurance, and Global Neoliberalism," International Journal of Political Economy, Volume 45 (2016), 127.

[8] Bryan and Rafferty, Capitalism with Derivatives, 2.

[9] Lapavitsas, Profiting Without Producing, 6.

[10] Ricardo de Medeiros Carneiro, Pedro Rossi, Guilherme Santos Mello, and Marcos Vinicius Chiliatto-Leite, "The Fourth Dimension: Derivatives and Financial Dominance," Review of Radical Political Economics, Volume 47 (2015), 642.

[11] Lapavitsas, 5.

[12] Ibid, 9.

[13] Carneiro et al., "The Fourth Dimension: Derivatives and Financial Dominance," 644.

[14] Randy Martin, "What Differences do Derivatives Make? From the Technical to the Political Conjuncture," Culture Unbound, Volume 6 (2014), 193.

[15] LiPuma and Lee, 87.

[16] Bryan and Rafferty, 63.

[17] Adam Tickell, "Dangerous Derivatives: Controlling and Creating Risks in International Money," Geoforum, Volume 31 (2000), 90.

[18] Tickell, "Dangerous Derivatives," 90.

[19] Lapavitsas, 8.

[20] Ibid.

[21] LiPuma and Lee, 91-92.

[22] Tickell, 90.

[23] Dodd, 6.

[24] Dodd, 20.

[25] Bryan and Rafferty, 42.

[26] Ibid.

[27] Dodd, 20.

[28] Doug Henwood, Wall Street: How It Works and for Whom (New York: Verso, 1997), 29.

[29] Dodd, 21.

[30] Henwood, Wall Street, 30.

[31] Dodd, 22.

[32] Henwood, 29.

[33] Dodd, 23.

[34] Henwood, 34.

[35] Dodd, 23.

[36] Aquanno, "US Power and the International Bond Market," 131.

[37] Ibid, 19.

[38] Carneiro et al., 643.

[39] Ibid.

[40] Ibid, 644.

[41] LiPuma and Lee, 43.

[42] Tickell, 88.

[43] Chris Muellerleile, "Speculative Boundaries: Chicago and the Regulatory History of US Financial Derivative Markets" Environment and Planning A, Volume 47 (2015), 2.

[44] Ibid, 4.

[45] Tickell, 88.

[46] Muellerleile, 5.

[47] Ibid.

[48] Greta Krippner, Capitalizing on Crisis: The Political Origins of the Rise of Finance (Cambridge: Harvard University Press, 2012), 60.

[49] Muellerleile, 8.

[50] Tickell, 88.

[51] Muellerleile, 9.

[52] Ibid, 12.

[53] Ibid, 13.

[54] Leo Panitch and Sam Gindin, The Making of Global Capitalism: The Political Economy of American Empire (New York: Verso, 2013), 150.

[55] Donald Mackenzie and Yuval Millo, "Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange," American Journal of Sociology, Volume 19, Number 1 (July 2003), 114.

[56] Ibid, 44.

[57] Bryan and Rafferty, 4.

[58] Panitch and Gindin, The Making of Global Capitalism, 150.

[59] Bryan and Rafferty, 7.

[60] Ibid, 8.

[61] Panitch and Gindin, 150.

[62] Ibid, 50-51.

[63] Ibid, 151.

[64] Aquanno, 131.

[65] Krippner, Capitalizing on Crisis, 2.

[66] Ibid, 4.

[67] Ibid, 52.

[68] Ibid.

[69] Ibid.

[70] Ibid, 58-59.

[71] Lapavitsas, 134.

[72] Panitch and Gindin, 176.

[73] Ibid.

[74] Wolfgang Streeck, Buying Time: The Delayed Crisis of Democratic Capitalism (New York: Verso, 2014), 51.

[75] Colin Crouch, "Privatized Keynesianism: An Unacknowledged Policy Regime," The British Journal of Politics and International Relations , Volume 11, Issue 3 (August 2009), 382.

[76] Martin, 195.

[77] Streeck, Buying Time, 66.

[78] Lapavitsas, 108.

[79] Tickell, 89.

[80] Ibid.

[81] Ibid.

[82] Martin, 191.

[83] Ibid, 199.

[84] Carneiro et al., 647.

[85] Ibid, 648.

[86] Ibid.

[87] Ibid.

[88] Lapavitsas, 3.

[89] Carneiro et al., 649.

[90] Ibid.

[91] Ibid, 650.

[92] Lapavitsas, 167.

[93] Martin, 196.

[94] Harvey, "The Spatial Fix," 7.

[95] Ibid.

[96] Ibid, 8.

[97] LiPuma and Lee, 98.

[98] David Harvey, The Condition of Postmodernity: An Enquiry into the Origins of Cultural Change (Oxford: Wiley-Blackwell, 1991): 284.

[99] Ibid, 287.

[100] Ibid, 295-96.

[101] Ibid, 296.

[102] Bob Jessop, "The Crisis of the National Spatio-Temporal Fix and the Tendential Ecological Dominance of Globalizing Capitalism," International Journal of Urban and Regional Research, Volume 24.2 (June 2000), 337.

[103] Ibid, 340.

[104] Ibid.

[105] Ibid.

[106] Ibid, 346.

[107] Ibid.

[108] Bryan and Rafferty, 12.

[109] Aquanno, 130.

[110] Panitch and Gindin, 188.

[111] Susanne Soederberg, Debtfare States and the Poverty Industry: Money, Discipline and the Surplus Population (New York: Routledge, 2014), 91.

[112] Ibid, 54.

[113] Jessop, 347.

[114] Soederberg, Debtfare States and the Poverty Industry, 54.

[115] Panitch and Gindin, 266.

[116] Ibid.

[117] Marty Wolfson, "Derivatives and Deregulation," in Real World Banking and Finance, 6th Edition, ed. Doug Orr, Marty Wolfson, Chris Sturr (Boston: Dollars and Sense, 2010), 152.

[118] Ibid.

[119] Ibid, 153.

[120] Soederberg, 43.

[121] Ibid, 91.

[122] LiPuma and Lee, 52.

[123] Wolfson, 151.

[124] LiPuma and Lee, 127.

[125] Ibid, 37.

[126] Bush, 134.

Monopoly Capitalism in the 21st Century: Neoliberalism, Monetarism, and the Pervasion of Finance

By Colin Jenkins

The following is the third part of a multi-part series, "Applying Poulantzas," which analyzes the work of Greek Marxist political sociologist, Nicos Poulantzas, and applies it to the unique political and economic structures found under neoliberalism and post-industrial capitalism.


With industrial or "competitive capitalism," it was the "separation and dispossession of the direct producers (the working class) from their means of production" which created this multi-layered, class-based societal structure. [1] Globalization has resulted in a massive shift of national economies. Former industrialized nations are now considered "post-industrial" due to the ability of large production-based manufacturers to move their operations into "cheaper" labor markets. International and regional trade agreements have facilitated this shift. With post-industrial capitalism and the widespread destruction of "productive labor," or labor that produces a tangible product and is thus exploited through the creation of surplus value, it is the complete reliance on a service economy which produces no tangible value that allows for strict control through wage manipulation. The ways in which the working class interacts with the owning class has changed significantly, if only in regards to their physical worlds. In the US, financialization has replaced industrialization as the main economic driver. Alongside this shift, monopoly capitalism has effectively replaced "competitive capitalism," and globalization has ushered in the neoliberal era. These developments have rearranged the superstructure and forced capitalist states to develop new methods in maintaining a societal equilibrium that is constantly being pushed to the brink of unrest at the hands of a capitalist system that breeds concentrations in wealth and power, while simultaneously driving the working-class majority towards a state of functional serfdom.

The emergence of monopoly capitalism was inevitable. "The battle of competition is fought by cheapening of commodities," explained Marx. "The cheapness of commodities depends, ceteris paribus, on the productiveness of labor, and this again on the scale of production. Therefore the larger capitals beat the smaller."[2] Whether we are referring to technology and automation, the relation of finance and the varying degrees of access to capital, or merely the all-encompassing process of "cheapening commodities" which Marx refers to above, it all works in tandem to create a funneling effect whereas capital becomes concentrated. And with this concentration of capital comes the concentration of wealth, which in turn inevitably breeds concentrations of other forms of power, i.e. political. In this sense, what many have come to refer to as "corporatism" is more correctly viewed as a mature stage of capitalism, rather than a differentiation from capitalism. The "marriage of corporation and state" that Benito Mussolini once referred to is merely a byproduct of capitalist advancement - the natural consequence of concentrated interests relying on the state apparatus to both facilitate its progression and protect its assets.

The consequent development of financialization could also be seen as an inevitable late stage of capitalism. As Paul Sweezy explains, while paraphrasing Marx, "Further, the credit system which 'begins as a modest helper of accumulation' soon 'becomes a new and formidable weapon in the competition in the competitive struggle, and finally it transforms itself into an immense social mechanism for the centralization of capitals.'"[3]

In the US, the creation of the Federal Reserve and the use of government-approved, macroeconomic policy-making has been a crucial tool in maintaining the equilibrium that is a central theme of Poulantzas' work. It has, in a sense, represented a Captain's wheel on a chaotic ship rolling over rough seas. The Keynesian model that dominated the American landscape from the late-1930s until the late-1970s relied on fiscal policy to supplement private sector instability, mainly by stimulating and supplementing this sector through infusions of money.

A shift to monetarism in the late-1970s paralleled the arrival of the neoliberal era, an intensification of privatization, and deregulation. While the all-encompassing policy-direction found under neoliberalism extended into the geopolitical realm to include "free trade" agreements and far-reaching international policies directed by the IMF and World Bank, it was this newfound reliance on monetary policy that created more ground between the standard operations of capitalist economy and the development of a " corporate-fascistic model." In other words, it allowed for greater returns on corporate profit in spite of wage stagnation, an overall degeneration of employment, increased poverty, and a consequent decline in expendable (consumer) income from within the working class. With regards to the equilibrium, direct manipulation of the money supply has allowed for a tightly-controlled mechanism that safeguards this extension and intensification of systemic inequities. Neoliberal economist Milton Friedman echoed the call for monetarism through his analysis of the Great Depression:

"The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 ... Far from the depression being a failure of the free-enterprise system; it was a tragic failure of government." [4]

Friedman's assessment wasn't critical of the existence of the Fed, or even of the Fed's ability to manipulate the money supply, but rather quite the opposite; it was critical of the Fed's failure to increase the money supply in times of crisis. In this sense, Monetarists did not oppose the Keynesian approach of intervention, but rather the nature of that intervention -fiscal policy (government spending) versus monetary policy (Quantity Theory of Money). The former provides money to the government, which in turn creates public programs and/or increases public spending that directly affects the population. The latter provides money to the financial industry and/or government, which in turn provides money to "power players" (corporate interests, big business, bank bailouts, etc...) in the hopes that such money will make its way through the population, hence "trickle down." Modern monetarism (Post-2008 financial crisis) has intensified through multiple bouts of QE (Quantitative Easing), which has reaped tremendous growth for the financial industry and big business (see the Dow Jones Industrial Average) while having no positive effect on the population, which continues to struggle through stagnation, chronic unemployment, and impoverishment.

It is no surprise that financialization found a perfect bedfellow in neoliberalism . "The neo-liberal bias towards de-regulation, which widened the space for financialization, was more often linked to an institutional fix that relied (and still relies) on 'unusual deals with political authority', predatory capitalism, and reckless speculation - all of which have fuelled the global financial crisis," explains Bob Jessop. "As the limits to 'more market, less state' emerged, there was growing resort to flanking and supporting measures to keep the neo-liberal show on the road. This was reflected in the discourse and policies of the ' Third Way ', which maintained the course of neo-liberalization in new circumstances, and is linked to the North Atlantic Financial Crisis (witness its eruption under 'New Labour' in Britain as well as the Bush Administration in the USA)." [5]

While conducted and carried out on different spheres, and for different reasons, financialization and expansionary monetary policy have emerged in parallel to one another. Because of this, they have maintained a loose relationship in the era of neoliberalism, with one (financialization) creating massive rifts and chaotic patterns of accumulation, and the other (monetary policy) attempting to manage the aftermath of this chaos. This has added yet another element to what Poulantzas saw as the inevitable rise of the authoritarian nature of State Monopoly Capitalism (SMC), whereas the capitalist state is forced to become more and more involved in maintaining equilibrium. In the economic realm, this amounts to monetary policy; in the political realm, this amounts to steadying the superstructure (balancing austerity measures with the welfare state); and in the social realm, this amounts to increased militarization of domestic police forces and a gradual erosion of civil liberties, features that become necessary when society's equilibrium is pushed toward a breaking point (civil unrest).

In the era of finance-dominated accumulation, and especially following periodic, systemic crises, governments have extended their reach to deal with unprecedented volatility. This was seen following the financial crisis of 2008-09, as capitalist states the world over scrambled to right their ships which had been steered into a perfect storm of financialized accumulation (many guided by illegal schemes; see the mortgage-backed securities scandal). Since then, it has become commonplace for governments, through monetary policy, to "intervene periodically to underwrite the solvency of banks, to provide extraordinary liquidity and to guarantee the deposits of the public with banks." [6] This is not to suggest that government intervention in the capitalist system is a new phenomenon; only that its methods have changed as capitalism has changed. Poulantzas explains:

"In the competitive capitalist stage, the capitalist state (the liberal state) always played an economic role; the image of the liberal state being simply the gendarme or night watchman of a capitalism that 'worked by itself' is a complete myth… From taxation through to factory legislation, from customs duties to the construction of economic infrastructure such as railways, the liberal state always performed significant economic functions..." [7]

With monopoly capitalism and the onset of financialization, the tendency toward extreme developments in both accumulations of the dominant classes and dispossession of the dominated classes requires higher degrees of state intervention. These interventions inevitably extend far beyond the economic base. Poulantzas contrasts this development with its former stage of 'competitive capitalism':

"If it is possible to speak of a specific non-intervention of this state into the economy, this is only in order to contrast it with the role of the state in the stage of monopoly capitalism, the 'interventionist state' which Lenin already had in mind in his analysis of imperialism. The difference between this and the state of competitive capitalism is not, as we shall see, a mere quantitative one. In the stage of monopoly capitalism, the role of the state in its decisive intervention into the economy is not restricted essentially to the reproduction of what Engels termed the 'general conditions' of the production of surplus-value; the state is also involved in the actual process of the extended reproduction of capital as a social relation." [8]

The emergence of expansionary monetary policy, most notably in the US Federal Reserve's use of Quantitative Easing, has become the go-to method of addressing the chaotic effects of financialization. This has become a necessary component for embedded capitalist interests that have taken advantage of a system that privatizes gains and publicizes losses. For the working classes, the reliance on consumer credit for not only luxury goods but necessities has illustrated how financialization has penetrated everyday life. To the former industrialized working classes (like that in the US), this is due to the emergence of both globalization and neoliberalism, which "favour exchange- over use-value" and "treat workers as disposable and substitutable factors of production," and "the wage (including the social wage) as a cost of (international) production." [9]

The permeation of this trifecta (Globalization, Neoliberalism, and Financialization) is not lost on the working classes. "Neoliberalism tends to promote financialization, both as a strategic objective and as an inevitable outcome," Jessop writes. "As this process expands and penetrates deeper into the social and natural world, it transforms the micro-, meso- and macro-dynamics of capitalist economies." [10] For the economic base and its power players, the state's use of expansionary monetary policy becomes a lifeboat, providing eternal life to corporate accumulation. For the working-class majority, whose existence is more and more precarious due to declining wages, consumer credit (often predatory) becomes a necessity to satisfy basic needs. Jessop concludes:

"The primary aspect of the wage is its treatment as a cost of (global) production rather than as a source of (domestic) demand; this is linked to re-commodification of social welfare in housing, pensions, higher education, health insurance, and so on. This leads to growing flexibility of wage labour (especially increasing precarization), downward pressure on wages and working conditions, and cuts in the residual social wage. A further result is the financialization of everyday life as the labour force turns to credit (and usury) to maintain its standard of living and to provide for its daily, life-course, and intergenerational reproduction. Combined with the increased returns to profit-producing and interest-bearing capital, this also intensifies income and wealth inequalities in the economies subject to finance-dominated accumulation, which now match or exceed their levels in just before the 1929 Crash (Elsner 2012; Saez 2013)." [11]

Monopoly capitalism in the 21st century has become ever more reliant on capitalist states to serve as facilitators, protectors, and a damage control mechanism. Former industrialized nations have shifted the remnants of "competitive capitalism" to global labor markets (which are also state-supplemented) and replaced them with service-sector economies based in finance schemes that seek to reproduce "fictitious capital" at alarming rates. Capitalist states, in adjusting to this shift, have embraced expansionary monetary policy as a means to address the ensuing chaos by supplementing and protecting financial institutions (the dominant classes in the age of neoliberalism/financialization). Will the volatility created by this shift finally bring capitalism to its breaking point? Will the prospect of automation force governments to develop radically new welfare states that include basic income guarantees? Will highly-exploited, global labor markets radicalize and collectivize, and bring the neoliberal era to its knees? The future brings many questions.



Notes

[1] Poulantzas. Classes in Contemporary Capitalism. Verso, 1978, pp. 97-98.
[2] Marx, Karl. Capital, Volume 3. Moscow: Progress Publishers, 1894.
[3] Sweezy, Paul M. "Monopoly Capital." Monthly Review, Volume 56, Issue 5. October 2004.
[4] Friedman, Milton & Friedman, Rose. Two Lucky People: Memoirs, University of Chicago Press, 1998.
[5] 'Finance-dominated accumulation and post-democratic capitalism', in S. Fadda and P. Tridico, eds, Institutions and Economic Development after the Financial Crisis, London: Routledge, 83-105, 2013.
[6] Lapavitsas, C. (2013) Profiting without Producing: How Finance Exploits All, London: Verso.
[7] 
Classes in Contemporary Capitalism, p. 100.
[8] Ibid. p. 100.
[9] Bob Jessop. (April 1, 2014) "Finance-Dominated Accumulation and Post-Democratic Capitalism."
http://bobjessop.org/2014/04/01/finance-dominated-accumulation-and-post-democratic-capitalism/
[10] Jessop, 2014.
[11] Jessop, 2014.


Works Cited

Elsner, W. (2012) 'Financial capitalism - at odds with democracy: The trap of an "impossible" profit rate', Real-World Economics Review, 62: 132-159. http://www.paecon.net/PAEReview/issue62/Elsner62.pdf

Saez, E. (2013) 'Striking it richer: The evolution of top incomes in the United States (Updated with 2011 estimates)', at http://elsa.berkeley.edu/~saez/.