The Crisis

Capitalism’s financial markets are the lubrication for the entire capitalist economy. The advance of credit mostly keeps capitalism running smoothly and speeds up greatly its circuits of production. The problem arises when--as always happens as the boom reaches its peak--credit is being advanced effectively as a life-belt to those enterprises in serious difficulties because they have produced too much for their available market. The more credit is advanced, and the longer this process continues, the more serious the necessary "correction" will have to be. If financial institutions keep extending credit to unprofitable enterprises, they will all go under, not just the latter.

From one point of view, this crisis is caused by capitalists choosing not to buy, that is, not invest profits because they judge they won't make any profits or not enough. The current crisis of capitalism is that there is "surplus liquidity". In other words, the rich have so much wealth they have exhausted places to store it. If it is not invested its value depreciates. And they won't invest unless it produces a return. This is why we see record amounts being spent on gold or on art (ironically mostly on art that depicts the pain and isolation of capitalist society). While workers are having their jobs and wages cut and governments are enforcing austerity, companies have never held so much cash. As one economist says: "Globally, companies are sitting on more than $5 trillion." This is a classic case of "over-production".

This article describes the findings of a group of University of Massachusetts economists on how America's largest banks and non-financial companies are hoarding $3.6 trillion in cash. Banks are sitting on $1.6 trillion in reserves -- about 80 times the $20 billion they held in 2007. Non-financial companies are keeping their profits liquid, rather than plowing them back into investments, to the tune of about $2 trillion. Together, that amounts to almost a quarter of the U.S. gross domestic product all the while small business are having a hard time getting anyone to lend them money.

While this other article talks about £19 billion held in cash in the banks by UK non-financial companies. Research from corporate financial health monitor Company Watch found that 211 UK-listed non-financial companies are sitting on cash of at least £1 million. Construction giant Amec led the way with £521m, followed by fashion house Burberry, which has £338m in the bank. Argos and Homebase owner Home Retail Group has £194m stashed away and Carphone Warehouse has £103m.
In total, European firms are sitting on £110 billion net cash.

The Financial Times writes that in 2006, "Corporate treasuries placed a mere 23 per cent of their funds in banks. But 2011, the proportion of funds sitting in banks doubled – and this year it rose above 50 per cent. Companies are eschewing capital market products, since they think that the returns are too low to justify the risk. Another factor that is prompting this flight towards the bank is a perception that bank deposits are relatively safe, if they are Federal Deposit Insurance Corp insured. Thus, the favorite destination for treasurers now is a non-interest bearing account, which carries a FDIC stamp. Never mind that this is producing negative returns; it does at least promise to return the cash. And that is important in a world where 98 per cent of treasurers are now also telling the AFP that their top priority is to protect their money, not earn yield. It could take years before they really start feeling confident enough to take long term investment bets again. The velocity at which money moves around the system - and cash is used in a productive way - may have now slowed in a more permanently; doubly so since the banks themselves are very risk averse and wary of lending. A corporate freeze is a world where money has slower velocity is also a place where it will be harder to produce growth. Companies could return to the capital markets again. History suggests that greed usually triumphs fear, in the end."

Much the same can be seen from a Business Insider report

"Borrowing costs for government are plummeting everywhere. US 10-Year Treasury, which is once again within a few basis points of an all-time low. Australian 10-yr bonds are at new lows. What this essentially means is that there's a lot of money out there that sees no productive investments in the real world, and thus people are willing to stick it with entities that promise them a very meager return. It's not about governments reaching their end-game. It's about a growth-deficient world, governments being the one place that can absorb all this money."

We also read in the Canadian newspaper Globe and Mail
"Never before in the history of the world has so much cash been hoarded in so many places by so many large organizations...Canadian companies have piled up more than $525 billion in cash reserves – almost a third the size of the entire economy – up from little more than $150 billion a decade earlier. According to a recent analysis by the Gandalf Group, at least 45 per cent of Canada’s biggest companies are hoarding cash rather than investing... In America the Federal Reserve estimates that a staggering $5.1 trillion – an amount larger than the economy of Germany – is piling up in American corporate cash holdings...In Britain, companies have accumulated almost $1.2 trillion in cash and deposits, equivalent to half the entire economy. And, no surprise, investment there grew by only 1.2 per cent last year......It’s strange, because this should be a great time for companies to invest: low prices, low interest rates, cheaper labour costs. A sensible company would build up cash during boom times – when investments are more expensive – and spend it during recessions, when consumer demand is weak and capital is cheap. Yet this is the precise opposite of what actually happens. Companies look at the low consumer demand and become terrified"
Companies are actually cash-rich and not re-investing but hoarding - can it be described as a capitalist strike?
A survey of chief financial officers (CFOs) from accountancy firm Deloitte, which showed worries about recession and a break-up of the euro are having a direct impact on the confidence, behaviour and business strategies. In regards, to the Federal Reserve Bank, the Bank of England injecting all that Quantitative Easing - as the saying goes - you can lead the horse to water but you can't make it drink. No prospect of profit - no investment and their money is put under the mattress big style!!!

Why this should all come as a surprise is a puzzle. Marx and those who understand capitalist economic have written about this a long time ago.

 "When trade is slow, money circulates slowly. When it is stagnant, money lies fallow. It goes to “sleep” in the bank vaults. There is no work for money. It is “unemployed...There being no profitable fields for reinvestment, they were obliged to hold their money in idleness.” explained John Keracher Economics for Beginners "The “big boys,” the finance capitalists who hold the gold, cannot find profitable and safe investments for their money and, much to their disgust, they are obliged to hoard it."
http://www.marxists.org/archive/keracher/1935/economics-for-beginners.htm

There is always a place in capitalism for scapegoats. John Keracher in Economics for Beginners explains the credit crunch and why banking were targetted as the culpable industry as the recent recession engulfed us all. "Whenever a crisis develops and “hard cash disappears,” when commodities are unsaleable and, as a result money is not changing hands and credit has tightened up, there usually arises much agitation against the existing monetary system. At present the great bankers with great hoards of gold are anxious to lend it out, but they can find few enterprises to which they can lend safely and at a profit. Countless numbers of businessmen are now trying to borrow. It is always so in a crisis, but fewer than ever can make the grade because of their insecurity. Therefore, at a time when the bankers (not the bankrupt ones, of course) have most to lend, and are very anxious to so, they find very few secure businessmen to whom they can lend. This condition creates the illusion that business is bad because the bankers will not let out their money. It is easy to see that there are plenty of people without money, but they can offer no security, and, in fact, many “securities” vanish in a crisis, leaving many bankers with no choice but to close their doors [all those recent bank mergers and take-overs] . However, the large bankers who survive have plenty of money on hand...Loss of income in relation to expenditure wiped out so much of their capital that they became insolvent. Reckless speculation helped to hasten their downfall, just as in the case of other speculators. But not all bankers failed. The large bankers, the real financiers, are in a very powerful position today...finance capital, as such, is in the saddle and will probably be riding hard when the old horse capitalism runs its last lap "
Even though written in the 1930s, it is surprisingly fresh and fully applicable in to-days economic crisis.

Socialists argue that capitalism, like every society, is an organisation of the human production process, which means that people work on their natural environment and transform it into forms that they can consume. Human beings are peculiar in that this process is culturally rather than biologically determined. In our culture today, social reproduction is dependent on the fact that access to natural resources is controlled by a small group of people, through the medium of money. Which means that the people who actually control the production process are interested not in production per se, but in an increase in their social control, which we call the making of profits. Goods are only produced if they can be produced in such a way that the owners of the production process—of capital—are able to make a profit. Capitalism, as explained by Paul Mattick Jr in his "Business as Usual" is not primarily a system for producing wealth to meet consumer demand, but for making money. This is what business is all about: using money to make more money. The capitalist (or, increasingly, a capitalist institution subsidised and backed by the state) starts off with a sum of money, which they throw into circulation in the expectation that it will return to him as a greater sum than he started with. To this end, the capitalist buys means of production and labour power on the market, then puts these to work to produce goods, which he then takes to market in the expectation not just of sales, but of profits. If he is successful in his aim, and if he is to remain a capitalist and keep up with the competition, he must reinvest at least a portion of that profit in yet more production, buying yet more labour power and means of production, to produce yet more wealth and, potentially, money profits. And then the cycle begins again, on an ever-expanding scale. he motive here is not the satisfaction of consumer need – a relatively straightforward matter – but the production and appropriation of profits on an ever-expanding scale – a much more tricky thing to achieve. And as the production of social wealth increasingly takes on this capitalist character, the production of the things we need increasingly relies not on our need for them, nor on our ability to produce them, but on the ability of capitalists to make profits from the whole process. When they cannot make or do not expect to make a profit from production, or when they produce too much to sell profitably, they will not invest in production, but in a general tendency, worldwide, to substitute speculation for real capital investment, or will not invest at all, and hoard money. This can affect not just their own line of business, but the whole system of wealth production. Crisis, in this view, is not caused by any bogey-man in the wings, but is a necessary result of the process itself.

There has been a tendency for periods of prosperity to lead to depressions, and periods of depression to lead to renewed prosperity. This process has been going on, more or less, since the beginning of the nineteenth century. This crisis, like those that have punctuated the history of capitalism since the beginning of the nineteenth century, is due to the inadequate amount of profit produced by workers in the capitalist economy, relative to the amount required for a significant expansion of investment. This problem has been hidden by the enormous expansion of debt – public, corporate and private. The credit-money created by governments and spread throughout the system by financial institutions created the basis for an apparent prosperity.

The truth is there is now a real conflict between the interests of ordinary people, that’s to say the working class, and the interests of the capitalists. The fundamental problem, the low profitability of capital, has not been overcome. The preservation and future prosperity of capitalism demands the impoverishment of the population. If workers accept government policy and opt for austerity and therefore to be impoverished to save capitalism, so be it, then, they will indeed be poverty-stricken. The problem many workers don’t yet understand is that capitalism is not going give them back their previous wage-levels or their pensions without a fierce struggle. The problem is that people are so used to the existence of capitalism, they’re so used to the idea that you have to work for somebody else, that they don’t see that they can just take it over. If all the owners of capital were to disappear, the world would be exactly the same, we would have the same farms, the same factories. Yet if all the workers disappeared, then everyone would starve to death. We have this wonderful and enormous productive technology, a world full of factories and farms. And there is absolutely no reason why people shouldn’t simply take political and economic control and start providing for the needs of all.

For more see here , and here