The Global Sociology Blog

Paul Jorion wrote a column in Le Monde a few days ago concerning the prospects of a new Bretton Woods (never mind that the original died at Richard Nixon’s hand in 1973). Starting from the fact that the crisis is extremely serious and half-measures won’t do anything, Jorion offers some suggestions:

A radical reconsideration of the role of Central Banks is in order. Within a capitalist framework, Jorion states, the capitalist provides capital to an entrepreneur whose activity will generate a surplus which will be shared by both. However, since the mid-1970s, investors (the capitalists) and business managers have pushed for the substitution of consumer credit for the declining share of the surplus that used to go to wager earners. We are experiencing now the price to pay for such greed.

Central banks played a special part in this scheme by becoming one of the favorite weapons (in the class war) beholden to investors only, through the manipulation of interest rates to force entrepreneurs into compliance through the threat of bankruptcy, and wage earners through the threat of unemployment.

The manipulation of interest rates is central here. Interests are the reward for the capital advance capitalists extended to entrepreneurs. For these interests to be collected, these advances have to have created actual value, real wealth. However, in the case of consumer credit, that is not what happens. Interests are collected on the salaries of borrowers, the product of labor, and not generated through the surplus generated thanks to capital advances. If wages decrease, households borrow more. These capital advances are not productive advances but a way of compensating for declining wages. As Jorion puts it, households now manage their budget like "the cavalry". At some point, it hit a wall as wages decline further. That is what happened.

The mission of the Central Banks should return to monitoring that currency reflects actual wealth creation and not, as is the case now, global speculation. They have failed to do so in two ways according to Jorion: (1) because they represent the investing class and not entire nations in the frame of just redistribution of wealth. And (2) because, in the calculation of wealth actually created, they never take into account the services provided by the biosphere or the plundering of non-renewable resources or the cost of environmental depletion as costs.

The point of a new Bretton Woods (I can’t resist: Bretton Woods 2.0!! ) is absolutely necessary for the survival of our species. The global financial system is in shambles. It needs to be rebuilt according to specific principles including a return to the origins of the financial system: to be the circulatory system of the real economy: the productive economy, the economy of distribution and redistribution or wealth with a global constitution to enshrine these principles irrespective of the states’s laws and political systems.