‘Fact: the cat eats the mouse.’ – Karl Marx April 2012 | #3

Gentrification – the economy of the land and the role of politics 1Sovereign Debt and the Crisis in the Eurozone 6Bitcoin – Finally, Fair Money? 19Islamism – consequence of, heir to, and rival of frustrated Arab nationalism 24Insane my Arse, Muammar Gaddafi – a historical sketch of his national project 26

Gentrificationthe economy of the land and the role of politics

1. The economy of the land

Who displaces whom and why?

The term “gentrification” is used to describea process whereby higher earners displace lowearners from inner cities or certain neighbour-hoods. It is a very poor description of what ishappening in terms of housing policy in Berlin,London or other cities.1 But many activistseven take it to explain the whole thing: therich, who are moving into the area, drive up therents. Some activists’ practical resistance takesits form according to this theory.

Among other people, Andrej Holm opposes thisexplanation of city development.2 Firstly, hepoints to the fact that rising rents still have animportant basis in the calculations of profitabil-ity by owners of land and houses. Secondly, hestates that these calculations have changed con-siderably over the last two decades because ofthe emergence of new agents of real estate ca-pital, which he presents as the economic reasonfor the change.

We will counter this with the following points.

First: the freedom of real estate owners isa matter of principle in a capitalist society,and this includes their interest in raising rentsthrough the peculiar methodology of land val-uation. The phenomenon is not something thatonly arises when real estate funds arrive.

Second: the success of the owners’ calculationis dependent not simply on rich people movingsomewhere, but on the overall development ofcapitalism in an area.

What determines the rent?

Owners of land (and as the case may be of thebuildings already existing on the land) can de-mand a lease or rent from prospective users ofthe land.

An ancient term is used for this: ground rent.Generally, owners have no interest in usingthe land themselves to plough, produce or liveon. Other members of society want to do this.But in order to be able to do this they requirethe agreement of the owner. As with every-thing owned exclusively by someone as privateproperty and desired by others, this is the startof a friendly relationship known as “give memoney”. If the land is not directly sold, permis-sion is granted for its use in return for a regulartribute variously called lease or rent.

A landowner usually has an interest in obtain-ing the highest rent possible. But “as high aspossible” finds its limit in competition betweenlandowners.On the other side, there is the user, i.e., a pri-vate or commercial tenant. Does she seek thelowest possible rent? As such this is not true,given that Burnley is clearly not the new hotspot for all kinds of tenants.3 Lets go throughit in terms of the potentially interested parties,starting with commercial tenants.Every kind of capital needs land in order to doits business. But different kinds of land havedifferent qualities and locations. Each capital-ist has a different interest in that land. Whatmatters for agricultural capital is fertility. Formining it is obviously the sub-surface contentof the land. What matters for industrial capitalin the narrow sense is transport links, proximityof suppliers, perhaps proximity to universitiesfor skilled labour etc. What matters for tradeis a good infrastructure and often proximity tocustomers.Land is not just an important requirement for allkinds of capital, it is a requirement for compet-itive advantage. Paying a relatively high rentmay influence profit favourably: to banks forinstance it is important to represent their wealthby having their offices in ostentatious buildingsin thriving areas in order to show their owncreditworthiness.Tenants are absolutely dependent on landown-ers, i.e., that they get some piece of land fromsome landowner. Because unlike many otherproducts, land cannot be multiplied throughproduction if needed. Yet, high rents do notsimply follow from sheer scarcity of land, as

1This text is a translation and sometimes adaptation of a German text with the same title, available at http://bit.ly/sk10t2, which in turn is based on a presentation given in Berlin. Wetried to replace examples taken from the German context with examples from the UK where possible. While there are significant differences between Germany and the UK with respect togentrification (such as the rates of renting households vs. home ownership and the political power of councils in both countries), the more general arguments presented in this article hold inboth countries.

2Andrej Holm is a relatively well-known social scientist in Germany who researches and critiques gentrification. He blogs about gentrification at: https://gentrificationblog.wordpress.com/ (available in German only).

3For those not that familiar with the lay of the land in the UK: Burnley here simply serves as an example where house prices are very low compared to, say, London.

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not too few activists like to believe. Rather,rents develop in line with capitalist develop-ment at a given location – as this produces de-mand.For the time being we may note that ownersneed not become active in any way in order toget a higher rental income. As long as the busi-ness world is interested in their land in particu-lar, their title to the land is automatically a last-ing source of money. For successful landown-ers, simply owning the land is a cash cow with-out the need for any intermediate steps of thekind required as, e.g., with the production ofgoods.

Formation of land prices

Before we talk of the non-commercial users,such as those looking for a flat, we will tracethe creation of the price of land as it developsfrom the conditions set out above.We described the particular interaction of sup-ply and demand, but that is not the whole storyto how the price of land develops. The rent orlease is capitalised, resulting in the valuation ofthe land according to what is broadly known asthe Income Approach.4

A fictive example: someone holds £1,000,000and could put it in a bank at 1% annual interest.Let us assume that 1% is the currently prevail-ing interest rate for money investments. So thisperson would receive £10,000 interest per year.She may as well buy a piece of land, say, whichalso earns £10,000 in income per year. Thisland would also cost about £1,000,000. Howis that?In a functioning capitalist society, where every-thing is subordinated to making money and ev-erything needed to make a profit can and hasto be bought for money, a banking system de-velops in which a sum of money is more thanitself. The million just mentioned is capital andquasi a licence to receive £10,000. Inversely, aflow of regular money income is treated as theoffspring of an underlying original capital. Inthis case the land itself is capital, so to speak.Not only the rent but also the prevailing in-terest rate determine the value of this capital.The land brings in £10,000 per year and thisamount is treated as equivalent to 1% intereston an underlying sum, hence the value of theland is £1,000,000. The price at which the landis eventually sold fluctuates around this landvalue.Clearly, the value of land rises according to theprevailing interest rate as the rent rises. If theowner can push through a rent of £20,000 peryear and capitalises this amount at 1%, then a

land value of £2,000,000 is the result. In or-der to make this clear we can compare again: ifsomeone has £2,000,000 and puts this into thebank at 1% interest, she will receive £20,000per year.If the rent decreases by half, so will the valueof the land.But land value can also change purely through achange in the prevailing interest rate. If the in-terest rate falls to 0.5% then the land value willdouble. Again, the comparison: to get £20,000per year you would have to take £4,000,000 to abank at an interest rate of 0.5%. The freeholdermakes £20,000 per year. This being treated asthe offspring of an underlying capital at an in-terest rate of 0.5%, the underlying capital is£4,000,000.If the prevailing interest rate increases, the landvalue decreases accordingly.In summary, land value may fluctuate accord-ing to changing rental income and interest rates.Apart from the actual rent, this is how devel-opment in land value becomes an additionalsource of income – or even the main source –for land owners.When it comes to this development of landvalue there is one vital difference between realestate funds and simple house owners: real es-tate funds have more money. Someone who isjust the owner of a house cannot as easily af-ford to modernise it in order to raise the rentto a level that prospective tenants may refuse topay when there are still cheaper flats to be hadnext door.Real estate funds on the other hand haveenough money to influence their own landvalue assessment positively. They can buy flatsin massive numbers, modernise them and askhigher rents. Thus, there will be fewer cheapflats in certain areas, and the tenants will not beable to simply say “oh well, then we’ll just go toanother landlord”. Real estate funds can designtheir impact in such a way that they can makeflats and their neighbourhoods more attractiveto tenants of a new, more affluent milieu, whowill be courted directly.5

Hence, both groups only differ in means andnot necessarily ends.

Tenants and their calculations

If a capitalist business life develops in an area,landowners will be able to count on growing de-mand for living space as well. Everyone wantsto have a place to live, from managers to un-skilled workers. If the city in question alsohas a university, students will be looking for a

place, too. In the case of a capital city, stateemployees will also be flat hunting.6

With their spending power, prospective tenantscompete, firstly, against business interests in thenarrower sense (demand for office space etc.,as described above) and, secondly, against eachother.They are free to make the following calculationin relation to what is offered on the rental mar-ket: what percentage of my income am I willingto pay for what amount of space of what qual-ity? For the highest earners this may not com-promise fulfilment of other needs. Others, how-ever, must consider their rent against restaurantvisits, cinema, travel or simply the pub and askthemselves: what can I do without?A cutback in the quality of a flat can be madewith regard to such things as size, brightness,noise, quality of air, transport connections ingeneral and proximity to the place of work, in-frastructure in the area (from shopping to enter-tainment to kindergartens and schools), socialenvironment, etc.In this muddle of bad decisions that have to bemade, many trends are possible. In one Berlindistrict named Kreuzberg, for instance, moretenants than in another called Prenzlauer Bergseem to have decided to stay albeit rising rents,even though it means rent will eat up on aver-age 40% of their income.7

Some people will move from one hole to an-other before modernisation takes place, untilthe next hole is also modernised and so on untilno holes are left. Thus, the availability of holesis gradually reduced.Some families may want to move away fromthe suburbs and their “green spaces”, for exam-ple, because both parents want or must work;they may want to feel “young” for longer andenjoy a recently adjusted inner city atmosphere.Some people are willing to endure commutingto work for an hour and a half because it savesrent. Others put up with the same journey timebecause they work in Nottingham but want tolive in London. Some academics may decideto keep a flat in two or even three major citiesin Europe and the US because they care aboutquality of life in relation to their job, in whichit seems sensible to hold two or three differentchairs.To sum up: urban changes in terms of rent andsurroundings usually have a number of visi-ble or tangible effects, e.g., more tourists andhotels, a changing social composition in theneighbourhood, different shops, etc. But it isimportant to realise that these things are onlythe expression of a much broader principle. The

4For those familiar with volume 1 of Marx’ Capital: the term “capitalised” should not be confused with the same term in said book. There it means to reinvest profits, here it is meant todetermine the value of something based on the revenue it provides. This latter meaning is also used in volume 3 of Capital.

5As free riders in this revaluation, simple house owners are increasingly willing to sell in order to cash in on the development of land value.6In the UK many of these groups buy instead of rent whereas in Germany it is much more common to rent. Yet, the calculations listed in the following do also apply to home owners who livein their own flat. The only difference to tenants is that home owners also have to take into account if and how much their flat will appreciate in value. That is, they relate to their flat both astheir means of living and an investment.

7Both Kreuzberg and Prenzlauer Berg are gentrified areas in Berlin. For comparison, Shelter reports: “The majority of London boroughs [22 out of 32, the authors] have median rents thatcost more than 50% of median local full-time earnings” (http://bit.ly/pcp9lh, access 15.3.212).

8Andrej Holm argues that some things stated in political and academic articles on gentrification are correct, but that on their own these do not explain the matter. Theories of supply – thereis something to it, but. . . Theories of demand – there is something to it, but. . . In this way he challenges every explanation but does not criticise any of them in principle. With Holm, then,gentrification appears as an interaction of many conditions. But when it comes to explaining rent development he names “central causes”, implying that there are also other less decisivecauses. “Critical housing market research thus sees the transformation of city-owned properties into purely financial assets and the weakening of traditional structures of land ownership as

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whole process depends on the relation of busi-ness interests to land and on the development ofcapitalist business life.8

A particularity of the real estate marketduring the sovereign debt crisis

Before we turn to discussing the role of pol-itics, some comments regarding the particularpart played by the real estate market during acredit crisis. At the moment it might be tempt-ing to get the impression that real estate marketdevelopment has less to do with overall capital-ist development in general than we claim. TheWestern world has been on the edge of or in cri-sis for years, yet, housing prices in some innercities continue to rise sharply.During the financial crisis, financial institutionshave come to distrust their own standard prac-tice of capitalising outstanding debt and treat-ing it as actually existing assets. Under thesecircumstances the debt owed, like state bondsor company equity, is no longer actual wealthbut only a precarious future promise. Inasmuchas the financial institutions treat it this way, thisbecomes a reality.The consequence is flight to so-called materialassets. Instead of investing in state bonds, in-vestors favour gold and push its value up tonew highs. And instead of investing in equity,investors and even bank funds tend to buy upreal estate. The purpose of investing changes:during crisis it is no longer about multiplyingprivate property by buying the rights to futurepayments. Instead, private property now seeksto retain its value in preference to disappearingthrough the devaluation of debt instruments andthe currencies tied to them. Investment in thenarrow sense, i.e., buying in order to multiplyvalue, is replaced by the attempt to buy thingsassumed to be of stable value.This kind of investment, a consequence of thecrisis, is currently being played out in Berlin,according to newspaper articles featuring inter-views with real estate agents. This serves as apreliminary explanation of the currently strongdemand for inner city housing among potentialowners. But that this leads not only to risinghousing prices but also to rising rents can onlybe found in the causes that also hold for ‘nor-mal times’, as described above.Of course, investors are also keeping an eye onplaces with the potential for economic develop-ment after the crisis. In their prognosis Berlin’sinner city seems to offer this potential, allowingin turn for speculation on the regular investmentflow implied by the prognosis.9

2. The role of politics

Municipal zoning policy – economicpromotion, regulation and the legalrecognition of property

In discussion of city development it is oftensaid that, for instance, Berlin’s municipal gov-ernment has abandoned housing policy alto-gether.For example: “Any practical housing policywould constitute a turning point compared withthe current situation where housing policy sim-ply does not exist. Under the ‘red-red’ adminis-tration and previously with the CDU-SPD sen-ate we have experienced massive cutbacks: theelimination of all subsidies for new social hous-ing and urban-social renewal and the sell-off ofmore than 200,000 publicly owned flats. ‘Red-red’ has liberalised building legislation to suchan extent that it has become possible to buildmore densely in the inner city than during theWilhelminian period.”10

The urban sociologist Andrej Holm here ex-presses a prevailing activist idea: once upon atime, the state or the city authorities mitigatedsocial suffering with policies such as buildingpublic housing, imposing rent control, etc. To-day, on the contrary, poor people are let downand the doors are opened wide to capital. Thestate or the city used to have a neutral, balanc-ing effect, but not any more.However, some things do point to politicalplans and actions on the part of the city admin-istration. For instance, in Berlin “Projekt Me-diaspree” was initiated, subsidised and partlyimplemented by the city of Berlin: an attemptto establish a new commercial site in the innercity on formerly economically lesser used area.There is evidence that not only Berlin but alsoother cities and districts are setting their hopeson real estate capital, seeking to attract particu-lar companies and high-spending tenants. Thisprocess entails the direct or indirect displace-ment of people with financially less useful at-tributes such as benefit claimant status, skate-boarding prowess, homelessness etc.11

Furthermore, this idea misconstrues housingpolicy and wider municipal policy in ways per-taining to three distinct levels of state activity.Lets look at those aspects one by one.Economic promotion. The city’s interest isquite evident in the case of “Mediaspree” inBerlin or the “Tech City” initiative in London.With the help of planning decisions, financialsupport from a consortium of companies andeventually the sale of land, a part of the cityis prepared explicitly for maximum economic

growth. Companies are supposed to move inand successfully multiply their money. The in-terest of the state body becomes clear whenlooking at its relation to the economy: whileno part of the state is in itself an economic sub-ject, state, city, etc. depend on money for theirvarious projects. They do not earn it directly,but by deducting taxes from all economic un-dertakings (and by going into debt). The morethe merrier: economic growth means a well-working economy with lots of opportunities forthe state to help this economy grow even more.The city wants to create good and appealingconditions for future businesses. It takes var-ious measures for that, among them munici-pal zoning policies. Because these measuresare made for a world of competitiveness, theyare necessarily speculative: whether businesseswill take up the offer depends on their owncompetitive development and on the possibilityof more appealing proposals from other cities.Therefore, it is wrong to claim that “surely theyshould have known this was coming”, when aproject does not work out.This economic development is measured as anaggregate of the business success of all citizensand is successful if that amount has increased.But it must be understood that what is added up– namely wealth measured in money – is ob-tained through competition. And competitionnecessarily includes losers. This affects deal-ings between companies but it mostly affectsthose who, as wage workers, are either forcedto submit to the companies or are not needed inthe first place, i.e., unemployed.Why, then, when there are already so manyempty offices, are business areas still being de-veloped continuously? We have mentioned al-ready that supporting the settlement of businessin a certain area can be of great interest to thecity. But no planning in a generally competitiveeconomy can be sure to meet the needs of ca-pital. Hence, there must always be enough freespace available for a sudden expansion of capi-tal. An expansion should not fail because spaceis scarce. In turn, individual real estate capi-tals compete against one another in the buildingof business towers as they try to entice compa-nies away from rival developers. The compa-nies, of course, are happy to take up the betteroffer, even if they were already making moneyat the old location.Regulation. Critics of Berlin’s economic pol-icy accuse it of one-sided attention to capital(or put more crudely, the rich). But a differentkind of attention is acknowledged in other pol-icy areas. Here, it seems, the city does some-thing for ordinary people, tenants or the poor.

central causes of the process of gentrification in the cities.” (Andrej Holm, Wir Bleiben Alle!, Munster 2010, p.27, our translation) But there is a difference between, on one hand, examiningthe market-oriented use of land and the development of land value speculation from the underlying drive for rental income – an examination which may entail looking more closely at oneparticular development – and, on the other, ignoring these wider connections and concentrating only on one particular development. In the latter case the particular is turned into the cause.Therefore we strongly suspect that “critical housing market research” does not go beyond our explanation, but begins and ends somewhere completely different. The question of conditions,reasons and causes is not just a philosophical exercise in logic. Those who grasp the management of the housing market by financial capital as a particular instance of the general subordina-tion of housing to capitalist criteria will not be content to cause some kind of nuisance to financial capital. Whereas those who do not understand this will complain about financial capital,will protest against it with banners saying “Greedification” and will maybe launch some kind of action, but will continue to sign up to the general capitalist order.

9For more on the sovereign debt crisis see “Sovereign Debt and the Crisis in the Eurozone” in this issue.10Andrej Holm in an interview with the daily, left-wing newspaper Junge Welt, 30. April 2011, our translation. “Red-red” refers to the coalition between the Social Democrats (SPD) and the

Left Party (die Linke). The CDU is the conservative party.11An example for such policies in the UK – although on a national level – is David Cameron’s “Tech City” initiative in London: http://www.wired.co.uk/magazine/archive/2011/02/start/silicon-roundabout (accessed 15.3.2012)

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Examples include public housing constructionprojects, rent control applied in areas of ur-ban renovation, or limits on rent rises in ongo-ing tenancies. While the critics examine thesethings sceptically, asking whether capital getstoo good a deal nevertheless, still, here the cityis said to have a balancing effect, acting for ev-eryone somehow.The error lies in a wrong assumption aboutthe city’s starting point, i.e., the reason whyit sometimes limits pursuit of capitalist inter-ests and helps the poor. The starting point wasnever that of a city confronted with two oppos-ing interests, simply and only seeking to limitboth somewhere in the middle. Rather, the citygovernment always was and is pursuing its ownends. These often align with business interests,but also can stand in contrast to it.One example: in Berlin, rent rises in exist-ing tenancies are restricted to 20% every threeyears. A rent index is also compiled every twoyears, measuring the average rent for each classof flats using all sorts of omissions and ruses.Landlords are not allowed to raise the rents forexisting tenancies beyond this average amountexcept in cases of modernisation and specialcontracts that allow for rent rises in advance.The interest of landlords in increasing rent isapproved here and rent increases are duly per-mitted, but a limit is applied at the same time.The interest of tenants in rent reduction, mean-while, is not approved as such. All that is ap-proved is the tenant’s interest in the predictabil-ity of rising rents. With the help of this kindof regulation the tenant can ask herself in ad-vance: should I expect a rent rise? If so, howmuch will it be? Furthermore: am I willing andable to pay this amount, leaving less for otherconsumption, or should I get ready to move?And if I move, it might make it harder or im-possible to keep my job for which I now needto spend more money on my commute (which Imight not be able to afford either).Other countries, such as the UK, do not (orno longer) have rent control laws. In the UKa similar purpose was served for a long timeby council housing; then gradually since the1980s mortgaged home ownership expanded toinclude much of the waged working class, witha housing benefit system and outsourced ‘so-cial’ housing more or less sheltering the rest ofthe population.The economy needs a local workforce and themunicipal government attempts to ensure itsavailability by means of appropriate regula-tions. Not only when it promotes economicgrowth but already when it is dealing with thementioned collisions of interest of tenants and

landlords, the city regards its territory as a cashmachine.Thus, it comes as no surprise that the city atsome point tests the viability of doing withoutlocal public housing. The cynical part here isthe way the decision-makers then wait to seewhether the people affected will make a fuss.Any protest is an indication of whether theplans were overdone and whether some soft-ening measures will be necessary. If some ofthe protests are accommodated and concessionsare made, this does by no means prove that thecity is a free space where a balance of powershifts back and forth. As mentioned above, thecity administration has its own interests and itrelates to other existing interests on this basis,sometimes conceding more to them and some-times less.12

Legal recognition of property. But what dothese “other existing interests” actually mean?Does the state or the city just ‘discover’ themand then react with regulations?For landed property as a source of income itis obvious that it is something licensed exclu-sively by the state. The freedom to decide onthe use of the land in question, to the exclu-sion of everyone else, begins with an entry inthe land registry. The state records which partsof its territory fall under the authority of whichprivate individual. In the same process the statecreates the inverse figure of the tenant, whodoes not own land and must pay a tribute to theowners for its use: the rent.Thus, in summary, the policies outlined abovehint at the following: the city does not simplydepend on money which it does not earn itselfbut which others must earn. The state and thecity make themselves dependent on a society inwhich everything revolves around the multipli-cation of money. That is the intended politicalprogramme.13

The role of the creative milieu in munic-ipal zoning policy

Art itself is an advertisement for the city as a lo-cation. “Ich-AG” projects14, bars and shops aresupported by “Quartiersmanagement”15 so thatsomething at least gets underway and unusedbuildings do not decay, but also to attract ten-ants who can pay more, etc. The fact that thesesubsidies are granted only to kick-start an in-dependent business life is explicitly stated.16 Itis also no secret that these small entrepreneurswill have to give way later on.17

The creative milieu contributes a small pieceto the municipal zoning policy puzzle, what-ever the ‘creatives’ may intend. But to look for

the reason for rising rents here is stretching it:those who embark on this kind of self-criticismoverestimate their own importance.The popular but wrong explanation is: the richand the creative scene are driving rents up. Theright explanation would be: successful munici-pal zoning policy boosts business, as a result ofwhich landowners are able to raise rents.

Who owns the city? – The city of course!

With this analysis of the reasons for the state’sor city’s housing and zoning policy in mind,one can criticise a main slogan of the Germananti-gentrification movement: “Who owns thecity?” Obviously, it is a municipal body withinthe state that regulates the city and watches overownership of land. So in that sense the city – asthe state’s project – is ‘owned’ by the state.But this is not the question the activists meanto ask. Instead, the question is meant as animplicit demand, namely to re-think municipalownership as commons. The movement op-poses “our” property to private property. Butthis identification of that what belongs to thecity and that what belongs to everyone is mis-taken. “Our” property under the current condi-tions means state ownership and that has noth-ing to do with common ownership in the senseof land being available to everyone under theconditions collectively decided. Rather, thiscurrent “common” property is subject to thestate’s calculation.Hence, those who talk of “our hood” and “ourBerlin” are harbouring an illusion about theirown living conditions. The daily grind of com-petitive conflict is mentally transformed into acommunal project. Secondly, they idealisticallymake themselves part of the rule they are sub-jected to – just as in nationalism.18

One might want to counter that the notion of acity’s purpose presupposes a degree of local ormunicipal autonomy that does not exist in thisway. Indeed, the city is part of the state. Soit is possible to say that there are certain limitsimposed on the city’s policies because of thisembedding. Or inversely: the city, includingevery politician working for it, is an active ex-ecutive body of the overall purpose of the state.And within this order the city is endowed withan autonomy of a lower order.Another counter-argument might be that thecity depends on local economic development,i.e., what it can make in business taxes, and istherefore not autonomous. However, this rela-tion of dependence was politically decided andis desired, whether at local or national level.Berlin and London are parts of political power

12In the 1990s, when Berlin announced urban renewal areas and real estate owners signed up to rent controls in order to get the city’s generous financial support, it was also clear thatexpulsions would occur. The aim was a ‘soft’ transformation of the population structure. This was in the municipality’s own interest, not just a good deed for the wretched.

13We are aware that this is rather sketchy. We plan to expand on the relation of the democratic state to the capitalist economy in the future.14Literally “I-PLC” or “I-Inc.”: self-employment through a scheme funded by the German government to encourage the unemployed to start businesses15Federally funded, locally administered ‘regeneration’ bodies.16In response to the crisis similar policies – sometimes referred to as “Berlinification” – are discussed for several British cities, towns and areas. See http://www.guardian.co.uk/business/2009/apr/14/government-high-street-shops-grants (accessed 25.3.2012)

17Of course this also happens without direct municipal involvement. Landlords allow small projects to use ground floor spaces in order to earn some rent and to keep the building in use andmaintained. Contracts are designed in such a way that increased rent or renegotiation in a few years’ time is already written into place. Thus, it is clear that in this case, too, the users aretreated as temporary placeholders.

18See “Why anti-national?” in Kittens #1 available at http://www.junge-linke.org/en/why-anti-national.

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structures, a structure that stands above busi-ness, wants something from business and ac-cordingly does something for business. Politi-cal power is not the expression of an economicpower relation: rather, it institutes and main-tains it – and makes itself dependent on the re-sults of business.

A cynical consequence of the dailystruggle against city development: glo-rification of poverty

In Berlin, apart from the 20% rent increase al-lowed every three years under the terms of rentcontrol, modernisation is another way of rais-ing the rents in existing contracts. The land-lord can add to the annual rent 11% of whateverexpenses go beyond simple maintenance of theflat. Thus, a new balcony in a flat of 100 squaremetres can easily push the rent up by e1 persquare metre.Faced with empty pockets, the tenants come upwith the following seemingly absurd activity:they try to prevent the improvement of the flatthey live in, for example, by trying to preventthe addition of balconies to their flats. Ten-ants’ associations support tenants in their legal

fight against an improvement of the quality ofhousing – to avoid the costs attached to it.19

Such irrationalism is not simply a mistake, butan imposed “mistake”, one that is necessary inthis society. Acting against ones own imme-diate interests (e.g., a balcony) does not speakagainst these actions. But it does indeed mil-itate against the conditions that make such ac-tions necessary.It is different with this next point: if a bor-ough attempts to ‘prettify’ the area for the sol-vent classes then, for example, homeless peo-ple will be expelled from a park. These peopleare only treated as a problem, the poor basis oftheir existence is not done away with once andfor all. Instead, they are pushed out and have tomove on to another place where the same thingwill happen to them sooner or later. Initiativesthat take exception to this, often organise theirprotests using slogans such as: “The park is foreveryone!” Those who reduce their protest tothis demand are acting cynically, because thepoverty of the homeless is in no way attacked.This position might come across as sympatheticbecause it does not patronise or harass the poorin their poverty. However, the thought accom-panying this position – that poverty simply ex-

ists and that there should be room for everyone,rich and poor – is not at all sympathetic. Thisis accepting poverty, not criticising it. Thoseinitiatives demanding that the poor should notbe expelled from their neighbourhoods fall intothis trap. Their goal is the preservation of al-ready existing poverty, like, for a family withfive children to be able to continue living in atwo-bedroom ground floor flat.At this point some people will accuse us of cyn-icism, that it is easy to talk but that talk will notchange things for the better either and that atleast a protest might soften the deterioration ofthe situation. In fact, we are not at all propos-ing that there should be no self-defence againstdeteriorations within the system. That wouldbe a ridiculous proposition simply because weare not left with a choice. One has to defendoneself so as not to be crushed. That is alsowhat we are doing, on our own in our every-day lives, or organised in tenants’ associations,at work, etc. But we want to warn against men-tally taking part in the cynical consequences ofthe system – because then nothing fundamentalwill ever change and that means an everlastingfight for one’s own or others’ existence as poorpeople.

19There may be people who simply prefer not to have a balcony or who simply dislike the idea of having “improvements” – which may or may not represent actual improvements imposedupon them. Here, we focus on people who fight against these measures for financial reasons.

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Sovereign Debt and the Crisis in the Eurozone

What this text wants1

In our text “Financial Crisis 2008ff.” we triedto explain how a financial crisis such as that ofsummer 2008 results from the normal courseof business and not from mistakes or misman-agement. Towards the end of the text webriefly touched on how states attempted to res-cue the financial markets and that – as a result– sovereign debt itself becomes subject to thepractical critique of these markets.2 In the lasttwo years these policies seem to have been suc-cessful, insofar as the financial markets have,again, started to make a profit; however, as aresult of the measures taken many states havenow become lodged in a debt crisis of theirown, which, again, is affecting the financial in-dustry.In our later text “Public debt makes the statego round” we then tried to explain how mod-ern credit money and sovereign debt are re-lated. However, there too, questions such ashow states contract debt and why, who theircreditors are and why, what the relation isbetween the GDP (gross domestic product)and sovereign debt and what the particulari-ties of the Eurozone are, were only very brieflytouched upon or not discussed at all. In thistext we attempt to fill this gap. First, we wantto explain the standard and common practice ofsovereign debt in general, as well as providinga critique of the most prevalent explanations forthe current crisis. And secondly, we would liketo consider the particularities of the crisis in theEurozone.

Too much sovereign debt as reasonfor the crisis?

One way to explain the Greek problems is toremark that Greece simply took on too muchdebt. In fact, sometimes newspaper articlesclaim that Greece has the largest amount of debtin the EU. This is de facto wrong.3

Table 2.1 demonstrates rather vividly thatGreece’s gross debt is comparatively small.Moreover, sovereign debt is not the exceptionbut the rule in capitalist states. As a tendency,the more economically successful a state is, thebigger its sovereign debt (converted into Eurosthe US’ sovereign gross debt in 2010 amountedto about e10.000 bn.). Debt is not reducedbut constantly increased. Sweden has been in-cluded in Table 2.1 as an example because it ac-

tually reduced its sovereign debt for some time(similar to Finland and Denmark).Somehow the current sovereign debt crisis is re-lated to high amounts of debt – to clarify howwill be the aim of this article. Pointing to hugeamounts of debt does not suffice, i.e., “Thiscould not have possibly worked out long termanyway.” The fact that almost every state in theworld is in debt – and the more powerful it isthe bigger the debt – first of all begs the fol-lowing questions: why have these states perma-nently contracted debt? Why is it that most ofthe states in the world were able to pile up theirdebt over such a long time without any prob-lems? Who are the creditors and why have theyreadily and increasingly accommodated loans /lent money to states? As usual it makes sensebefore asking why this “it” does not work to doexactly the opposite: what is this “it” anywaythat does not work, and how did “it” work be-fore?

Why sovereign debt?

If a state’s debt becomes problematic, as is cur-rently the case in Greece, public opinion of-ten holds that current and former politicianshave failed. They have supposedly pouredmoney down the drain, or given out nothing butpresents to the people. In short, they have notmanaged the state for the sake of the nationaleconomy but conducted political mismanage-ment. This kind of explanation for the crisisis most striking for often having been arrivedat only when the state’s financial difficulties al-ready exist. It seems that the outrageous profli-gacy of the government, or consecutive govern-ments, has conducted itself quietly until such apoint is reached. In opposition to this way ofexplaining the crisis, we will provide an outlineas to why the democratic state always has goodreasons to draw on debt as a means of makingpolicy. For those who are wondering who “thestate” is supposed to be, perhaps the followingproposition: it does not matter who is in power,be it the Tories, the Labour Party, the LiberalDemocrats, . . . or even the Fascists -– all politi-cians always refer back to sovereign debt as theadequate means of funding.4

Sparing tax sources, such that they aremore yielding in the future

The democratic state does not organise its taskson the basis of the means of production and

workers directly at its disposal. In earlier feu-dal states, for comparison, this was the case:feudal lords owned serfs working for them ontheir land which enabled them to fund knightsand castles. By contrast, the democratic stateallows its own as well as foreign citizens to pro-duce on its territory – an activity whereby theyearn their money. If the democratic state wantsto accomplish something it simply takes moneyaway from its citizens via taxes and buys what-ever it wants from the citizens (disregardingsovereign debt for the moment). Democraticstates also own (parts of) companies, e.g., in theUK there are many private-public partnerships.In such cases, however, the state does not in-tend to earn money but usually keeps ploughingmoney into this business to keep it running insuch a fashion that the products and services ofthis business are available for the national econ-omy on a safe and affordable basis. If the pro-duction is viable and has the same output, thestate usually privatises the business – as long asthere are no concerns regarding national secu-rity. In principle a democratic state’s incomeshall be based on taxes rather than the state act-ing as an economic subject itself.A democratic state does not have to earn its rev-enue but can decide it. A wage labourer is re-quired to earn her money, and if she has run outof it before the end of the month she is forced toconfine herself.5 A business lacking money forits next push against competitors is required tomake more money or ask for credit, whereas astate has the option to simply increase taxes. Toavoid a misunderstanding: the state is not freeto dictate its own wealth, which is to say it is inno way the arbiter of how much wealth a soci-ety has produced; it is free only to dictate howmuch it will expropriate of the wealth first cre-ated by the producers in that society – the pointhere being that the money the state wants to col-lect through tax revenues must actually exist.This is in some ways analogous to how any-one makes money, insofar as she too may onlyearn that money which has already been earnedelsewhere. But there is a difference: earning isdifferent from expropriating.Still, many hold the belief that taxes mean somekind of exchange. They give money to the stateand expect – are entitled, even – to get some-thing in return. Hence, if, according to thispoint of view, the state’s actions are disagree-able, this is a scandal, since it is the tax payerwho is the state’s rightful client. Politicianstend to support this perspective. If they intro-

1This text is a translation and in some places adaptation of our text “Staatsverschuldung und die Krise im Euroraum” published in November 2011 at http://junge-linke.org/staatsverschuldung-und-die-krise-im-euroraum-alle-teile.

2Common synonyms for sovereign debt are government debt, national debt or public debt. Yet, it is not the government, the nation, or the public which is the debtor but the state. Hence, weopted for “sovereign debt” and avoided these synonyms.

3What newspapers actually mean is that Greece has the highest debt level compared to its national economic output measured in a state’s GDP, i.e., it has the highest relative debt. Never-theless, it is often written that Greece’s sovereign debt is the largest, and people who are less knowledgeable in respect of state finances may well often hold the view that Greece indeed isindebted the most in absolute terms.

4By “democratic state” we simply mean successful capitalist, “Western” states such as those in the Eurozone, the UK or the USA. When we write about the democratic state we simply meanfeatures that these states have in common, i.e., those features which are an integral part of them being democratic states.

5Of course, private persons too can apply for credit up to some limit. This limit is especially low if a loan is solely for such unproductive expenditures as food and rent.

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1999 2003 2007 2009 2010 1999 2003 2007 2009 2010Germany 1225 1384 1579 1761 2080 UK 653 631 852 1093 1351France 804 1003 1212 1493 1591 Greece 122 168 239 299 329Italy 1282 1395 1602 1764 1843 Sweden 161 145 133 129 146Euro area 4618 5218 5985 7116 7837

Table 2.1: Time series of gross debt in bn. Euros – rounded. Source: Eurostat http://bit.ly/Ac6ME

duce a new tax they call it e.g. “green tax”whereby the claim is made that tax collectionand the state’s splendid use of the taxes are di-rectly connected. Such a connection does notexist, as was perhaps most notably expressedby Winston Churchill in 1925: “Entertainmentsmay be taxed; public houses may be taxed;racehorses may be taxed. . . and the yield de-voted to the general revenue. But motorists areto be privileged for all time to have the wholeyield of the tax on motors devoted to roads. Ob-viously this is all nonsense . . . Such contentionsare absurd, and constitute . . . an outrage uponthe sovereignty of Parliament and upon com-mon sense.”6 The taxes the state collects be-long to the state — it is that simple. Accord-ingly, it is up to the state alone what taxes areused for. Moreover, no-one but the state itself– i.e., Parliament when deciding on the state’snational budget — has the right to appropriateand direct taxes (e.g., to dedicate tobacco taxesto health care or to building roads).

A capitalist state obtains its power from its citi-zens’ private activities and collects money fromwhatever income they generate. No-one knowsbetter than the state itself that it can only takewhat has been produced in society, i.e., moneyearned by the state’s residents. Hence, the moresuccessful they are in making money, the more(financially) potent the state.

This presents a comfortable dilemma to thestate: on the one hand, the more the statetakes from its citizens by taxation the more it isable to accomplish, whether that be in terms ofprocuring advanced weaponry/technology forthe military, building better infrastructure, oropening more preschools and child care facili-ties. On the other hand, the more taxes the statecollects from its capitalists the less money theyhave in their pockets to be able to invest in newprojects and thereby further increase society’swealth. Private business is supposed to flour-ish – this is, after all, what makes up the state’spower. Furthermore, the more taxes the statecollects from wage labourers, the more it con-tributes to their impoverishment, which mayalso affect the economy negatively as a whole.7

Debt seems to offer a direct way out of thisdilemma: the state obtains financial meanswithout burdening the businesses of its citizens.These businesses are then able to invest moneyto increase society’s wealth. It is certainly not

true that citizens are not affected by sovereigndebt (see the passage on inflation later). Butwhat is true is that the dilemma of “as littletaxes as possible as the basis for as much taxesas possible” functions as a founding motive forcontracting sovereign debt. No surprise this op-tion comes to politicians’ minds consistentlywhenever it is time for preparing the next na-tional budget.

Creating new tax sources, such that theyyield in the future

The second important reason for sovereign debtis perhaps best explained by comparison with acompany. If, for example, Shell wants to ex-ploit a new oil field, then it needs to invest,say, £1 bn to build the necessary infrastructure.Now, Shell does not wait until it has earned thismoney from the annual profits of its already ex-isting oil fields. Instead Shell takes out a loanand starts exploring the new oil field immedi-ately. With that credit Shell establishes its inde-pendence from the already existing sources ofrevenue and even creates new ones. With thesesources of revenue Shell can then pay back itsloan and, on top of that, make new lasting prof-its – at least this is the calculation.Politicians see it quite similarly. For themcredit is not the exception to the rule; it is nota one-off which follows from an inadequatesource of tax revenue in the face of necessaryexpenditure, or from a desire to preserve (po-tential) tax sources. With credit they are con-cerned with creating the optimal conditions un-der which tax sources can develop.To facilitate economic growth throughout thecountry, extensive and well maintained roadnetworks are required for the transport ofworkers, materials, and goods; universities areneeded for technical progress and the produc-tion of specialised knowledge in the workforce;child care services are also necessary so thatmum and dad can go to work etc. If success-ful states had waited until the already existingcompanies on their territories were successfulenough to allow the funding of a new universitybased on tax revenue alone, the development ofthe means of production and the GDP would beperhaps that of 100 years ago.It is important to understand that this logic isa logic of speculation. Credit is used to pro-

duce future national success in competition.Whether this success shows itself or whethercompeting national economies are more suc-cessful, or a worldwide crisis strikes throughall calculations by all states, is impossible tosay a priori. So when somebody ingeniously re-marks, “we lived beyond our means,” then threecounterpoints can be made. First, it was not“we” who took on credit but the government.Second, it was not “we” either who spent themoney, but the state. And third, what about this“beyond our means”? The whole point of theinvestment by the state was to produce the con-ditions which could justify the debt and somefurther economic growth on top of it.

Less tax revenue and more responsibili-ties: crisis

There remains a third reason for the democraticstate incurring debt, and this concerns its util-ity in an economic crisis. Revenue from taxbreaks away as companies no longer turn aprofit and subsequently lay off their staff; thiscauses massive reductions in income, commer-cial, and VAT tax revenue. At the same timestate spending is increased because there aremore welfare cases in the working class, andthe economy must be subsidised to prevent thedestruction of entire industries. In this sense,the banking system was indeed ‘saved’ duringthe financial crisis with extensive new loans.For this particular dilemma, credit, of course,presents itself as a veritable option for the be-leaguered state capable of securing it.We might conclude this point with the obser-vation that borrowing always assumes too lit-tle money. But the question one must ask is:from what conditions and for what purposes hasthis lack of money arisen? We discussed threefundamental aspects of the debt of the capitaliststate:

• Fall in tax revenue.

• Protection/sparing of tax revenue sources forthe purposes of making them stronger in thefuture.

• The desire to create sources of tax revenue inthe first place.8

In each economic situation – growth, stagna-tion, and crisis – there are good reasons for

6http://ipayroadtax.com/no-such-thing-as-road-tax/bring-back-the-road-fund/ accessed 31.12.20117The difference how its policies affect the two classes constitutes the reason why budgetary policies repeatedly and resolutely turn to social welfare whenever austerity is on the menu. Politi-cians call this saving and the truism that one cannot spend more than what is there to make this all plausible. This platitude holds true for every wage labourer but certainly not for the state.Since the state generates its income by enacting resolutions, its only limit is the amount of money actually available in society. Up to this limit the state may spend as much as it wants. Ifthe state abstains from collecting income it must have its economic reasons. The reason for the cutbacks in social benefits is thus simple: the state deems money in the hands of businessesmuch more useful than in those of hardship cases. The latter do nothing else but spend it on consumption while the former accumulate it.

8A last fundamental reason for loans is war. For the production and security of their own political position in the world states are willing to take on large amounts of credit – just have a lookat the war against terror of the United States. However, why states wage and prepare for wars is not the subject of this text.

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politicians to rely on sovereign debt. It is, assuch, true that sovereign debt is no exceptionbut the constant companion of bourgeois poli-tics. The rule is an ever-growing mountain ofdebt.

Greece’s debt

The immense and ever-growing mountains ofdebt of nation states result from normal eco-nomic calculation and not from the absenceof the same by spending-addicted politicians.Nothing unusual happened in Greece before thecrisis; rather the country has taken out loans inorder to create the conditions for better nationaleconomic growth.This speculation has not worked out. Greecewas not one of the winners of the EU commonmarket, but a loser. Where there is competi-tion, there are necessarily losers. The shelvesin Greece are full of German and French prod-ucts. It was not Greece, or Greek entrepreneurs,but Germany and France that made those gainswhich Greece had hoped for in joining the ECand EU. This is one reason behind the Greeksovereign debt crisis, but it is not the principalone, as shall be discussed later.Here we want to point out that it is too easyto disregard all economic and political calcu-lations and to say instead that Greek politi-cians have simply thrown money out the win-dow. The same pattern of behaviour would beobserved in any other nation faced with sim-ilar difficulties. Were Germany, to take thestrongest EU economy as an example, to slide

into a debt crisis, and the public would — in-stead of asking for reasons – call for the bloodof its politicians in the same manner as hasbeen witnessed in Greece then democracy pro-vides enough material for those who want tofind someone to blame.First, one would find material in (almost) anybudget debate. There, the government alwayssays it has considered all aspects carefully andfound the right mix of necessary expenses, sav-ings, tax increases and cuts, plus borrowing.The opposition, on the other hand, insists thattax money would be wasted, where it does notagree with a certain decision.It is striking, however, that in any budgetary de-bate the government is also accused of savingat the wrong end – i.e., where the oppositionwould deem measures appropriate. In every de-bate the opposition accuses the government ofboth: wasting money and saving at the wrongend.Second, in Germany there also exists some-thing called the “Bundesrechnungshof,” whichevery year publishes a book documentingwhere the state has supposedly wasted moneyor where construction projects, for example,ran over budget (once again). Furthermore, thefact that Germany hosted a World Cup wouldappear about as absurd as the 2004 Olympicsin Greece in light of a debt crisis.These hypothetical considerations are meant toemphasise that it is easy to blame politicians forfailing by disregarding their considerations andjustifications of the specific policy measures. Itis easy to blame politicians for failing, in retro-spect, if one ignores that every measure of eco-

nomic policy is a speculation which inherentlycarries the possibility of failure in it.

How the mountain of debt grows andwhy the tax payer does not have tosettle the debt

The state borrows money by issuing bonds. Forexample, the British state receives £1 millionand promises to pay back this amount plus in-terest after 5, 10 or 30 years depending on thekind of bond. Greece does the same and so doesGermany.However, when these two countries are dis-cussed some people claim that contrary toGreece, Germany could pay back its debt – allof it. Similarly, pundits warn about the burdenof sovereign debt the tax payers are confrontedwith because they would have to pay it back.These statements are incorrect: in 2010 Ger-many had an absolute level of debt — grossdebt — of around e2,080 bn. Greece hade329 bn of debt. Each year, a part of this debtis redeemed. Because there are “governmentbonds” – i.e., state bonds – with longer maturi-ties (durations), not all outstanding debt has tobe repaid every year. Greece’s current problemslie in its inability to repay those debts whichare currently due. As for the claim that Ger-many could pay its annual debt bill from taxrevenue alone: this would be impossible, as asimple comparison shows. The total tax includ-ing all extra revenues for 2009 totalled at e260bn in Germany. In the year 2010 Germany had

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to spend e276 bn just to repay its outstandingdebt.Greece, Germany, and the U.S. would all be un-able to settle their debts through taxes. The bur-den on the taxpayers is definitely not that theyhave to pay back the debt. Sovereign debt onlyworks so long as states can find new investorswho will lend them money that can be used topay off previous investors. This happens in oneof two ways: either, a creditor gets his moneyback, plus interest, and subsequently reinvestsimmediately in new state bonds; or, if she doesnot want to reinvest new creditors in her placeare needed to grant the state credit. This proce-dure is called “follow-up financing”.This is not a debt trap in which states acci-dentally step into. This relation to the finan-cial markets is actively sought – simply becausetheir purpose is not to be debt free, but commer-cially successful.The whole process depends on the on-going re-purchase of debt. Therefore, a closer look atwhat makes sovereign debt so attractive for themain creditors (the financial industry and otherstates) is in order. And to answer the questionabout debt crisis specifically, we must inquireas to the conditions in which sovereign debt be-comes unattractive to these creditors.Before that, one more point. So far this text hasonly discussed debt which was taken on in thepast and how this debt is repaid. However, in al-most perfect regularity the mountain of debt isgrowing each year, which means that new debtis added to the existing. Those debts which arecontracted in addition to the follow-up financ-ing debts are called “new net debt”. And toclear up a few common confusions that stemfrom fiscal jargon: if politicians talk about abalanced budget, then this only means that thisyear no new net debt shall be added to the ex-isting gross debt. The state still has to take onnew loans to pay off the old that are now dueto be paid. When politicians say that they wantto save or adopt an “austerity budget” then thissometimes only means that they want to spendless money than planned last year. This mayinclude that they spend more money than lastyear and that they take on more debt than lastyear. Sometimes “austerity” simply means tocontract less new debt than last year. The to-tal gross debt still increases. These remarksare intended to counter the confusion that arisesfrom the usage of terms such as “saving” ingovernment finance. For individuals “saving”indeed implies spending less money – not sofor states. Calling taking on less new debt thanlast year “saving” highlights with peculiar forcehow self-evident the course of debt is for politi-cians.

Who are the lenders and what makesstate bonds so interesting for them?

The main lenders come from the financial in-dustry. Banks, insurance companies and mutual

funds buy the bonds of their own state or otherstates. The second major creditor group con-sists of other states or their central banks. TheGerman state, Japan and China, for instance,have considerable holdings of U.S. Treasurybonds. Thirdly, states attempt to harness theirown population to finance sovereign debt. Withbonds tailored towards this clientele states en-courage the people to grant the state credit forinterest in return.In the German budget debates of the ’60s and’70s there were concerns that sovereign debtwould lead to a “crowding-out effect”. Bankswould only have limited credit available and themoney they lent to the state could not be lentto companies. Sovereign debt would thereforehave a negative effect on the ‘supply’ of cheapcredit to companies. But this worry was nevertoo severe and governments always arrived atthe conclusion that they had carefully consid-ered the extent of new net debt and that it was somodest that companies would not feel the bur-den.This concern at that point was already ideologi-cal. In the following, we want to explain thatwhen banks grant states credit, this does notdisplace other investments. On the contrary,state bonds spur on the business of banks so thatthey can grant even larger volumes of credit tocompanies. The thesis is that banks need statebonds so that their business can properly flour-ish elsewhere. This is important to understandso as not to conceive the idea that banks fuckedup when they allegedly invested so carelessly instate securities. Furthermore, when states con-tract debt, it is always also an economic policyto support their financial sectors. This again isimportant to understand so as not to simply ac-cuse politicians of mistaken policy by provid-ing the banking industry with state bonds.

The financial industry as creditor

One reason to invest in state bonds is simplyto make money. The money spent comes backin a few years, plus interest. To that extent,state bonds are compared with all other bonds,stocks and other debt obligations offered bycompanies. From this perspective, state bondsare attractive to the lender when they promise –compared with other investment opportunities– higher interest rates.The second point of comparison of the manymoney-making opportunities lies in the relativecertainty that the debt plus interest will be re-paid. An absolute security does not exist, butas a rule of thumb one can say that the safer aninvestment the lower the interest. A loan to asmall business might earn more interest than aloan to BMW but in case of the small companyit may be much more uncertain the loan will berepaid. And in this regard sovereign debt has aspecial feature.The state, as the monopolist on violence, isalways the last solvent subject in its society:firstly, when in doubt, it may decide to raise as

much taxes as required to pay the debt. Beforethe state defaults it could, due to its taxing au-thority, tax all citizens, businesses, banks, etc.in its society so that they default first. Secondly,the state itself is the issuer of that money, inwhich it contracted debt. The U.S. and the UK,for instance, may, in the last resort, simply is-sue the money they owe others. For Germanyand Greece, in contrast, this is no longer as easydue to their participation in the Euro. This as-pect will be relevant later on in connection withthe explanation of the European sovereign debtcrisis – but for now we want to leave this spe-cial case aside.As the master over money and as the monop-olist on violence, the state usually enjoys thehighest solvency in comparison to companies,banks, etc., in its society. With solvency wemean the relative safety of a debtor to be ableto pay back its loans and interest.State bonds offer less interest than corporatebonds but, compared to the latter, they are rela-tively safer. This relative safety is necessary tothe banking industry as a base for its more in-secure investments. Before we go into this, aninterim step is required.

The trade and valuation of bonds

If an issuer of a debt instrument, i.e., an issuerof a bond or the debtor, has shown for sometime that she is a reliable money-making ma-chine by servicing debt and interest on timethen these debt instruments are traded. Organ-ised via the stock exchange or via telephone be-tween financial institutions, debt is bought andsold prior to maturity.Due to the possibility to be sold at any time, adebt is assigned a value. Without this possibil-ity it would simply be like this: a bank has £1million and gives it to the state. Now the statehas that £1 million and spends it. The bank inreturn has a debt obligation, i.e., a promise offuture payment, say, in 5 years. During these 5years the bank does not have the £1 million anymore, but just a piece of paper with a promise.After 5 years the bank gets its money back plusinterest – if the state is solvent.However, if there is a trade of state bondsthen this transaction presents itself differentlyin practice. A bank which gives away £1 mil-lion does not have the money but the promis-sory note. If this is traded the bank has the op-tion to transfer this note into money at any time.The financial sector treats this option as an as-set. The bank’s balance sheet does not simplystate: “We are poorer by £1 million – in 5 yearsthis will change again” but instead it is morelike “We have the promissory note now worthXXX”.This capitalisation – to turn promises of pay-ment into an asset – of debt obligations turnsthese promises into “fictitious capital”. Herewe do not want to go into detail along whichcriteria these promissory notes – bonds – areevaluated, they can be found elsewhere.9

9For example, see Karl Marx’s Capital: Volume 3, pages 594-600 of the Penguin edition. Also, our text “Gentrification” in this issue discusses capitalisation of land.

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However, here we want to highlight three con-ditions for the trading of debt instruments.

First, the debtor must be known to be a money-maker. Bonds or shares of small companies arenot traded because no one can size them up.Daimler Benz, on the other hand, is known tobe a big, even a global player; its economicperformance figures are continuously publishedand continuously robust. In case of states, too,it is known how potent the national economy isover which they reign.

Second, the debtor must have shown that it al-ways pays debt plus interest on time. Not onlyis it necessary to prove to be a money-makingmachine, but also to show (potential) creditorsthat this machine works reliably for them. Forexample, in 2002 Argentina announced that itdoes not intend to repay its debt in full. Fol-lowing this, the creditors grudgingly accepteda negotiation with Argentina over the dimin-ished redemption of their bonds. With this step,which is now discussed under the name “hair-cut” for Greece, Argentina has freed itself fromits debt burden. The consequence was that Ar-gentina did not get any more credit from thefinancial industry. Argentina is considered anunreliable debtor since and there is no (large)trade of its bonds.

Third, the debtor must contract large quantitiesof debt for its bonds to be traded. This soundsparadoxical at first since the more one is in debt,one might think, the less likely it is to be ableto service all debts. But if there are only a fewbonds on the market then there are high fluctu-ations of their value. These fluctuations, how-ever, have neither to do with the bonds’ interestnor the assumed (in)security that payment of in-terest occurs nor with the changing assessmentof the quality of the debtor. Instead changes insupply and demand have strong effects on thebonds due to the scarcity of the traded debt in-strument. If the absolute amount is highly lim-ited, a slight increase in supply might cause abig drop in price. In the business of specu-lation on changes in value such notes are ex-tremely profitable, but also loss-prone. Theyare so risky that not many companies want tobuild their business based on them. This in turnhas an effect on their trading volume.Only when many bonds are bought and sold ev-ery day will a bond holder have some assurancethat changes in value are based on the estimatedquality of the debtor. This certainty is not onlyrelevant to current buyers and sellers. If debtacts as an asset for the banks, then the dailychanges in value even affect those banks thatsimply want to hold these bonds at present anddo not want to sell them just now. Only when

the bonds are bought and sold daily en mass, isit worthwhile for the bulk of banks to invest inthem and to hold on to them. This way, tradingvolume is created in circles – demand for bondsis created by the demand for bonds – that makesrandom fluctuations due to tight supply and de-mand negligible. But for that the debtor mustissue enough promissory notes first.

The particular significance of sovereigndebt to the banking business

In order to understand sovereign debt (andthus also to grasp the crisis) it is important tocomprehend the function that safe and there-fore much-traded securities have in the bankingbusiness as well as their role in banks’ balancesheets.First of all, one has to give up the idea thatbanks would only lend their own money out.The money Barclays or HSBC lend to compa-nies, invest in equities or state bonds they bor-row from society themselves. Banks are char-acterised by the fact that they are always bothborrowers and lenders. That this is the casewith all banks, and hence is the norm, can bededuced from the obligation for them to hold9% of their investments as their own property orown capital. This means that 91% of the money

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they lent or invested they themselves borrowedfrom elsewhere.10

Banks, for instance, issue bonds themselves,i.e., they go into debt with other investors in or-der to lend this money to others. An easy wayto get money is to offer citizens to set up cur-rent accounts with them. Using this examplewe want to explain the important role sovereigndebt plays for banks.Every worker, every civil servant, every com-pany has an account with some private bank.At, e.g., Barclays there is a constant flow ofwages, salaries and earnings of companies intovarious accounts. To some extent Barclayslends out this collected money. The cost ofthese accounts, such as interest or administra-tive expenses, are lower than the interest rateBarclays may charge when lending that moneyout. This way they are, as they say, in business.However, somewhat annoyingly to Barclays isthe fact that customers withdraw or transfermoney from time to time. For that the bankalways has to keep money as a reserve that itcannot lend out, i.e., a minimum amount ofmoney must be present at all times. Sometimesmore money is withdrawn by the customers,sometimes less. In theory, Barclays would haveto keep enough money for the maximum case,i.e., the amount of money all the bank’s cus-tomers have in their accounts. Yet again, thiswould be even more annoying if subsequentlyonly the minimum is withdrawn. In retrospect,this money would have lain idle – money thebank could have lent out to make money. Goodbonds, which can be sold any time and, thus,can be converted into new money, offer an ex-cellent solution for this distress. Hence, in prac-tice, Barclays holds back only a minimum ofmoney as a reserve, invests a portion in good,marketable bonds and the remaining money itlends out to companies for higher interest rates.Yet, if account holders do withdraw the maxi-mum of money, the bank simply sells the goodbonds, it is liquid immediately and, thus, it isable to pay out its customers. And in case themaximum is not needed (i.e., withdrawn) themoney is not fallow but Barclays has lent themoney out and, hence, can reap interest.Good, i.e., at any time marketable, bonds givethe above mentioned contradiction a passableform of development: banks can enter intointerest-bearing transactions, thereby increasetheir money as capital, and at the same timehave quasi-money as a reserve in case of claimsagainst them.This function reinforces itself: if bonds aretreated as bank capital and bought because ofit, one can be more certain that one can sell atany time. Thus, the better they serve this func-tion.Because sovereign debt is considered to be par-ticularly safe and traded as such, one can find it

in the balance sheet of every bank. Sovereigndebt is particularly compelling for banks dueto the special safety of the debtor as the mo-nopolist on violence and master of money.Sovereign debt, thus, is both investment andliquidity.This way, the banking business is de-limitedand freed through good, solid debt instruments.They are a good basis to take on extended creditand to grant credit and, thereby, to remain con-stantly liquid. This way the economically desir-able ‘supply’ of companies with credit becomeslooser and interest rates do not necessarily sky-rocket because of a tight money supply (eventhough they might still do that for other rea-sons).The question why states contract debt insteadof simply printing the money they need derivesa different answer than the usual one in thislight: through its sovereign debt the state sup-ports the national banking industry. Not in theway that it simply wants to pay for its interest,as many leftist critics of unjust redistributionassume. Instead, the state adjusts its financ-ing to the requirements of the banking industryand this way contributes to de-limited lendingby banks to businesses.Furthermore, the state engages with the pri-vate interest of banks in quasi-cash, which alsobears interest for economic reasons and sup-ports the banks through its economic policy,when it endows its debt with another feature:the central bank always accepts sovereign debtand returns fresh, new, real money to the banks.So the banks do not have to trade the debt se-curities among themselves to get money. Theycan go directly to the central bank and receivereal money for these bonds there.11 This waythe state supports the financial sector in its in-terest to lend money and to have liquidity at thesame time and this way the state supports itselfin its accumulation of debt. Here, too, the Euroconstruction has some particularities to whichwe will return when explaining the crisis.

Other states as creditors

The reason why states buy sovereign debt ofother states is similar to the above discussed in-terest of banks. But here the first concern is notinterest. States want to hold foreign currencyto hedge their own currency. Germany, Japanand China have always had an interest in Dol-lar reserves in order to tell the world: “When indoubt, we have more than our own currency inwhich we can pay. If for whatever reason thereis doubt on our currency, we are still able to payin another currency.” Yet, this is intended as asort of alibi so as no one actually ever questionstheir currencies. Every modern currency needsits own bank hoard. Now in a second step, con-siderations about the rate of return come into

play: “If we have to hold Dollars as a reservethen we can also take United States treasurybonds which also promise interest. Should wethen need to tap the reserve, we can exchangethese bonds into Dollars quickly – either on themarket, or with the Federal Reserve.” This waythen, these states also have both: a reserve thatat the same time functions as capital, i.e., forthe accumulation of money.

The population as creditor

The third group of creditors for states is theirown population. In Germany a special bondwas specifically created for this group, the Fed-eral Treasury note. The conditions of this notevery clearly show Germany’s interest with this.First, one can buy it even for small amounts ofabout e100. This way every wage earner isinvited to invest her savings in the state. Sec-ond, “Type A Federal Treasury” note interestincreases the longer one holds on to it. Thesenotes have a maturity of six years but they canbe returned early; one then, however, collectsthe low interest rates of the initial phase only.If one holds on to these notes until they maturethen one collects the higher interest rates of thefinal phase. “Type B Federal Treasury” notesonly earn interest at the end of their seven-yearterm anyway. This ought to encourage citizens– unlike the banks – to hold on to these notesuntil they mature. If one then, thirdly, reinveststhe principal sum plus the interest back intoFederal Treasury notes then the whole thingis tax-exempt. Federal Treasury bonds may,fourth, be bought by citizens and non-profit or-ganizations only, not by banks. Fifth, they maynot be traded on the stock exchange. This waythese notes are excluded from the evaluation asfictitious capital.These Federal Treasury notes hence produceproceeds for the German state which are re-moved from the speculations of the banking in-dustry. This contributes to trust in sovereigndebt by banks and other states as creditors.

Credit replaces money – credit can-not be replaced by money

In almost all economically successful states theaccumulated debt has reached a level where it isunthinkable for it to be repaid through taxes –this would be, and has been for several decadesnow, impossible.This situation has come about on the back ofthe financial industry’s certainty that debt andinterest would be serviced on time; which is tosay, through credit they themselves will havegranted at a future date. This propitious cir-cle must be continuous if the symbiosis of stateand financial capital is to be carried out success-

10On 27 October 2011 the Euro countries introduced new regulation for all European banks which raised the limit to these numbers. Before, banks only had to own 4% of the money theylent or invested – apart from a few exceptions.

11Technically, this can work in two ways. Before the introduction of the Euro private banks in Germany could sell state bonds to the German central bank (discount rate) or temporarily de-posit them with it (Lombard rate). Since the introduction of the Euro, banks have only been allowed to temporarily deposit the sovereign debt to get fresh money. They must take thesestate bonds back after some time and return the money. But because private banks can do this over and over again, this procedure effects the same, namely, that the European Central Bankpermanently holds state bonds and that the banks permanently have fresh money. In the current crisis, however, the ECB too has begun to directly buy state bonds.

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fully. A bank that has invested in state securi-ties, and which is now waiting for its money,should immediately reinvest in new state secu-rities so that it can then be paid with this (here:its own) newly invested money. In this fashionbanks are able to hold on to a permanent stockof, say, British state bonds despite the matura-tion of given bonds after a few years. If a bankwants to reduce its holdings of state securities,then it demands payment without granting anynew credit to the state. For this to work, otherbanks must be willing to increase their engage-ment in these securities.For its own speculations on state bonds to besuccessful each bank depends on the specula-tions of its competitors. If a bank, for what-ever reason, believes that other banks will re-duce their commitment, it has good reason toreduce its own involvement as well. Such anaction is of course likely to have a domino ef-fect, arousing the fears of other investors andinitiating a movement of divestment or with-drawal. But how do banks gauge the intentionsof their competitors? Here they are reliant notonly on information from their own creditors’cycle but also from the economic developmentof the debtor – the intended recipient of any po-tential investment. Does the national economyruled over by the state have a positive economicoutlook? And, when there is a crisis, will thiseconomy be one of those to come out of the cri-sis as winners?Hence, the circular system of credit refers tothe productive sphere where money is spent andearned in a different way than in the financialcycle.12 The national economy which is subjectto the indebted states must permanently show tobe a large and sustainable money-making ma-chine. If this is the case, and the creditors haveno doubt about it, then they trust that they willeach want to invest over and over again in thelong term. In order to gain this trust the statethen makes policy. The state does not take careof economic growth so as to pay back debt, butthe state provides for economic growth so thatit does not have to settle the debt but can alwayscontract new loans.

What follows for the states? Theirpurpose of capitalist economicgrowth becomes an objective con-straint

What are the responsibilities of the capitaliststate in securing the availability of sovereigndebt? Most importantly, past debts and interestmust be paid on time. Any question of reliabil-ity here is detrimental. Should a state default ona payment to a creditor, not only is that credi-tor deprived of its returns and subsequently lesslikely to buy new state bonds in the future, but

equally damaged is the capacity for those statebonds to be treated as quasi money.The state is thus concerned both with ensuringan adequate line of credit and with the healthof its domestic banking industry. Keeping thefinancial markets happy is central to both andso, understandably, a pressing concern for thestate at all times. The credit made availableto the state is used, on the one hand, to payback old loans, and, on the other, to pay fornew projects. Central to this availability, andthe cheery up-keep of the financial markets, are“signals” from the state, i.e., “Here, on my terri-tory, everyone and everything is concerned withone goal: making more money.” In this way thestate is fortuitously compelled to ensure opti-mum conditions for what it wants in any case:capitalist growth. To this end it subjects ev-erything and everybody. To avoid a possiblemisunderstanding: the following points on howthe state guarantees capitalist growth are validin general and are not due to sovereign debt.However, if growth is demanded, one needs tounderstand how the state facilitates it – with orwithout compulsion from the financial markets.Firstly, the state meets its responsibilities togeneral capitalist growth by upholding itselfand its law (politicians, judges, police, othercivil servants plus other infrastructure). This isthe absolute prerequisite for private business.Secondly, the state must make sure that theclasses can play their role in capitalism. So-cial provisions will be necessary for the work-ers – not so that they can live a carefree life, butso that they are merely mentally and physicallyfit enough to be able to offer themselves to andwork for companies. The state must also havedone a good deal of preparation before capitalis in a position to begin investing: infrastruc-ture, universities etc.If all this is given the state, thirdly, consid-ers how to accelerate economic growth. Here,some of the services and social provisions thatseemed necessary in step two (e.g., labour pro-tection laws) now become more problematic.These are necessary only to the extent that theywill prevent the collapse of workers under thestress of hire and fire rules, thus rendering themunavailable to capital. But such measures canalso be seen as an impediment to increased eco-nomic growth. This keeps politicians busy withthe continuous experiment: how much can onedo without some social services and labour pro-tection laws?A fourth necessary provision of the state is adiplomatic team so that capital’s interests maybe represented, and that it is able to invest,abroad. Furthermore, it needs the whole warmachinery so that this diplomatic staff can ne-gotiate properly with other foreign sovereigns;that is, such that other countries pay the appro-priate respect.

All of the above costs money. And, of course,in the effort to establish and promote economicgrowth as just described, but also in the attemptto make its creditors feel secure, the state is inneed of more credit. The state wants to facili-tate the logic of capital, and for that it goes intodebt.If it is indebted and permanently dependent oncredit, the state has in fact created an objec-tive constraint which merely compels it towardswhat it had initially wanted. Perhaps this dif-ference of “want to” and “need to” is indistinctwhen everything goes well, but the oppositionbetween the two asserts itself in an economiccrisis. No one wants it, no one works towardsthe crisis, neither the state, the banks, com-panies, nor wage earners; but every few years“it” happens, and everybody knows it.13 In thisphase, the state, as shown above, has to rely oncredit even more. In this phase the state wantsnational economic growth, but it does not havethe means to bring this to pass. But the claimsagainst the state in the form of sovereign debtare in the world and require positive evidence.With this in mind, one can distinguish betweentwo types of austerity programmes. The firsttype is implemented when a state suspects thatfinancial markets are not quite convinced ofits quality as a money-making machine. Inthese cases, less money is spent on social pro-grammes, but more is spent for the supportof certain industries. For these stimulus pro-grammes even additional loans are taken outand tax cuts for businesses are introduced to at-tract additional capital. The signal is: “Look,we have cut everything that is economically su-perfluous and we also have given impetus to in-creased economic growth.”The second type of austerity can be seen inGreece. The EU and the IMF make their ‘sup-port’ dependent on broad tax increases and aus-terity measures. The Greek government is for-bidden to contract more credit, and thus it isunable to provide new impetus. In this way therecession is exacerbated and there is no trace ofdevelopment – a signal which is understood ac-cordingly on the financial markets: a state thatactually scales back all its expenses is a projectin liquidation and is certainly undeserving oftrust.

The ideology of objective constraints

The objective constraint of economic growth,imposed by sovereign debt, is real and not anideology. How this fact is presented in politi-cal debates, however, is often ideological andprovides the basis for more nonsense.When a politician claims that social benefitsand wages had to be cut to satisfy the finan-cial markets, the claim comes couched in theappeasing tones of sympathy and regret: he

12See also our text “Financial crisis 2008ff” available at http://www.junge-linke.org/en/financial-crisis-2008ff.13Here we do not want to pursue the issue of economic crisis further. But from the fact that it appears in all regularity, one can conclude that it is somehow related to the normal pursuit of

success of everybody involved. Especially when there is a worldwide economic crisis, one cannot even specify which state had done something wrong now. All countries had their nationalefforts to promote economic growth, all companies have tried to generate tidy profits, the result is a period in which there is no gain to be accounted for across the board. A crisis doesnot “come” from heaven, and not because of failure of the actors, but because everybody did everything “right” according to the logic of capitalism. To explain how this works exactly isbeyond the scope here.

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Year 1980 1995 2005 2009 2010 2011Interest in bn e 7.1 25.4 37.4 38.1 33.1 35.3New net debt in bn e 13.9 25.6 31.2 34.1 48.4 48.4

Table 2.2: Time series of interest payments and new net borrowing in the federal budget, FRG. Source: German Federal Ministry of Finance.

would indeed like to see better provisions forwage labourers, but, unfortunately, at this point,hands are tied, and needs must, etc. Any suchargument fails to acknowledge that the state infact approached the financial sector, and madeitself dependent on it precisely in order to fos-ter national economic growth. The state makesthe life of wage earners dependent on profitand this also applies if special measures are re-quired because of sovereign debt. The state isnot compelled by a matter with which it wouldotherwise have no involvement but by an effectwhich follows from its national project of capi-talist growth.Unfortunately, this argument is not only popu-lar among politicians but is widespread in thegeneral public as well. During a more success-ful phase of the national economy, there is al-ready enough evidence to put to question ca-pabilities of capitalism to provide for materialneeds. In this regard, a crisis provides an evenclearer demonstration of this. However, manypeople do not take this as a reason to questioncapitalism but as a reason to hope for or demandits better functioning: for that, many are willingto accept cruel policies. However, in the logicthat the state now has to be cruel because ofthe financial markets, the public goes one stepfurther: it is thought to be because of the finan-cial markets, as opposed to the state’s project ofnational economic growth – which the peoplethemselves want – that these austerity measuresare now needed. This difference in emphasis iswhat politicians are after when they speak ofeconomic constraints; it is not the own projectthat causes inconvenience but it is the financialmarkets.A good part of the protest which recently spreadacross Europe and the U.S. is based on this idea.It targets the financial sector as the culprit andcalls for its regulation or sometimes even na-tionalisation. Governments fuel these kinds ofexplanations for the crisis by complaining thebanking industry has ‘forgotten’ its supposedpurpose as a servant of the whole economy.This way, the contradiction which is con-tained in capital as an economic principle isdistributed across different actors. In railingagainst some of the actors (the banks) other ac-tors are longed for (strong politicians who dareto take on the banking industry), and so thewhole mess keeps going on.

The problem is not injustice in dis-tribution but capital’s end in itself

A common critique of sovereign debt is itsalleged redistributive effecton incomes; some

would collect interest on sovereign debt, whileothers would have to guarantee it via the taxesthey pay. Since tax laws have been changedin recent years so that, for example, now two-thirds of the taxes in Germany are paid by wageearners, it is clear for many: through sovereigndebt some get richer and others poorer.

This critique of sovereign debt, firstly, is wrongand, secondly, it is far too harmless. For theprincipal sum we have already discussed thatit is usually repaid through follow-up financingon the financial markets instead of taxes. Thefocus on the relationships that arise solely fromdealing with old debts was meant to emphasisethat the necessities of sovereign debt are morefar reaching than interest payments. But notonly is it wrong to assume the the principle sumof sovereign debt to be paid by taxes. Even theidea that at least the interest from that debt ispaid by ‘the people’ in form of taxes is doubt-ful.

Every year interest payments are due for the to-tal debt. These are listed in the German federalbudget as a separate item. In the years 2005and 2009 the new net debt (i.e., debt that isadded in addition to the old) was slightly lowerthan the interest that was due in those years (cf.Table 2.2). Here it was indeed the case thatat least part of the obligations growing out ofsovereign debt were met by taxes – but not thepredominant part. As shown in the table, in theother years, new net borrowing was higher thanthe interest owed. Regarding this, it may besaid that the federal government not only paidits debts with new debts but also the interest.Hence, the taxpayers are not or only slightlyburdened with debt. The lenders have earnedmoney through sovereign debt, but this is onlyby virtue of the fact that they have credited notonly the old debt but also the interest. That thegap between rich and poor would be wideneddue to the redistribution of taxes into interestpayments is only correct to a minor degree, ornot at all, depending on the fiscal year.14

The attack on the living conditions of work-ers resulting from sovereign debt is to be foundelsewhere and it is much more extensive. Inorder that the state permanently does not haveto meet its debt obligations from its economicperformance alone but is always able to takeout new loans, the whole of society must bealigned without exception as a money-makingmachine. This signal to the financial marketsincludes measures such as establishing a low-wage sector, cuts in social welfare, promotionof already successful businesses, etc. The nor-mal functioning of capitalism then provides thedazzling juxtaposition of poverty and wealth.

In relation to those who earn from sovereigndebt we need to make one more point regardingtheir ‘greed’: their wealth exists and prolifer-ates only so long as their private consumption,which may well turn out to be lavish, remains asideshow of their money-making. Their wealthsustains and reproduces itself only when theyreinvest their earned money again and again. Ifthey do not – and this happens now during thesovereign debt crisis – their wealth vanishes.Banks must write off their wealth in large quan-tities. The immiseration of workers does not re-sult from wine and cheese for bank sharehold-ers but for the recurring reinvestment of profitsfor more profits. This end in itself of capitalproduces misery, and even more so during a pe-riod of crisis when this end in itself is not beingrealised.

Sovereign debt and economic perfor-mance

At the beginning of this text we offered a cri-tique of the idea that the European sovereigndebt crisis had its basis in too much debt. How-ever, what is mainly referred to in explanationsof the crisis is the ratio of gross domestic prod-uct (GDP) and gross debt. Here people do notsimply talk about too much but about a ratio –an excess of debt in relation to economic per-formance.The usual explanation of crisis then goes some-thing like this: “Greece has fallen into the debtcrisis because it has contracted too much debtin relation to its economic performance. WhileGermany had a ratio of about 73% at the begin-ning of the crisis in late 2009, Greece was at aratio of 127%. Greece lived beyond its means.”A ratio of 100% would mean that the economicperformance of a country, as measured in ayear’s GDP, would be as high as the absolutelevel of debt. If Germany has a ratio of 73%then the GDP in Germany is greater than thegross debt. Greece, however, in 2009 had moredebt than its GDP in that year.So, does this ratio offer a cause for the cri-sis? When financial capital is looking for posi-tive evidence in the national economy to decidewhether a loan is worth it, then one could saythat the economic performance indeed plays arole. This is true but not in the rigid sense im-plied here.First of all, every contraction of credit isan attempt to become independent of currenteconomic performance – “living beyond yourmeans” is invariably the starting point. Stateswant to take on credit to develop their own na-tional economy. Hence, it is clear that, when

14The British campaign “Move your Money” http://www.moveyourmoney.org.uk/ makes a similarly erroneous assertion when it claims “UK taxpayers have given up to £500 bn to thebanks in the form of bailout and guarantee schemes.” (http://www.moveyourmoney.org.uk/the-problem-with-the-banks, accessed 18.2.2012) This money was not collectedthrough taxes but borrowed from the financial markets.

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1999 2003 2007 2009 2010 1999 2003 2007 2009 2010Germany 60.9% 63.9% 64.9% 73.5% 83.2% UK 43.7% 39.0% 44.5% 69.6% 79.9%France 58.9% 62.9% 63.9% 78.3% 81.7% Greece 94.0% 97.4% 105.4% 127.1% 142.8%Italy 113.7% 104.4% 103.6% 116.1% 119.0% Spain 62.3% 48.7% 36.1% 53.3% 60.1%Euro area 71.6% 69.0% 66.2% 79.3% 85.1%

Table 2.3: Time series of gross debt as % of GDP. Source: Eurostat

borrowing the ratio of debt to economic perfor-mance increases. However, another question iswhether the economy then develops in such away that it proves itself worthy of the sovereigndebt. If debt was a contribution to faster capi-talist growth then the relationship between debtand economic performance would fall again.But why should a state only contract debt tem-porarily and then wait to see whether this worksout? At any time there are opportunities andideas on how to develop the national economy.Therefore increased economic output might en-sue, but at the same time the start of the next“period of development on credit” may be her-alded – in this case, the ratio does not decrease.Table 2.3 lists the temporal development of theratio of absolute debt and gross domestic prod-uct of some countries and the whole Euro area.

None of the numbers by themselves indicatethat a state has overdone it. A country likeGermany which had 60% in 1999 is dependenton follow-up financing via the financial marketjust like Greece. The 60% could express stag-nation and may indicate to the financial marketsthat Germany deserved no confidence. Spainis currently one of the main loose candidatesin the Eurozone at 60%. The 113% of Italy in1999 could have meant that Italy has taken on alot of credit for its development. For this reasonthe number itself could be interpreted as abso-lutely ‘healthy’. Germany’s ratio has continu-ously increased until 2007 to nearly 65%. Thiscould be interpreted against Germany’s favour,so as to say that the economic development waspositive, but not as positive as it might first ap-pear, owing to the growth of its debts at thesame time. But why should 65% not expressthat Germany got to work on accomplishingmore, and that success will be seen in the fu-ture? When Italy’s ratio decreased to 103.6%by 2007, this might have been seen as an ex-pression of the successful outcome of Italy’s‘calculation’ – i.e., the high debt pays off grad-ually. But the financial markets could then alsohave asked whether Italy has not become unin-spired after its successful period of develop-ment: does it not have any more future-orientedprojects for which an expansion of sovereigndebt would be justified? Is Italy not, therefore,yet again a questionable candidate for invest-ment? One can see that the ways of financecapital are not unfathomable, but nor are theydefinite. This is not the fault of financial capitalbut is due to the nature of capital.

Whether it is in the case of states or companies,there is an effort to become independent fromtraditional sources of revenue (taxes or prof-its). They constantly live beyond their means:contracting credit and thereby trying to cre-

ate new sources of revenue. Credit is a claimagainst them, it stipulates that they will haveto pay an increased amount of money at a laterdate; and insofar as this is the case, credit isin principle an entitlement to the economic fu-ture. When and if this economic future be-comes the present cannot be properly identified.As such, the banking industry has the thanklesstask of deciding when a borrower has becomeso heavily indebted that the economic future nolonger meets the growing demands. This is thepolitical-economic basis for the hatred whichconfronts the financial sector in crisis. Becausethey trigger the crisis with their verdict, they areheld responsible for the crisis. Here we empha-sise that the crisis is anticipated from the begin-ning. The normal credit relation contains thepossibility of crisis from the very outset.

The sovereign debt crisis in the Eu-rozone

Since late 2009, Greece has been facing a debtcrisis. It has not been able to find enough in-vestors willing to lend it money to service olddebt – under the previous conditions that is.Therefore, in order to get money at all, Greecehas been forced to offer higher interest rates toits creditors. The financial markets did not greetthis news with joy and queue to collect higherreturns, but rather as a result they became evenmore cautious about Greek debt. For if Greecealready had problems, then how would it beable to repay even higher obligations in the fu-ture. This raised interest rates on Greek debteven further which Greece would have had tooffer on new loans – if the Euro Communityand the IMF had not intervened in early 2010.Figure 2.1 shows interest rates that variouscountries of the Eurozone had to pay in the past.What is striking about it is that with the intro-duction of the Euro, interest rates began to align(Greece joined the Euro in 2001) and then withthe financial crisis in 2007 interest rates divergeagain.Before the fixing of exchange rates of the re-spective currencies to the Euro (1998) and theintroduction of the Euro (2002) the financialmarkets obviously rated the respective statebonds differently. German state bonds wererated as more secure in comparison to Ital-ian bonds. In Europe Germany had alwaysbeen the state which paid the least interest.Greece, Italy and Portugal had to promise muchmore in interest in order to secure their loans.This first of all expresses that German bondswere more in demand than others. Sure, onemight think, Germany indeed was and is the

strongest economy. However, since the de-parture of the Deutschmark, the Lira and theDrachma, in short with the introduction of theEuro, financial markets have treated the respec-tive sovereign debts the same. As these coun-tries still had different economic strengths andstill developed differently, the reason for thisequal treatment must then lie in the single cur-rency. In retrospect, one can say that the differ-ent treatment must also be explained by the dif-ferent currencies. The quality of their sovereigndebt was apparently equal to the quality of theirnational currencies. With the onset of the finan-cial crisis in 2007 this equal treatment stoppedagain. The financial markets treated the vari-ous countries differently, notwithstanding themhaving the same currency. In what follows wewant to show, by analysing the Euro construc-tion, that this “notwithstanding” is incorrect.The thesis, which is yet to be established, is thatthe Euro has a contradictory design, such thatit allows two opposed assessments: because ofthe Euro all sovereign debts are equal and be-cause of the Euro all sovereign debts are differ-ent.First, however, the connection between thefinancial crisis and the sovereign debt crisisought to be explored.

The financial industry distrusts itssaviours

In 2007 the worldwide trade of a particular typeof securities (securitised loans) broke down.Gradually, it turned out that pretty much all themajor financial institutions worldwide were in-volved in one way or another in this trade andwere in trouble. Already in 2007/early 2008the first institutions started to falter and gov-ernments began to support the financial sectorwith extensive financial aid packages – basedon credit. These funds did not stop the down-ward spiral. In summer / autumn 2008 one re-spected bank after another faced collapse andthe largest financial crisis in 80 years unfolded– even more credit was now needed to rescuethe financial system. A general economic crisis,especially in the automotive sector was addedto the mix which in turn again required moresovereign debt as an intervention.As in the US, Japan and Great Britain, countriesin the Euro area took on massive amounts ofnew debt to rescue the banks. This was meantto prevent a “meltdown”. For some time thismeltdown was indeed stopped. Back then, rat-ing agencies were attacked by governments forrating what in retrospect turned out to be badassets as fairly safe. They were accused of not

kittens April 2012 15

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

5

10

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Exchange rates fixed

Greece joins Euro

Lehman Brothers collapses

year

stat

ebo

ndyi

elds

inpe

rcen

t

GermanyGreeceFranceSpainItaly

Ireland

Figure 2.1: Yields for ten year state bonds from the Eurozone (Source: ECB Data Warehouse)

properly assessing the risks attached to debt in-vestments, whilst banks were accused of engag-ing in risky speculation without assessing thesafety of their investments properly. To encour-age them to be more cautious, new laws werepassed (e.g., Basel III).

In the aftermath the financial industry and therating agencies indeed reconsidered the safetyof businesses which were previously consid-ered risk-free and found some problematicones: sovereign debt itself.

From the point of view of investors, states de-serve trust when they use their debts to promoteeconomic growth. In this respect the bailoutof the banks by European states was a big mi-nus. The ratio of gross debt to GDP in theEurozone was increased from 66% in 2007 to85% in 2010. That might have been acceptableif all the money had been used for the devel-opment of the respective national economies.However, the bank bailout was only an attemptto maintain the status quo, not to further eco-nomic growth. Hence, banks became more cau-tious towards all sovereign debt. Rating agen-cies also learned their lesson and took a harderlook at sovereign debt. This is half the expla-nation why currently almost all successful cap-italist nations are confronted with or threatenedby a debt crisis.

However, in the Eurozone this crisis took on aspecial form. The first suspicion was directedmainly against Greece, and later against Spain,Italy and Portugal. In October 2011, Francewas already under pressure. Hence, the ques-tion on the table is why the financial marketscame to such different conclusions when theyre-assessed sovereign debt in the Eurozone andwhy they continue to do so. This is due to thenature of the Euro.

The Euro: a common currency of ri-vals

The Euro Stability and Growth Pact imposesthe rule on member states of the Euro that theirgross debt must not rise above 60% of theirgross domestic product. Additionally, their newnet borrowing, i.e., those debts which are addedeach year, must not exceed 3% of the gross do-mestic product. To monitor these rules mem-ber states are required to write reports on howthey are going to comply with them in the cur-rent as well as the next few years. If a state ex-ceeds these requirements it receives a blue let-ter and if things still do not change penalty faresare due – this is what the member states agreedon.15

This agreement expresses both a common pur-pose and mutual mistrust. The member statesknew that the Euro was a good basis for eachcountry to take on debt. Indeed, this wasthe plan for each country, to borrow as cheapand easily as Germany could when it had theDeutschmark. Thus, in the first step, going intodebt is permitted. However, in the second step,the freedom to borrow is limited. An unlim-ited use of the freedom to take on debt, it is as-sumed, would damage the new joint currency.How is this potential damage to be understood?As discussed above, states support the quasi-money quality of their bonds by offering banksthe right to exchange state bonds at any timefor real money via their central bank. This alsoapplies to the Euro. The fiscal policy of theEuropean Central Bank (ECB) declares that itaccepts bonds with a top-rating by rating agen-cies and offers fresh money in return. These toprated bonds include above all sovereign debts ofEurozone member states. In this way the EuroCommunity declares its sovereign debt to be the

same as the Euro (sovereign debt = Euro). Con-versely, they declare that the Euro is equal totheir debt (Euro = sovereign debt). The qualityof the Euro now depends on how well this debtcontributes to capitalist economic growth.The extent to which sovereign debt does not fa-cilitate capitalist growth in the Euro area can beobserved in the inflation of the Euro.16 Infla-tion refers to the situation in which money de-values itself and prices rise; everything bringsin more money than before, but everything ismore expensive. Companies and banks earnmore money but realise that this brings no ben-efit because everything is more expensive.Strong inflation shakes up a national economy.A capitalist invests money, gets more moneyback and then has to worry whether he can af-ford all the raw materials needed for furtherproduction, because they are now more expen-sive. But inflation is especially crucial for thebanking industry. A loan which earns 3% in-terest is an actual loss if, during the same time,money was devalued by 4%. Therefore, stateshave an interest in avoiding excessive inflation,because it prompts financial capital to investsomewhere else in equities, state bonds, cor-porate bonds, etc. On the other hand, no statewants to completely avoid inflation. Every stateknows that inflation is a necessary side effectof their sovereign debt. Thus, the ECB sets theself-imposed goal of 2% inflation.By mutually restricting each other’s debt theEurozone member states collectively worryabout the quality of their money. Above all,they want to prevent the respective other statesfrom harming the shared currency.They have a common money, but the nationstates still compete against each other as be-fore, when they pursue economic growth intheir respective domestic contexts. The power

15From the beginning almost no country obeyed these rules, not even Germany. Despite agreeing on the rules the incentives for member states to take on more debt than agreed did not goaway. Furthermore, until the bank bailout the financial markets did not seem to mind this.

16The fact that sovereign debt has an inflationary effect on the currency is recognised in bourgeois economics and politicians are aware of it, too. However, we explain this relationship quitedifferently than bourgeois theories. That said, we have not understood the issue of inflation well enough so far to be able to present it here clearly. We still have open questions. Therefore,here we simply content ourselves with citing inflation as one reason for the mutual distrust amongst the Euro states.

16 April 2012 kittens

of Germany, Italy or Greece still depends on thestrength of their respective national economies.And it remains the duty of the respective statesto seek to achieve that success through nationaleconomic policy. The extensive use of debt byone country might not only damage the Eurobut also allow this country a competitive advan-tage at the expense of other nations. If Greececould have taken on much more debt and there-with set up superior infrastructure, perhaps thencapital would have flown to Greece. Thenmaybe supermarkets in Germany would be fullof Greek products and not the other way aroundas it is now: German producers are superior toGreek producers, defeat them through competi-tion and do not allow them to develop. Now,Germany profits from the fact that supermar-kets in Greece are full of German products.The justice that the Euro countries have agreedon is that whoever is successful is right. Withthe freedom to take on 60% debt relative to itsGDP Germany may – with a GDP of arounde2,500 bn (2011 estimate) – take on e1,500 bnin debt. Greece with a GDP of around e226 bnmay only take on e135 bn. On the one hand,this means that successful countries such asGermany and France dictate to the other statesthe conditions of their community. On the otherhand, this condition has an internal rationality;if the adverse effect of sovereign debt on thequality of money can be balanced out by cap-italist growth, then it is logical that states cancontract more debt if capitalist growth accumu-lates more on their territory. If they contributeless in this respect, then they should also bor-row less. This is a signal to financial marketswhich says: look, the entire economic outputof all Euro countries underwrites the Euro. Weonly take on debt in accordance with a fixedrelation to economic performance. Therefore,you can trust us as the Euro Community.

The financial industry had trust inthe Euro construction . . .

At first, the financial sector had confidence inthis construction, when, since the introductionof the Euro, it did not discriminate betweenstate bonds of different Euro countries. Theywere all equally good because they could allbe exchanged, if in doubt, for fresh Euros atthe ECB. That these countries maintained theirjoint money as competitors the financial mar-kets also did not take as an argument againstthe quality of the Euro. After all, all countriesgain an advantage from the Euro, hence, theyhave a common concern for their currency. In-deed, because they are competitors they mon-itor each other more vigilantly with respect totheir debt policies than they would do on their

own. Behind the Euro stands an economicpower which is the sum of the individual na-tional economies – another argument in favourof the currency. The Euro also managed to re-place the Deutschmark adequately as foreignexchange hoard outside the Eurozone. Centralbanks around the globe are interested in hold-ing the Euro alongside the Dollar as a currencyreserve. As discussed above, this does not takethe form of suitcases full of Euro banknotes butrather the form of state bonds. The best hoardis one which increases itself.

. . . and wonders now, whether thiswas justified

In light of the bank bailout the financial mar-kets see this somewhat differently now. Due tothe large amounts of new debt taken on merelyfor the preservation of the status quo, there aregood reasons to be wary with respect to anyEuropean state. But suspicion is not just sus-picion, because this wariness engenders a hy-pothetical question which reinforces the sus-picion: if the financial markets actually wereless happy to accept a specific state bond, mak-ing that state’s follow-up financing come un-der pressure, what options would such a statehave at its disposal? If a state has options, thismay be enough to calm the markets such thatthey do not even test out whether these optionswould work.17 The hypothetical answer to thisquestion differs from one Euro state to another.Also, with respect to this question the Euro con-struction itself proves to be a disadvantage.Before the start of the Greek crisis in late 2009the situation was like this: in the event thata Euro country had issues with refinancing itssovereign debt on the capital markets, that ithad to pay higher interest rates because of this,and therefore that its chances of getting freshcredit were reduced further, it was not intendedthat the other Euro countries would intervene tohelp the troubled nation out. On the contrary,the Euro states explicitly agreed on a “non-assistance clause” (Article 125 of the Treaty onthe Functioning of the European Union). If thenrating agencies downgraded the state bonds inquestion, then the ECB, in accordance with itsown rules, should not accept these bonds anymore in exchange for fresh money.A sovereign state, as the sole master of itsmoney, always has the option of exchanging itsbonds for fresh money. This might cause in-flation (which alleviates sovereign debt) whichcan lead to a devaluation of its currency sothat domestic companies can export more (butimports become more expensive). This waythe national economy may regain momentum.These are by no means certain but still possi-

ble ways to get out of the dilemma. However, asingle Euro country cannot decide the monetarypolicy of the ECB alone. Why should the com-petition agree to a Eurozone wide inflationaryprogramme that would harm their own nationaleconomies? According to the regulations, until2009 a single country in a debt crisis could relyonly on its own national economic strength andwas in just as bad a situation as a country thathad contracted debt in a foreign currency.18

The test of financial markets and theresponse of the Euro Community

The financial markets picked Greece as theweakest link in the chain of the Eurozone andbecame more cautious. Therewith they pre-sented the following questions to the rest of theEuro countries.Firstly, will you really allow Greece to defaultin accordance with your treaty, or will you leaveit to the IMF to take care of it? If so, thenwe made a mistake in the past when we specu-lated that the strength of the Euro stands behindGreece. We then need to rethink our involve-ment in all other Eurozone countries. That is,we will have to exercise more caution in the fu-ture for all countries except perhaps Germany.Or secondly, does the Euro or the Euro Com-munity now support Greece in violation of thetreaty? If so, then we would refrain from treat-ing Greece only as Greece since the Euro wouldstill stand behind Greek sovereign debt and itwould be as good as any other debt. But thatdoes now mean that the Euro and the rest of thesovereign debt are a little bit as bad as Greeksovereign debt is itself. Similar to the bankbailout, new credit was contracted for an un-profitable piece of land: not to develop it butsimply to preserve it in its miserable condition.The Euro would then be burdened by an unprof-itable area and bad debts. Thus a more cautiousapproach would be in order with respect to theEuro and the sovereign debt of all countries –including Germany.Along these two alternative lines, each car-rying bad consequences, a dispute broke outwithin the Eurozone. Germany wanted to an-swer the first question with “yes”: no help forthe sovereign debt problems of individual coun-tries. The Euro Community shall not become a“transfer union”. If a country has a fiscal prob-lem it is its own problem. Germany insistedthat its own national achievements are not to beused to make up for the failures of other states.France, however, did answer the second ques-tion with “yes”: we have to help other Eurocountries, otherwise there will be an unpre-dictable chain reaction and the whole Euro willcollapse.

17When in this text or in newspapers one reads that the financial markets “test out”, “cherry pick” or “put pressure”, then one should not imagine that the heads of major financial institu-tions meet and devise a common strategy. Financial institutions are competitors, they usually do not coordinate. But they are dependent on each other with regard to the development ofthe value of their assets, and, hence, they pay attention to each other. If an institution is becoming more cautious about the purchase of Greek bonds, then it may be appropriate for com-peting institutions to become more cautious as well. The result is a uniform investment strategy that is inappropriately called “herd instinct” not only in newspapers but also in bourgeoiseconomics.

18Third World countries, in which the financial markets have little trust economically, hardly get any credit in their own currency. They need to offer state bonds denoted in Dollars to the fi-nancial markets. They receive Dollars but must also repay the debt and the interest in Dollars. If there is inflation in their own currency, then the lenders do not lose money – as long as thestate pays, which, ultimately, the IMF ought to guarantee.

kittens April 2012 17

This argument ultimately made sense to Ger-many. After all, its successes depend on theEuro and the Eurozone. This does not meanhowever that the first argument is off the table.Hence, Germany has a conflicting interest: be-cause of its national interest it does not wantto stand by and assist other countries and be-cause of its national interest it must stand byother countries.

With a little resistance from Germany, the Eu-rozone member states and the ECB agreed onoption number two. In April 2010 the Eu-rozone countries agreed on an initial bailoutfor Greece. It would run for three years andthe IMF would be involved. In an emergencyGreece could access assistance totallinge45 bnin the first year.

As with the bank bailouts, the Euro states mo-bilised large sums of money, such that theGreek state had the necessary funds to pay backits due debt. If Greece had to access these fundson the capital markets, according to the valua-tion of its bonds on these markets, it would havehad to pay 20% interest rate for its state bonds19

– a rate that makes funding in the future so un-likely that no investor would grant the Greekstate credit. Now it gets this credit from therescue funds, which ‘only’ demand an interestrate of 5%, or since July 2011 of 3.5%.

For these funds, the Euro countries themselvesborrow on the credit market and thereby fur-ther increase their sovereign debt. This moneyis then invested in new Greek state bonds, thequality of which of course is not much betterthan the old ones.

That did not impress the financial markets. TheEuro states responded with increasingly highermasses of money to support those countries thatare under pressure. Already in May 2010, thepackage for Greece was raised to e110 bn. Atthe same time the EU and IMF agreed on a res-cue fund for the whole Euro area – the EFSF(European Financial Stability Facility). Addi-tional e750 bn were mobilised to assist thoseEurozone countries having problems contract-ing credit on the credit market to pay back oldloans. For this the ECB also decided to tem-porarily accept poorly rated bonds in exchangefor fresh Euros. This “temporary” still holdstrue today (November 2011). This, unsurpris-ingly, did not impress the financial markets.

First, this is because these rescue measurescarry the above-mentioned disadvantage inthem – that more debt is issued just for thepreservation of the current state and not forcapitalist development. The larger the res-cue packages, the more claims on accumula-

tion of money are collected relative to a non-development.

Second, perhaps a common announcementwould have impressed the financial markets alittle bit – an announcement that the Euro areawould absolutely and unquestionably stand be-hind sovereign debts and was ready to step in nomatter what size of credit was required wouldhave impressed the financial markets a littlebit. However, the German point of view isalso present the whole time: to grudgingly ac-cept rescue packages but always to jam on thebrakes. Rescue packages, at a pinch, but lim-ited please. The financial markets take note ofthis and this is an argument against these rescueattempts.

Third, imperialist competition thrives in timesof crisis. The weakness of the other states isthe best opportunity to extort political conces-sions from them. In this way, Germany strong-armed all the other states into surrendering theirnational fiscal sovereignty. What one can ob-serve in Greece shall be extended step by stepto other states. In addition to the Parliament, aninternational troika is now also allowed to in-tervene with a government’s budget. To wringsuch concessions – that is the nature of extor-tion – Germany must threaten over and overagain to not agree to the rescue packages. The

19When a state issues a bond of e1 million at 5% interest, then it promises that it will pay e1.05 million when the bond ‘matures’. On the stock market these bonds are bought and sold daily.If suspicion develops and more and more institutions want to sell but less want to buy then the price on the stock exchange falls – say to e900,000. Now, if the debtor can ultimately pay,then the yield for the buyer has risen. For e900,000 he has the right to e1,050,000. This would be a gain of e150,000 and therefore a return of 11.67%. A state that now issues new bondsmust offer the financial markets at least 11.67% interest rate, otherwise nobody would buy them as there is a better deal to be had on the stock exchange. Greece’s state bonds have fallenso much that it would theoretically have to offer 20% or more of interest to attract investors.

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German chancellor Angela Merkel has accom-plished this repeatedly in the last two years. Shehas over and over again risked everything inorder to extort the next concession from othercountries. All this jeopardising, of course, isnot a calming influence on the financial mar-kets.

Fourth, in this way more and more countries getinto trouble. The trend is that fewer and fewerstates are using their credit to support a growingnumber of states. If Spain or Italy would haveto be supported as a large debtor, then Franceand Germany could no longer manage this.

However, in order to give the impression thatthis could work and that the financial marketswould therefore not need to test it, it was de-cided that the rescue package would be in-creased to e2,000 bn in October 2011.20

However, the Euro states note that their pre-vious rescue principle, by which no Europeandebtor could admit that it was unable to meetits payment obligations, hit a dead end for thereasons given above. Therefore, what has longbeen discussed as insanity is now proposed as anew solution.

Greece’s creditors should take a “haircut”. Thiswould mean all creditors, namely financial in-stitutions, states and the rescue fund of the Eurostates itself should give up around 50% of theirclaims. In this way, not only would Greecelose a bit of its burden, but the rescue fund it-self would also be relieved. It does not haveto spend as much additional money when only50% of Greek debt has to be re-financed. Thishowever begs the question again whether thebanks could withstand this haircut and whatchain reactions this could cause, if, for exam-ple, credit default swaps (CDS) – basically in-surance against default – which also still exist,are due. If the haircut is voluntary then theseCDS might not be due. Then all of the institu-tions which hold these derivatives must depre-ciate these assets which they list in their balancesheets. This way the game returns to its startingpoint: the banks must be rescued by state loans.To that effect the EFSF rescue fund is allowedto grant credit to member states to support theirbanks.

Austerity and mass impoverishment –for what?

As of November 2011, the logic of the res-cue packages was as follows: more and largermasses of debt would be mobilised to ensurethat no state bond ruptured. Each state bondshould, at the end of its term, fulfil its promise:to return the principal sum plus the promisedinterest rate. In countries facing a sovereigndebt crisis the program accompanying theserescue attempts has been austerity and govern-ment policies which reduce the salaries of stateemployees or dismiss them directly; in addi-tion, pensions and social benefits have been cut.This, first of all, ought to reduce governmentspending. Second, the state’s revenue oughtto be increased independently of credit by in-creasing or more thoroughly collecting taxesand by privatising state property. Third, eco-nomic growth ought to be boosted, pensions re-duced and “barriers to competition” removed,i.e., wages cut.To think of these measures those countries donot need guidance, they come up with them ontheir own. The Euro Community’s role is to en-courage them to try even harder. Greece, how-ever, which was the first nation in need of sup-port from the Euro Community, has been forcedto commit itself to these measures.These measures are a radical programme of im-poverishment. This can be illustrated brieflyin Greece. A state employee earns on averagee1,000 per month. A worker in the private sec-tor earns on average e800. While the unem-ployment rate in Greece was at 10% before thecrisis, it has now reached 19%. In addition, inGreece a salary must usually suffice for an en-tire family. This family often includes youthsold enough to work but who, with a youth un-employment rate of over 40%, cannot cut thecord from the family and cannot contribute any-thing to its income.All this occurs, with food prices that are on av-erage not lower than in the UK or Germany.That it is necessary for survival under such con-ditions to evade the tax claims of the state isobvious. Against this widespread behaviourthe Greek state now acts fanciful and collectstaxes with electricity. Anyone who does not

pay taxes gets their power shut off. If the stateis the largest economic player in a country be-cause it has nothing to offer but tourism, ship-yards, fields and banks, then an austerity pro-gram does not end an economic crisis but exac-erbates it. Because people are made dependenton capital’s success, this results also in acceler-ated impoverishment. In the 21st century peo-ple are turning their backs on cities and return-ing to the land. They are learning agriculture,not to make money but to survive somehow bythis kind of subsistence economy.This dazzling new poverty is due to a specificcause: the doubt that is produced by the Euroconstruction and still present in the rescue ef-forts, is fought against by extending the finan-cial control of the Euro Community over thenational budgets. Ideally, and to some extentactually, Greece degenerates to a basket casewhich has had taken from it a core aspect ofits sovereignty, namely its fiscal policy. Greecehas become a piece of trash that shall continueto exist in such a way that the Euro is notdoubted. All debts are settled, this the Euroguarantees. The vital needs of the people areirrelevant, for those no new loans are taken on.The harshness with which this happens is at thesame time a demonstration intended to boostthe financial markets’ confidence in the Euro.The message is this: although the new loans arenot being used for the development of capital-ist progress, but only to save the status quo, nomoney is wasted on the mere necessities of thepeople.As a tendency it can be said: the larger the sizeof the rescue package, the less financial marketssee it as a solution; so, the more countries grad-ually come under pressure, the more radical andcruel become the impoverishment programmes.What force is behind this development can per-haps be shown by the example of a strike of airtraffic controllers in Spain in December 2010.The government declared a state of emergency,sent the military out and threatened strikers toput them in front of military courts for insub-ordination which would have resulted in prisonsentences of several years. Tourism is an im-portant economic sector in Spain, and it is tooimportant for the government to take any risk.That also was a signal to the financial markets.

20It works like this: before, the money from the bailout fund was used simply to pay off old creditors. The states that have given money to the bailout fund in turn received new promises ofpayment from Greece. With e500 bn one can buy e500 bn worth of state bonds. Now, the money will be used differently, that is, as insurance. Potential investors in Italian state bonds arepromised that they get up to, for example, 30% from the bailout fund, if Italy would actually default. This is supposed to animate investors to grant Italy new credit so that it can use it topay off old debt. Thus, with e500 bn one could hedge state bonds worth e1,666 bn up to 30% (500 · 10

3 ≈ 1, 666). However, should it actually come to a default, which would meanthat Italy negotiated to pay only 70% of its debt, those e500 bn from the bailout would simply be gone. In the old variant the bailout fund would still have claims against Italy worth e350bn (i.e., 70% of e500 bn).

kittens April 2012 19

Bitcoin – Finally, Fair Money?

In 2009 Satoshi Nakamoto invented a new elec-tronic or virtual currency called Bitcoin, the de-sign goal of which is to provide an equivalent ofcash on the Internet.1 Rather than using banksor credit cards to buy stuff online, a Bitcoinuser will install a piece of software, the Bitcoinclient, on her computer and send Bitcoin di-rectly to other users under a pseudonym.2 Onesimply enters into the software the pseudonymof the person one wishes to send Bitcoin andthe amount to send and the transaction willbe transmitted through a peer-to-peer network.3

What specifically one can get with Bitcoin issomewhat limited to the few hundred websiteswhich accept them, but includes other curren-cies, web hosting, server hosting, web design,DVDs, coffee in some coffee shops, and classi-fied adverts, as well as the ability to use onlinegambling sites despite being a US citizen and todonate to Wikileaks.4 However, what allowedBitcoin to break into the mainstream – if onlyfor a short period of time – is the Craigslist-style website “Silk Road” which allows anyoneto trade Bitcoin for prohibited drugs.5

On February 11th, 1 BTC exchanged for 5.85USD. So far 8.31M BTC were issued, 0.3 Mil-lion BTC were used in 8,600 transactions in thelast 24 hours and about 800 Bitcoin clients wereconnected to the network. Thus, it is not onlysome idea or proposal of a new payment sys-tem but an idea put into practice, although itsvolume is still somewhat short of the New YorkStock Exchange.The three features of cash which Bitcoin triesto emulate are anonymity, directness and lackof transaction costs, all of which are wanting inthe dominant way of going about e-commerceusing credit or debit cards or bank transfers. Itis purely peer-to-peer just like cash is peer-to-peer. So far, so general.But what makes the project so ambitious is itsattempt to provide a new currency. Bitcoin arenot a way to move Euros, Pounds or Dollarsaround, they are meant as a new money in itself;they are denominated as BTC not GBP. In fact,Bitcoin are even meant as a money based ondifferent principles than modern credit monies.Most prominently, there is no “trusted thirdparty”, no central bank in the Bitcoin economyand there is a limited supply of 21 million ever.As a result, Bitcoin appeals to libertarians who

appreciate the free market but are sceptical ofthe state and in particular state intervention inthe market.Because Bitcoin attempts to accomplish some-thing well-known – money – using a differentapproach, it allows for a fresh perspective ofthis ordinary thing, money. Since the Bitcoinproject chose to avoid a trusted third-party inits construction, it needs to solve several ‘tech-nical’ problems or issues to make it viable asmoney. Hence, it points to the social require-ments and properties which money has to have.In the first part of this text we want to both ex-plain how Bitcoin works using as little techni-cal jargon as possible and also show what Bit-coin teaches about a society where free andequal exchange is the dominant form of eco-nomic interaction. In the second part we thenwant to criticise Bitcoin’s implicit position oncredit money. From this also follows a critiqueof central tenets of the libertarian ideology.The first thing one can learn from Bitcoin is thatthe characterisation of the free market econ-omy by the (libertarian) Bitcoin adherents (andmost other people) is incorrect; namely, that ex-change implies:

Mutual benefit, cooperation andharmony.

Indeed, at first sight, an economy based on freeand equal exchange might seem like a ratherharmonious endeavour. People produce stuff ina division of labour such that both the coffeeproducer and the shoemaker get both shoes andcoffee; and this coffee and those shoes reachtheir consumers by ways of money. The ac-tivity of producers is to their mutual benefit oreven to the benefit of all members of society. Inthe words of one Bitcoin partisan:“If we’re both self-interested rational creaturesand if I offer you my X for your Y and you ac-cept the trade then, necessarily, I value your Ymore than my X and you value my X more thanyour Y. By voluntarily trading we each comeaway with something we find more valuable, atthat time, than what we originally had. We areboth better off. That’s not exploitative. That’scooperative.”6

In fact, it is consensus in the economic main-stream that cooperation requires money and theBitcoin community does not deviate from thisposition: “A community is defined by the co-operation of its participants, and efficient coop-eration requires a medium of exchange (money). . . ”7 Hence, with their perspective on markets,the Bitcoin community agrees with the consen-sus among modern economists: free and equalexchange is cooperation and money is a meansto facilitate mutual accommodation. They paintan idyllic picture of the ‘free market’ whose illsshould be attributed to misguided state inter-vention and sometimes misguided interventionsof banks and their monopolies.8

Cash

One such state intervention is the provision ofmoney and here lies one of Bitcoin’s main fea-tures: its function does not rely on a trustedthird-party or even a state to issue and main-tain it. Instead, Bitcoin is directly peer-to-peernot only in its handling of money – like cash –but also in the creation and maintenance of it,as if there was no Bank of England but therewas a protocol by which all people engaged inthe British economy collectively printed Ster-ling and watched over its distribution. For sucha system to accomplish this, some ‘technical’challenges have to be resolved, some of whichare trivial, some of which are not. For exam-ple, money needs to be divisible, e.g., two fivepound notes must be the same as one ten poundnote, and each token of money must be as goodas another, e.g., it must not make a differencewhich ten pound note one holds. These featuresare trivial to accomplish when dealing with abunch of numbers on computers, however, twoqualities of money present themselves as non-trivial.

Digital signatures: guarantors ofmutual harm

Transfer of ownership of money is so obviouswhen dealing with cash that it is almost notworth mentioning or thinking about. If Alicehands a tenner to Bob, then Bob has the ten-ner and not Alice. After an exchange (or rob-

1This text is a slightly revised version of a text which first appeared on http://metamute.org.2The central white paper on Bitcoin is Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakomoto, the Bitcoin creator. However, some details of the network are not explicitlydescribed anywhere in the literature but only implemented in the official Bitcoin client. As far as we know, there is no official specification except for https://en.bitcoin.it/wiki/Protocol_specification.

3A peer-to-peer network is a network where nodes connect directly, without the need of central servers (although some functions might be reserved to servers). Famous examples includeNapster, BitTorrent and Skype.

4Probably due to pressure from the US government all major online payment services stopped processing donations to the Wikileaks project (http://www.bbc.co.uk/news/business-11938320). Also, most US credit card providers prohibit the use of their cards for online gambling.

5After Gawker media published an article about Silk Road (http://gawker.com/5805928/the-underground-website-where-you-can-buy-any-drug-imaginable) two USsenators became aware of it and asked congress to destroy it. So far, law enforcement operations against Silk Road seem to have been unsuccessful.

6https://forum.bitcoin.org/index.php?topic=5643.0;all7Wei Dai, bmoney.txt, http://www.weidai.com/bmoney.txt. This text outlines the general idea on which Satoshi Nakamoto based his Bitcoin protocol.8“The Real Problem with Bitcoin is not that it will enable people to avoid taxes or launder money, but that it threatens the elites’ stranglehold on the creation and distribution of money. If peo-ple start using Bitcoin, it will become obvious to them how much their wage is going down every year and how much of their savings is being stolen from them to line the pockets of bankstersand politicians and keep them in power by paying off with bread and circuses those who would otherwise take to the streets.” – http://undergroundeconomist.com/post/6112579823

20 April 2012 kittens

bery, for that matter) it is evident who holds themoney and who does not. After payment thereis no way for Alice to claim she did not payBob, because she did. Neither can Bob transferthe tenner to his wallet without Alice’s consentexcept by force. When dealing with bank trans-fers etc., it is the banks who enforce this rela-tionship, and in the last instance it is the police.One cannot take this for granted online. Abanknote is now represented by nothing but anumber or a string of bits. For example, let ussay 0xABCD represents 1 BTC (Bitcoin).9 Onecan copy it easily and it is impossible to provethat one does not have this string stored any-where, i.e., that one does not have it any more.Furthermore, once Bob has seen Alice’s note hecan simply copy it. Transfer is tricky: how do Imake sure you really give your Bitcoin to me?10

This is the first issue virtual currencies have toaddress and indeed it is addressed in the Bitcoinnetwork.To prove that Alice really gave 0xABCD toBob, she digitally signs a contract statingthat this string now belongs to Bob and notherself. A digital signature is also nothingmore than a string or big number. How-ever, this string/number has special crypto-graphic/mathematical properties which make it– as far as we can ascertain – impossible toforge. Hence, just as people normally transferownership, say a title to a piece of land, moneyin the Bitcoin network has its ownership trans-ferred by digitally signing contracts. It is notthe note that counts but a contract stating whoowns the note. This problem and its solution– digital signatures – is by now so well estab-lished that it hardly receives any attention, evenin the Bitcoin design document.11

Yet, the question of who owns which Bitcoinin itself starts to problematise the idea of har-monic cooperation held by people about econ-omy and Bitcoin. It indicates that in a Bitcointransaction, or any act of exchange for that mat-ter, it is not enough that Alice, who makes cof-fee, wants shoes made by Bob and vice versa.If things were as simple as that, they would dis-cuss how many shoes and how much coffee wasneeded, produce it and hand it over. Everybodyhappy.Instead, what Alice does is to exchange herstuff for Bob’s stuff. She uses her coffee asa lever to get access to Bob’s stuff. Bob, onthe other hand, uses his shoes as a leverageagainst Alice. Their respective products aretheir means to get access to the products theyactually want to consume. That is, they pro-

duce their products not to fulfil their own orsomebody else’s need, but to sell their productssuch that they can buy what they need. WhenAlice buys shoes off Bob, she uses her moneyas a leverage to make Bob give her his shoes; inother words, she uses his dependency on moneyto get his shoes. Vice versa, Bob uses Al-ice’s dependence on shoes to make her give himmoney.12 Hence, it only makes sense for eachto want more of the other’s for less of their own,which means deprive the other of her means:what I do not need immediately is still good forfuture trades. At the same time, the logic ofexchange is that one wants to keep as much ofone’s own means as possible: buy cheep, selldear. In other words, they are not expressingthis harmonious division of labour for the mu-tual benefit at all, but seeking to gain an advan-tage in exchange, because they have to. It isnot that one seeks an advantage for oneself butthat one party’s advantage is the other party’sdisadvantage: a low price for shoes means lessmoney for Bob and more product for her moneyfor Alice. This conflict of interest is not sus-pended in exchange but only mediated: theycome to an agreement because they want to butthat does not mean it would not be preferableto just take what they need.13 This relation theyhave with each other produces an incentive tocheat, rob, steal.14 Under these conditions – asystematic reason to cross each other – answer-ing the question who holds the tenner is veryimportant.

This systemic production of circumstanceswhere one party’s advantage is the other party’sdisadvantage also produces the need for amonopoly on violence of the state. Exchange asthe dominant medium of economic interactionand on a mass scale is only possible if partiesin general are limited to the realm of exchangeand cannot simply take what they need andwant. The libertarians behind Bitcoin might de-test state intervention, but a market economypresupposes it. When Wei Dai describes theonline community as “a community where thethreat of violence is impotent because violenceis impossible, and violence is impossible be-cause its participants cannot be linked to theirtrue names or physical locations.”15 he not onlyacknowledges that people in the virtual econ-omy have good reasons to harm each other butalso that this economy only works because peo-ple do not actually engage with each other. Pro-tected by state violence in the physical world,they can engage in the limited realm of the In-ternet without the fear of violence.

The fact that ‘unbreakable’ digital signatures –or law enforced by the police – are needed tosecure such simple transactions as goods beingtransferred from the producer to the consumerimplies a fundamental enmity of interest of theinvolved parties. If the libertarian picture of thefree market as a harmonic cooperation for themutual benefit of all was true, they would notneed these signatures to secure it. The Bitcoinconstruction – their own construction – showstheir theory to be wrong.Against this, one could object that while by andlarge trade was a harmonious endeavour, therewould always be some black sheep in the flock.In that case, however, one would still have toinquire into the relationship between effort (thepolice, digital signatures, etc.) and the out-come. The amount of work spent on puttingthose black sheep in their place demonstratesrather vividly that it is expected there would bemany more of them without these countermea-sures. Some people go still further and objecton the more principal level that it is all downto human nature, that it is just how humans are.However, by saying that, one first of all agreesthat this society cannot be characterised as har-monic. Secondly, the statement “that’s just howit is” is no explanation, though it claims to beone. At any rate, we have tried to give somearguments above as to why people have goodreason to engage with each other the way theydo.

Purchasing power

With digital signatures only those qualities ofBitcoin which affect the relation between Al-ice and Bob are treated, but when it comes tomoney the relation of Alice to the rest of soci-ety is of equal importance. That is, the ques-tion needs to be answered how much purchas-ing power Alice has. When dealing with physi-cal money, Alice cannot use the same banknoteto pay two different people. There is no dou-ble spending, her spending power is limited towhat she owns.When using virtual currencies with digital sig-natures, on the other hand, nothing prevents Al-ice from digitally signing many contracts trans-ferring ownership to different people: it is anoperation she does by herself.16 She would signcontracts stating that 0xABCD is now ownedby Bob, Charley, Eve, etc.The key technical innovation of the Bitcoinprotocol is that it solves this double spending

9For those who know a few technical details of Bitcoin: we are aware that Bitcoin are not represented by anything but a history of transactions. However, for ease of presentation we assumethere is some unique representation – like the serial number on a five pound note.

10“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. [...] Completely non-reversible trans-actions are not really possible, since financial institutions cannot avoid mediating disputes. [...] With the possibility of reversal, the need for trust spreads. Merchants must be wary of theircustomers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can beavoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.” – Satoshi Nakomoto, op. Cit.

11For an overview of the academic state-of-the-art on digital cash see Burton Rosenberg (Ed.), Handbook of Financial Cryptography and Security, 2011.12To avoid a possible misunderstanding. That money mediates this exchange is not the point here. What causes this relationship is that Alice and Bob engage in exchange on the basis of

private property. Money is simply an expression of this particular social relation.13Of course, people do shy away from stealing from each other. Yet, this does not mean that it would not be advantageous to do so.14The Bitcoin designers were indeed aware of these activities of direct appropriation and the need to protect the possible victim . “Transactions that are computationally impractical to reverse

would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers.” – Satoshi Nakomoto, op. Cit.15Wei Dai, op. Cit.16“The problem of course is the payee can’t verify that one of the owners did not double-spend the coin.” – Satoshi Nakomoto, op. Cit.

kittens April 2012 21

problem without relying on a central author-ity. All previous attempts at digital moneyrelied on some sort of central clearing housewhich would ensure that Alice cannot spendher money more than once. In the Bitcoin net-work this problem is addressed by making alltransactions public.17 Thus, instead of hand-ing the signed contract to Bob, it is publishedon the network by Alice’s software. Then, thesoftware of some other participant on the net-work signs that it has seen this contract certify-ing the transfer of Bitcoin from Alice to Bob.That is, someone acts as notary and signs Al-ice’s signature and thereby witnesses Alice’ssignature. Honest witnesses will only sign thefirst spending of one Bitcoin but will refuse tosign later attempts to spend the same coin bythe same person (unless the coin has arrived inthat person’s wallet again through the normalmeans). They verify that Alice owns the coinshe spends. This witness’ signature again ispublished (all this is handled automatically inthe background by the client software).

Yet, Alice could simply collude with Charleyand ask Charley to sign all her double spend-ing contracts. She would get a false testimonyfrom a crooked witness. In the Bitcoin network,this is prevented, however, by selecting one wit-ness at random for all transactions at a givenmoment. Instead of Alice picking a witness,it is randomly assigned. This random choiceis organised as a kind of lottery where parti-cipants attempt to win the ability to be witnessfor the current time interval. One can increaseone’s chances of being selected by investingmore computer resources. But to have a decentchance one would need about as much com-puter resources as the rest of the network com-bined.18 In any case, for Alice and Charley tocheat they would have to win the lottery by in-vesting considerable computational resources,too much to be worthwhile – at least that is thehope. Thus, cheating is considered improbablesince honest random witnesses will reject forg-eries.

But what is a forgery and why is it so bad that somuch effort is spent, computational resources

wasted for solving the aforementioned mathe-matical puzzle, in order to prevent it? On animmediate, individual level a forged bank notebehaves no different from a real one: it can beused to buy stuff and pay bills. In fact, the prob-lem with a forgery is precisely that it is indis-tinguishable from real money, that it does notmake a difference to its users: otherwise peoplewould not accept it. Since it is indistinguish-able from real money it functions just as nor-mal money and more money confronts the sameamount of commodities and the value of moneymight go down.19

So what is this value of money, then? Whatdoes it mean? Purchasing power. Recall, thatAlice and Bob both insist on their right to theirown stuff when they engage in exchange andrefuse to give up their goods just because some-body needs them. They insist on their exclusiveright to dispose over their stuff, on their pri-vate property. Under these conditions, moneyis the only way to get access to each other’sstuff, because money convinces the other sideto consent to the transaction. On the basis ofprivate property, the only way to get accessto somebody else’s private property is to offerone’s own in exchange. Hence, money countshow much wealth in society one can get accessto. Money measures private property as such.Money expresses how much wealth as suchone can make use of: not only coffee or shoesbut coffee, shoes, buildings, services, labour-power, anything. On the other hand, moneycounts how much wealth as such my coffee isworth: coffee is not only coffee but a means toget access to all the other commodities on themarket: it is exchanged for money such that onecan buy stuff with this money. The price of cof-fee signifies how much thereof. All in all, num-bers on my bank statement tell me how muchI can afford, the limit of my purchasing powerand hence – reversing the perspective – fromhow much wealth I am excluded.20

Money is power one can carry in one’s pockets;it expresses how much control over land, peo-ple, machines, products I have. Thus, a forgerydefeats the purpose of money: it turns this limit,

this magnitude into an infinity of possibilities,anything is – in principle – up for grabs just be-cause I want it. If everyone has infinity power,it loses all meaning. It would not be effectivedemand that counts, but simply the fact thatthere is demand, which is not to say that wouldbe a bad thing, necessarily.

In summary, money is an expression of so-cial conditions where private property separatesmeans and need. For money to have this qual-ity it is imperative that I can only spend what ismine. This quality, and hence, this separationof means and need, with all its ignorance andbrutality towards need, must be violently en-forced by the police and on the Bitcoin network– where what people can do to each other islimited – by an elaborate protocol of witnesses,randomness and hard mathematical problems.21

The value of money

Now, two problems remain: how is new cur-rency introduced into the system (so far we onlyhandled the transfer of money) and how are par-ticipants convinced to do all this hard computa-tional work, i.e., to volunteer to be a witness.In Bitcoin the latter problem is solved using theformer.

In order to motivate participants to spend com-putational resources on verifying transactionsthey are rewarded a certain amount of Bitcoinif they are chosen as a witness. Currently, eachsuch win earns 50 BTC plus a small transactionfee for each transaction they witness. This alsoanswers the question of how new coins are cre-ated: they are “mined” when verifying transac-tions. In the Bitcoin network money is created‘out of thin air’, by solving a pretty pointlessproblem – that is, the puzzle whose solution al-lows one to be a witness. The only point ofthis puzzle is that it is hard, that is all.22 Whatcounts is that other commodities/merchants re-late to money as money and use it as such, nothow it comes into the world.23

17“We need a way for the payee to know that the previous owners did not sign any earlier transactions. For our purposes, the earliest transaction is the one that counts, so we don’t care aboutlater attempts to double-spend. The only way to confirm the absence of a transaction is to be aware of all transactions.” – Satoshi Nakomoto, op. Cit. Note that this also means that Bitcoinis far from anonymous. Anyone can see all transactions happening in the network. However, Bitcoin transactions are between pseudonyms which provides some weaker form of anonymity.

18On the Bitcoin network anyone can pretend to be arbitrary many people by creating many pseudonyms. Hence, this lottery is organised in such a way that any candidate has to solve a math-ematical puzzle by trying random possible solutions which requires considerable computational resources (big computers). This way, being ‘more people’ on the network requires morefinancial investment in computer hardware and electricity. It is just as in the lottery: those who buy many tickets have a higher chance of winning. As a side effect, many nodes on thenetwork waste computational resources solving some mathematical puzzle by trying random solutions to win this witness lottery.

19For many people, this is where they content themselves with knowing that the value goes down without ever asking what this “value” thing is. However, changes in value only make senseif one knows what it is that changes. Furthermore, the relationship of money supply and inflation is not as it might seem: increased money supply does not necessarily imply inflation; onlyif it is not accompanied by increased economic activity.

20From this it is also clear that under these social conditions – free and equal exchange – those who have nothing will not get anything, aka the poor stay poor. Of course, free agents on afree market never have nothing, they always own themselves and can sell their skin – their labour-power – to others. Yet, their situation is not adequately characterised by pointing out thatnature condemns us to work for the products we wish to consume, as the libertarians have it. Unemployed workers can only find work if somebody else offers them a job, if somebody elsedeems it profitable to employ them. Workers cannot change which product they offer, they only have one. That this situation is no pony farm can be verified by taking a look at the livingconditions of workers and people out of work worldwide.

21The Bitcoin forum is – among other things – a remarkable source of ignorant and brutal statements about the free market, such as this: “If you want to live then you have to work. That’snature’s fault (or God’s fault if you’re a Christian). Either way, you have to work to survive. Nobody is obligated to keep you alive. You have the right not to be murdered, you don’t havethe right to live. So, if I offer you a job, that’s still a voluntary trade, my resources for your labor. If you don’t like the trade then you can reject it and go survive through your own meansor simply lay down and die. It’s harsh but fair. Otherwise, I’d have to take care of myself and everyone else which is unfair. Requiring me to provide you a living is actual slavery, muchworse than nonexistent wage slavery.” – https://bitcointalk.org/index.php?topic=5643.0%3ball

22“The only conditions are that it must be easy to determine how much computing effort it took to solve the problem and the solution must otherwise have no value, either practical orintellectual” – Wei Dai, op. Cit.

23Those who read Marx’s Capital might now object that this implies that Bitcoin is based on a concept of value whose substance is not abstract human labour. Instead it would rely on valuewhich is abstract computer labour or something else entirely. This objection is based on a misunderstanding: computing power earns, if one is lucky, 50 BTC but this is just a number, it ismeaningless. What 50 BTC buy, how much purchasing power or command over social wealth they represent is an entirely different question. 50 BTC have value because they commandsocial wealth not because a computer picked the right random number.

22 April 2012 kittens

Thin air: Bitcoin, credit money andcapitalism

However, the amount of Bitcoin one earns forbeing a witness will decrease in the future – theamount is cut in half every four years. From2012 a witness will only earn 25 BTC insteadof 50 BTC and so forth. Eventually there willbe 21 million BTCs in total and no more.There is no a priori technical reason for thehard limit of Bitcoin; neither for a limit in gen-eral nor the particular magnitude of 21 million.One could simply keep generating Bitcoin atthe same rate, a rate that is based on recenteconomic activity in the Bitcoin network or theage of the lead developer or whatever. It is anarbitrary choice from a technical perspective.However, it is fair to assume that the choicemade for Bitcoin is based on the assumptionthat a limited supply of money would allow fora better economy; where “better” means morefair, more stable and devoid of state interven-tion.24 Libertarian Bitcoin adherents and devel-opers claim that by ‘printing money’ states –via their central banks – devalue currencies andhence deprive their subjects of their assets.25

They claim that the state’s (and sometimes thebanks’) ability of creating money ‘out of thinair’ would violate the principles of free mar-

ket because they are based on monopoly insteadof competition. Inspired by natural resourcessuch as gold, Satoshi Nakamoto chose to fix aceiling for the total amount of Bitcoin to somefixed magnitude.26 From this fact most punditsquickly make the transition to the “deflation-ary spiral” and whether it is going to happen ornot; i.e., whether this choice means doom forthe currency by exponentially fast deflation –the value of the currency rising compared to allcommodities – or not. Indeed, for these punditsthe question why modern currencies are creditmoney hardly deserves attention. They do notask why modern currencies do not have a limitbuilt in, how credit money came about, if andhow it is adequate for the capitalist economyand why the gold standard was departed fromin the first place.27 They are not interested inexplaining why the world is set the way it is butinstead to confront it with their ideal version.Consequently, they miss what would likely hap-pen if Bitcoin or something like it were to be-come successful: a new credit system woulddevelop.

Growth

Capitalist enterprises invest money to makemore money, to make a profit. They buy stuff

such as goods and labour-power, put these ‘towork’ and sell the result for more money thanthey initially spent. They go through cycles ofbuying – production – selling.28 The faster eachof these steps, the faster the advanced invest-ment returns, the faster the profit arrives and thefaster new investments can be made. Capitalistsuccess is measured by the difference betweeninvestment and yield and not by the amount ofmoney someone owns in absolute terms. Ofcourse, the absolute amount of wealth a com-pany owns is a relevant magnitude, becausemore money is a better basis for augmentation.Yet, in order to decide whether a company didwell or poorly in the last quarter, the surplus isusually what counts. For a capitalist enterprise,money is a means and more wealth – countedin money – the end: fast growth – that is themantra.

Libertarian Bitcoin adherents have no problemwith this. While currently Bitcoin are mainlyused – if at all – to buy means of consumptionor as a hoard, they hope that one day some-thing like Bitcoin will replace the US dollar andother central bank controlled currencies: Bit-coin or its successor as the currency to do se-rious business in. This sets Bitcoin apart fromother virtual currencies such as Linden Dollarsor World of Warcraft Gold. They are purely

24“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currenciesis full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. Wehave to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.” – Satoshi Nakamoto quoted inJashua Davis, The Crypto-Currency: Bitcoin and Its Mysterious Inventor, The New Yorker, 10 October, 2011.p. 62.

25We stress that opposing states increasing the ‘money supply’ at will and fixing the absolute amount of money that can ever be created are not the same thing. One could just as well keepgenerating 50 new BTC every 10 minutes until the end of time or the Bitcoin network – whichever comes first.

26“The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU [central processing unit] time andelectricity that is expended.” – Satoshi Nakomoto, op. Cit. Furthermore, the distribution of how Bitcoin are generated is inspired by gold. In the beginning it is easy to mine but it becomesharder and harder over time. Bitcoin’s mining concept is an attempt to return to gold money but on the Internet.

27cf. our text “Public debt makes the state go round” available at http://www.junge-linke.org/en/public-debt-makes-the-state-go-round. It should be noted that Bitcoin isnot an equivalent to a return to the gold standard but a return to paying with gold coins. Even under the gold standard there were many more dollars than the gold they represented, basedon the assumption that people would not claim the gold worth of their dollars from the FED.

28Some companies such as supermarkets do not have a production phase, they simply buy and sell. This difference does not matter for the argument presented here though.

kittens April 2012 23

used to buy/sell in some limited realm of somevirtual world, while Bitcoin are in principle us-able for any purchase (on the Internet). Bitcoinwant to be money, not just some means of cir-culation in a virtual reality.

Credit

If money is a means for growth and not the end,a lack of money is not sufficient a reason for theaugmentation of money to fail to happen. Withthe availability of credit money, banks and frac-tional reserve banking it is evident that this isthe case. Just because some company did notearn enough money yet to invest in a new plant,that does not mean it cannot – it would applyfor a loan from a bank. That bank in the last in-stance may have borrowed that money from thecentral bank which created it ‘out of thin air’.However, assume, for the sake of argument,that these things did not exist. Even then, atany given moment, companies (or parts thereof)are necessarily in different stages of their accu-mulation cycles: some are just starting to sell alarge stock of goods while others are looking tobuy machines and hire workers. Some compa-nies have money which they cannot spend yetwhile other companies need money to spendnow. Hence, both the need and means for creditappear. If some company A expects to make,say, 110 BTC from a 100 BTC investment butonly has 70 BTC in its accounts, it could takea loan of 30 BTC from some company B with10% interest rate and still make 10 - 3 = 7 BTCof profit. For the company B which lends A 30BTC, this business – if successful – is also bet-ter than just sitting on those 30 BTC which earnexactly nothing. If growth is demanded, havingmoney sitting idly in one’s vaults while some-one else could invest and augment it is a poorbusiness decision.29 This simple form of credithence develops spontaneously under free mar-ket conditions.30 The consequences of this factare not lost on Bitcoin adherents. As of writing,there are several attempts to form credit unions:attempts to bundle up the money people have intheir wallets in order to lend it out to others –for interest, of course.Furthermore, under the dictate of the free mar-ket, success itself is a question of how muchmoney one can mobilise. The more money acompany can invest the better its chances ofsuccess and the higher the yield on the market.Better technologies, production methods, dis-tribution deals and training of workers, all thesethings are available – for a price. Now, withthe possibility of credit the necessity for creditarises as well. If money is all that is needed forsuccess and if the right to dispose over moneyis available for interest then any company hasto anticipate its competitors borrowing moneyfor the next round of investments, rolling up themarket. The right choice under these conditionsis to apply for credit and to start the next round

of investment oneself; which – again – pushesthe competition towards doing the same. Thisway, the availability of money not only pro-vides the possibility for credit but also the basisfor a large scale credit business, since the de-mand for credit motivates further demand.Even without fractional reserve banking orcredit money, e.g., within the Bitcoin economy,two observations can be made about the rela-tion of capital to money and the money supply.If some company A lends some other companyB money, the supply of means of payment in-creases. Money that would otherwise be pet-rified to a hoard, kept away from the market,used for nothing, is activated and used in circu-lation. More money confronts the same amountof commodities, without printing a single newbanknote or mining a single BTC. That is, theamount of money active in a given society isnot fixed, even if Bitcoin was the standard sub-stance of money.Instead, capital itself regulates the money sup-ply in accordance with its business needs. Busi-nesses ‘activate’ more purchasing power if theyexpect a particular investment to be advanta-geous. For them, the right amount of moneyis that amount of money which is worth invest-ing; to have available that money which can beused to make more money. This is capital’s de-mand for money.31

Growth guarantees money

When one puts money in a bank account or intosome credit union, or simply lends it to someother business, to earn an interest, the value ofthat money is guaranteed by the success of thedebtor to turn it into growth. If the debtor goesbankrupt that money is gone. No matter whatthe substance of money, credit is guaranteed bysuccess.In order to secure against such defaults credi-tors may demand securities, some sort of assetwhich has to be handed over in case of a de-fault. On the other hand, if on average a creditrelation means successful business, an IOU –i.e., a promise of payment – itself is such anasset. If Alice owes Bob and Bob is short oncash but wants to buy from Charley he can usethe IOU issued by Alice as a means of payment:Charley gets whatever Alice owes Bob. If creditfulfils its purpose and stimulates growth thendebt itself becomes an asset, almost as good asalready earned money. After all, it should beearned in the future. Promises of payment get –and did get in the past – the quality of means ofpayment. Charley can then spend Alice’s IOUwhen buying from Eve, and so forth. Thus, theamount of means of payment in society maygrow much larger than the official money, sim-ply by exchanging promises of payment of thismoney. And this happens without fractional re-serve banks or credit money issued by a centralbank. Instead, this credit system develops spon-

taneously under free market conditions and theonly way to prevent it from happening is to banthis practice: to regulate the market, which iswhat the libertarians do not want to do.However, the replacement of cash by these se-curities remains temporary. In the most severesituation, in crisis, the means of payment avail-able for the whole of society would be reducedback to hard cash again, which these credit to-kens were meant to replace. Simply becausepeople start distrusting the money quality ofthese promises of payment would lead to a col-lapse of trade which relies on these means ofpayment. In crisis, credit’s purpose to replacemoney is void.

Central banks

This is where the central banks step in, they re-place the substance of money with somethingadequate for its purpose: a money whose valueis guaranteed by the growth it stimulates. Withthe establishment of central banks, the econ-omy is freed from the limitations of the totalsocial hoard of hard cash. If there is a lucra-tive business then there is credit: money whichis regulated according to the needs of capital.Credit money as issued by a central bank isnot a promise of payment of money, it is itselfmoney. The doubt whether these promises ofpayments are actually money ought to be putto rest by declaring them as money in the firstplace.Now, the value of modern credit money isbacked by its ability to bring about capitalistgrowth. When it facilitates this growth then –and only then – money fulfils its function.Hence, something capital did to money before,is now ‘built in’. The central bank allows pri-vate banks to borrow (sometimes buy) addi-tional funds – for interest – when needed. Themoney they borrow is created by the centralbank ‘out of thin air’. Hence, all money in soci-ety comes into being not only with the purposeof stimulating growth but also with the explicitnecessity: it is borrowed from the central bankwhich has to be paid back with interest. Whileclearly a state intervention, the central banks’issuing of money is hardly a perversion of capi-talism’s first purpose: growth. On the contrary,it is a contribution to it.Systematic enmity of interests, exclusion fromsocial wealth, subjection of everything to cap-italist growth – that is what an economy lookslike where exchange, money and private prop-erty determine production and consumption.This also does not change if the substance ofmoney is gold or Bitcoin. This society pro-duces poverty not because there is credit moneybut because this society is based on exchange,money and economic growth. The libertariansmight not mind this poverty, but those on theLeft who discovered Bitcoin as a new alterna-tive to the status quo perhaps should.

29Of course, there are also reasons keep a certain amount of money around, such as the uncertainties of the markets.30An even simpler form of credit exists between whole-sellers and producers. If, for example, the producer allows the whole-seller to pay later, he is effectively granting credit.31On a side note, if businesses which take out loans are successful on average, they produce more commodities: more commodities that confront the increased supply of purchasing power.

Hence, increases in the money supply, and hence purchasing power, does not necessarily mean inflation.

24 April 2012 kittens

Islamismconsequence of, heir to, and rival of frustrated Arab nationalism

1 Islam has a bad press in the free West: fol-lowers of Islam still live in the Middle Ages,one hears, and Islamic clerics may conduct pro-cedures their Christian colleagues have onlybeen allowed to dream of for 150 years – toveil women, stone sinners, and burn heretics todeath. Some even consider the Koran an earlyversion of “Mein Kampf” – what a fitting anti-Fascist armament for the “clash of cultures” ofwhich the ‘free West’ still is not sure if it wantsit, and if so, to what extent.

2 Within Islam there have always been revivalmovements – just like in every other religion. Aworld in which people seek comfort in religionis not a pleasant place. If it was, people wouldnot have to seek comfort. The kind of com-fort religion conveys is paid for with humilityand sacrifice and hence religion is far from acontribution to changing the world for the bet-ter. Consequently, time and again people havetried to receive more encouragement, more helpfrom above by a yet ‘more correct’ belief. Thatway Islam has undergone a split (Shiites of ShiaIslam and Sunnis of Sunni Islam), there havebeen a couple of smaller secessions (Ismailis,Alevi, Druze) or new religions have emergedfrom Islam (Sikhs, Baha’i). While some staywithin the framework of the Islamic religion(though worshippers of the traditional beliefmight sometimes disagree), there are and havebeen transitions to a quite different manner ofpraying to Allah and his mates. It has less todo with good arguments and convincing dog-mas that such religious revival movements – orrather: religion in general – were and are ableto spread and prevail. Rather, it is closely con-nected to two questions: whether political au-thorities attend to a particular deism and assertit by force and if classes or other social groupsconsider this kind of communication with thehigher powers as a spiritual weapon for theirother concerns.

3 There are also fundamentalists in Islam – justlike in every other religion. Those are peoplewho preach a ‘return’ to the true belief, andwhose aim is, for fairly current reasons, to ‘re-store’ the moral rules of their ancestors. Thesehave never existed as such, but always amountto the same thing: sacrifice, oppression of de-viant positions, submission to the ‘right’ au-thority and readiness to fight for this nasty pro-gramme. Far from being satisfied with the ex-istence as merely a blinkered private opinionsuch a programme becomes a political move-ment to oblige the state to ‘re’-raise all moral-ity. With regard to Islam this is called Islamism.Such movements seem to astonish and worry

people in Europe, of all places, where almostevery country has a large Christian-democraticparty.

4 Initially, Islamism appeared as the pan-Islamic revival movement in the beginning ofthe 20th century. The various tendencies withinthe pan-Islamic movement aimed to restore theUmma, i.e., all worshippers of Islam unitedunder one single political authority. Between1815 and 1914 France, Spain, Great Britain, theNetherlands, Russia, and Italy had absorbed Is-lamic countries – from Morocco to Indonesia– taking possession of them as colonies, hadturned them into “protectorates” and blown theOttoman Empire, which continuously weak-ened, into separate spheres of interest. The anti-colonial struggles aimed to reverse this devel-opment.

5 The pan-Islamists were particularly popularin the Arabic-speaking countries1, because theOttoman Empire’s answer to the decline of itspower was an intensified politics of homogeni-sation. After the “Young Turks” had taken overin Constantinople (now Istanbul) in 1908, theytried to turn the sultan’s subjects into moderncitizens of a Turkish-dominated nation state.However, the “Ottoman Porte” did not endearitself to its Arabic subjects with this politics of“turkification”, besides, this way they becameaware of their ‘Arabic-ness’. Hence, the samehappened as in the British, French and Italiancolonies: the interaction of national demandsand racial exclusion created a diverging, in thiscase, Arabic nationalism. Under the prophet’sbanner the aim was to gather either all Arabs orall Muslims (a clear distinction between the twowas not always of concern). The alleged truththat the Arabic language alone, the languageof the Koran, allows access to the divine truthemphasised the identity of Islamic revival andArabic ‘re’-emergence according to Islamic in-surgents. The British and French supported,armed and used such movements against theOttoman Empire in World War I (that is theplot of “Lawrence of Arabia”), while Germanforeign politics also concentrated on the “Mo-hammedans”, without much success, though.Instead of gaining independence as promised,France and Great Britain after 1919 took onthe heavy burden of mandates by the League ofNations and created Syria, Iraq, the Lebanon,Palestine, Yemen as dependent quasi-colonies,and moreover, they granted the foundation ofSaudi Arabia.

6 The answer of the “Arabic movement” to the“Turks” and Christian “crusaders” (that is what

the colonialists were called in remembrance ofother hard times) and later the Zionist move-ment was the dream of the ‘re’-erection of anArabic and/or Islamic Empire of apparently an-cient beauty and greatness. But in the 1920sthis pan-Islamism paled into insignificance be-side the rise of the new nationalistic move-ments that struggled for independence withinthe boundaries drawn by the colonial powersand which aimed at the foundation of modernnation states such as Egypt, Algeria, Morocco,Libya, Tunisia, Syria, Lebanon, Iraq, Jordanetc.

7 This did not mean, however, that those na-tional liberation movements would have relin-quished the cultural distinction of Islam towardthe Christian colonialists. The statesmen-to-beindeed appreciated the belief in Allah as far asit was an integral part of the Arabic folk cultureas well as a moral resource. However, as reli-gion they did not want to take it too seriously.On the one hand, this was due to the fact thatthere still were many different Islamic sects aswell as strong Christian minorities that ought toparticipate in the national projects; on the otherhand Islam was often used to cement traditionalfeudal dependencies and thus was regarded ashindering modernisation by the nationalists.

8 After World War II, when the Arabic stateshad achieved their ideal of sovereignty – insofaras the world order allowed it that is – the var-ious countries and movements all continued topraise the ideal of pan-Arabism. This impliesthey accepted the contradiction that their na-tionalism and national politics actually servedto achieve the formation of an even higher Ara-bic unity. Nevertheless, they continuously frus-trated those ideas with their politics as illus-trated by the short life spans of the various“United” Arab Republics that were founded.The rivalry between Arabic states was con-stantly exercised by one’s own declaration ofbelief in the Arabic matter, the complaint aboutthe lack of unity of the Arabic world, and theaccusation of others to be solely interested innarrow-minded nationalism. Beyond all vi-cissitudes the mutual enmity towards Israel,which was blamed for Arabic weakness, stayedon. But even the mutual hatred of the “JewishState” has never led the Arabic “sister states” toeven implicitly support the fight of the PLO.2

Not to mention a good treatment of those whowere jammed into refugee camps to await theirfuture use as material for the Palestine state.

9 Those countries where political authority laiddown a Western course in politics – mainly

1For those who do not know: Islam is anything but equivalent to Arabic. Turkish is a completely different language, as is the language spoken in Iran; in Bangladesh and Indonesia peoplespeak entirely different yet again. The fact that these languages use/used Arabic script does not change the fact that they are all different.

2See the massacre of Palestinians by Jordanian security forces in the so-called “Black September” in 1970, which gave name to the group that attacked the Israeli team during the 1972Olympic games in Munich.

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royal dynasties like Morocco, Jordan, SaudiArabia, the Gulf Emirates, and Iraq until 1958– appreciated Islam as means to resist ideasof democratisation as well as to neutralise ac-tivities of a Socialist and Communist nature.This also held true for the non-Arabic statesAfghanistan and Pakistan, whereas the Shah’sregime in Persia (now Iran), until 1979, consid-ered the Islamic clergy and population as noth-ing but a hindrance to modernisation. And eventhe Kemalist military in Turkey appreciated Is-lam as moral resource for the state. The ideaof the religion being of service to the state wasregarded as convenient by all of them, yet, notin terms of making the state’s programme sub-servient to Islam.

10 Even the ‘Arab Socialist countries’ didnot avoid making use of Islam (Nasser: “Mo-hammed was an imam of socialism”, Baathistsetc.), although “socialism”, like in many otherAsian and African states, did not involve muchmore than stating “the economic wealth be-longs to the nation” (art. 26 Baath Party’s con-stitution). The anti-capitalism of those coun-tries always had an anti-materialist approachpreaching national dedication and sacrifice tothe people; capitalism was tantamount to ego-ism and an overemphasis on material interestsinstead of fighting for the “eternal mission ofthe Arabic nation” (third principle of the BaathParty). If Marxism-Leninism was an inspira-tion at all, it was Stalin’s dictum that enemiesof the people had to be smashed and Mao’sappreciation of revolutionary heroism. Otherthan that the class struggle was opposed to “re-actionary elements” and directed against thosepeople who were not willing to give away theirwealth as well as against minorities that seemedto disturb the nation’s homogeneity with theirown ‘special’ collective practices and identi-ties. Furthermore, it obviously was directedagainst Israel, the “bridgehead of imperialism”,whose Jewish residents by means of persistentpropaganda for the last 40 years had becomethe personification of Western greed. When theEastern bloc had ceased to exist, movements

that earlier had explicitly disapproved of Islam(PKK, PLO, etc.) now regarded it as a revolu-tionary power.

11 Islamism, which until late in the 1970splayed a marginal role, today is a widely spreadideology – from Turkey to Sudan, from Mo-rocco to Indonesia. This has happened, how-ever, without its followers agreeing on whobelongs to the Umma or how it should becomprised, whether Sunnis or Shiites shouldlead, which Islamic school and interpretationof Sharia is the correct one and whether it isabout the whole of Islam or particularly theunity of all Arabs. Islamism is a nationalis-tic globalisation critique that rejects the nationstate since it is unable to achieve pan-Arabicand pan-Islamic aims. In the fashion of al-most every “pan”-movement, dissatisfied na-tionalism serves as starting point. The only wayto rescue the fatherland is to transcend and sub-stitute it by a higher and more powerful unit;yet certainly not without abandoning the chanceof getting the hands on one’s own nation, ad-justing the nation’s politics to the new goal andimposing a moral revival programme on the re-spective national society.

12 There is no lack of dissatisfied nationalismin Arabic and other Islamic countries. Sincethe 1980s nearly all of these states had to grap-ple with matching their own “mixed economy”of state isolation and certain guarantees for thepopulation’s survival with requirements by theIMF in order to stay creditworthy. Since theEastern bloc’s downfall, the global market aswell as the competitiveness of the own pro-duction have become the determining politicalstandards in all countries worldwide. The “pro-grammes of structural adjustment” by the IMFimply new hardships to those masses who arenot blessed with wealth anyway, with respectto food (bread subsidies), health care, educa-tion, etc. Islamism is growing not only becausethe Muslim Brotherhood establishes alterna-tive networks (schools, Islamic hospitals, soupkitchens for the poor) but because the Islamist

explanations for the new situation and their pro-posed solutions match the existing wide-spreadservile cast of mind and the regimes’ officialpropaganda well. After all, Islamism is – fromMorocco to Malaysia – accompanied by anti-Semitism. This has nothing to do with Israelipolitics, except that those provide the occasion.Instead it is closely connected to nationalisticanti-capitalism: against greed, enrichment andmaterialism the anti-materialist virtues of Is-lam is set and an economy according to Islamicprinciples of fair sharing and prohibition of in-terest is promoted. Even those who apparentlyfight Islamism – Egypt, Turkey, some formerSoviet republics with Islamic majorities – at-tempt to assert Islamic moral rules in society,thus, laying the ground for Islamism.

13 The new Islamism is therefore consequenceand heir of and rival to Arab nationalism. Is-lamic fundamentalism results from a state ofdissatisfaction with the outcomes of these poli-tics. It inherits the nationalistic critique of cap-italism which was popularised by Arab social-ists; at the same time Islamism fights the re-maining nationalists and Arab socialists as god-less people and Western collaborators. Partic-ularly in regard to women – emancipated byArab socialists as a corollary to modernisation– modern Islamists hold out an ideal of moralrenewal where morality and sexuality are themain topics. Three fears seem to be important:first, the idea that Allah is not on one’s side incase one lacks proper moral, second, the ideathat sexuality weakens male power to fight inthe jihad, and, third, the apprehension that ful-filled sexuality and love, would generally resultin rejecting jihad and thus may get in the way ofpolitics. How exactly the interaction betweenthese thoughts works is a subject for a furtherstudy.Just like every other religious fundamentalismseeking national renewal, the transition from Is-lamism to Fascism is fluent. This has nothingto do with the Koran, but it has everything todo with the disappointed idealism of Arab andnon-Arab Nationalists.

26 April 2012 kittens

Insane my Arse, Muammar Gaddafia historical sketch of his national project

Already during his lifetime public opinion inthe West had been in agreement about the de-ceased Libyan dictator: “insane” was the mostfrequent description of him. However, puttingaside fashion faux-pas and focussing instead onhis political career, the former ruler shows up ina rather different light. So who was MuammarGaddafi?

A nation-builder with Western edu-cation

Gaddafi belonged to a generation of Arabic mil-itary officers much dissatisfied with the circum-stances in which the newly established nationstates found themselves at the end of colonialrule. Many of those military officers had beeneducated in former colonial powers (Gaddafispent a few months in Great Britain to receivemilitary training). There they were able to ob-serve the way successful world powers work:i.e., as nation states, with a people interested inand devoted to the state. At home in the Mid-dle East, however, monarchs who had been ap-pointed by colonisers reigned over clans andtribal communities that were much more im-portant to its members than the nation state asa whole. The monarchs contented themselveswith the clan leaders’ loyalty and left the ex-traction of raw materials to the former colonis-ers for money that served their personal enrich-ment.

Those military officers who brought down thefirst and only King Idris I of Libya in Septem-ber 1969 aimed at turning Libyan subjects intopatriotic citizens. They closed Western militarybases, disenfranchised Italian landowners andbegan to nationalise the oil production and itsexport. Having been the basis of foreign in-fluence in Libya, oil was now to become themeans of national independence.

For a start, the Libyan population had to learnthat it now actually existed as a single body inwhich each and every clan was part of a whole:the nation. The success of state propaganda andgovernment policy – aimed at establishing thenew nation state – required a massive expan-sion of the educational system, as well as inten-sive literacy campaigns. Revenues from oil ex-port were diverted to this end by the new pow-ers in the country. Indeed, in comparison withother African states Libya showed up in a pos-itively favourable light: it had the highest percapita income on the continent, and health careand education were available to a good deal ofthe population. This form of relation betweena state and its citizens was something new inAfrica. Elsewhere on the continent the variousstate apparatuses considered their people barelyuseful and did not bank on their loyalty.

An idealist of democracy and a dic-tator

Gaddafi assumed power together with othermilitary officers but in the course of the 1970she ousted other military leaders and becamethe de facto autocrat. At the same time hebecame detached from his earlier role modelNasser, the president of Egypt, and began tocreate his own “concept of socialism”. This in-cluded the idea of the immediate “people’s au-thority” which was to replace political parties(actually, there had been only one party before)and the military regime. These ideas resultedfrom his analysis of other forms of government:in the Colonel’s opinion parliamentary democ-racy was a scam and he criticised parties andparliaments for manipulating the “true will ofthe people”. The Soviet system, on the con-trary, did not find his approval because of its“one-class-dictatorship”.

The Libyan alternative was the Jamahiriya, theauthority of the masses. A “true” democracycould only be a direct one, was the new slo-gan. With his pompous indictments of parlia-mentary representatives, and their alleged inep-titude in divining the real desires of the people,Gaddafi was able to touch the hearts of a greatmany left-wingers. His idea that a truly unifiedpeople would have one uniform will that a de-termined leadership would simply have to putinto practice pointed to the Fascist aspect of thenation state in the concept of Jamahiriya.

Left and right-wing pilgrims alike enthusiasti-cally spread the word about the unity that ex-isted between the people and the Leader ofthe Revolution. In practice, political decisionswere still taken by delegates. But all deci-sions of the “people’s committees” could bequashed by the “revolutionary leadership” (i.e.,by Gaddafi) and were, on top of that, subjectto the close scrutiny of “revolutionary commit-tees” comprised of loyal subjects.

Gaddafi managed to paint any kind of politicsthat he did not agree with as “undemocratic” –similar to how the “free West” does it. As acritic of every form of representation and dele-gation, he claimed to perceive and channel theunified voice of the people. It was this voicethat over the years was the mainstay and vali-dation of his benevolent reign.

Despite all ideological ideas of “one people”however, political and economic conflicts of in-terest were continuously produced and repro-duced among the Libyan population so that thestate again and again felt compelled to enforcethe purported interests of the people.

A butcher of communists and a part-ner of the Eastern Bloc

At first, Gaddafi was rather hostile to commu-nism and the Eastern Bloc. As late as 1971he lent Numairi, the Sudanese dictator, a handwith eliminating one of the biggest communistparties in Africa and the Middle East – the Su-danese Communist Party. However, from thelate 1970s Libya and the USSR found commonground in a shared enmity towards the NATOand Israel. Since Ronald Reagan had becomepresident of the US Gaddafi was considered ade-facto communist and named alongside FidelCastro and Kim Il-Sung in the West.For its foreign policy Libya was in constantneed of new arms which the West refused todeliver. It thus came in handy that Libya hadnot only found a new buyer for its oil but alsoa new source for weapons: the East. Yet,Gaddafi continued to stress the independenceof his “third way.” While other left-wing na-tionalists in the Arab world were from time totime in cahoots with communist parties in or-der to please Moscow, the author of the “ThirdUniversal Theory” made sure no communist ac-tivities whatsoever could unfold. Libya bannedMarx’ works and the USSR in turn prohibitedevery attempt to distribute the “Green Book” bythe Leader of the Revolution.

An anti-imperialist and a partner ofthe West

Although Libya constantly emphasised its in-dependence, business was flourishing withthe West. As early as 1980 the American-Libyan trade volume reached its peak. Libya’sweapons which were bought in bulk from theEastern Bloc protected it from possible po-tentially military interventions by its capitalisttrading partners. At the same time Gaddafi hadto compromise from the very beginning: e.g.,expropriated western companies wanted to becompensated; and the close-down of the west-ern military bases happened only because it wasguaranteed that no Soviet military bases wouldcome to be established in Libya. This indicatesthe constant contradiction intrinsic to Gaddafi’snational project, which depended on high oilprices and demand in precisely those countriesfrom which Libya wanted to become indepen-dent.This does not mean, however, that the Libyanstate did not take its anti-imperialist ambitionsseriously. The initial problem had been thatthe main Western powers – albeit from out-side of an explicitly colonialist structure – werenow pulling the strings more than ever on theAfrican continent, and this problem remained.Furthermore, although Libya was now a nation

kittens April 2012 27

state, internationally it was a rather insignif-icant one. Yet Colonel Gaddafi had at leastlearned that this need not go unchallenged and,as such, he quickly adopted an eager interven-tionist policy, much after the manner of thegreater world powers in the West and USSR.Regardless of whether he attempted to unite allArabs, Muslims or African people under theLibyan roof; whether he supported Palestinefactions, African dictators or British Trotsky-ists – sometimes more, sometimes less gener-ously; never did he loose sight of his aim tobehave just like those heads of state that werehis opponents. Gaddafi’s anti-imperialism wasan attempt to imitate the foreign politics of hispartners as well as of his opponents.In the 1980s the USA, and later their allies,took revenge by establishing economic em-bargoes and conducting air strikes. Supportfor Gaddafi from the Eastern Bloc soon van-ished, therefore he had to realign. At firsthe changed his image from being a terroristsupporter to becoming a peacemaker. Hence,sometimes Western hostages in Islamic coun-tries were freed by means of Libyan mediation,sometimes Gaddafi instigated an African Union

(AU) action that very reasonably took care ofobserving conflicts on the continent and whichwas, hence, useful to the West.From 2003 at the latest, the experiments of a so-cialist welfare state were put to an end for goodand the establishment of the “people’s capital-ism” was announced. What followed was atsunami of privatisation in Libya. But the leaderof the Mediterranean state also came to fulfila quite important role for the EU: becomingsomething of a turn-key dignitary, Gaddafi be-gan to intercept African refugees before theirMediterranean voyage and to have them in-terned in camps. Moreover, post-9/11 the Westwas much more concerned with Islamism andLibya in turn was in such need of foreign capi-tal that agreements were reached without prob-lems.The former “bad guy” had barely been reha-bilitated before the “Arab spring” began, andGaddafi, for whom surrender was not an op-tion, was promptly dropped by his recently ac-quired friends. However much the media mightromanticise peaceful revolutions in the region,Gaddafi demonstrated that protests in the street– however many people – can be perfectly inca-

pable of showing or allowing the state to see thelogic of giving in. Gaddafi made use of thosemeans foreseen by every state in the event ofmassive functional disruption: state of emer-gency decrees that allow for the reckless de-ployment of various means of violence in or-der that the state’s monopoly on it may be re-stored. At this, the international outcry wasdeafening. Public opinion in the West and be-yond, including those democratic countries inwhich “state of emergency” provisions are writ-ten into their constitutions, were filled with in-dignation that Gaddafi was gunning down hisown people. This indicates that it is consideredmore reprehensible to kill one’s own people, asopposed to foreign people.

Irrespective of the weak protest of someright-wing US-republicans (who considered theColonel to be a smaller problem compared withthat of Islamic radicals) and anti-imperialistleftists (partly still appreciating Gaddafi’s ear-lier achievements, partly simply consideringit unfair when stronger states intervene in af-fairs of weaker ones), Gaddafi’s Jamahiriya wasplastered with NATO bombs.

28 April 2012 kittens

About this Journal

Critique’s failure does not usually derivefrom peoples’ inability to see the miseryaround them; work, unemployment, war,hunger, racism, toxic waste, sexism, drowningrefugees, homophobia, stress, to name but afew. Everybody knows and almost everybodyresents these facts. However, as quickly as mostpeople offer pity, they offer wrong explanationswhy these facts keep surfacing in the “most hu-man of all societies”.We claim that modern misery ultimately isthe result of capitalism and the nation state.The purpose of this journal is to prove thisclaim by explaining manifestations such asthose listed above. The ideological conclu-sions people draw from this world make mat-ters worse. We therefore criticise especiallythose theories that blur or even idealise the con-ditions we are forced to live under – whateverthe well-meaning intentions behind them. Inother words, with this journal we aim to crit-icise those conditions which ensure that wineand cheese are not available to everyone and tocriticise everyone who justifies this.Since we refer to Marx quite a bit, a few clari-fications. Capitalism does not vanish by itself.Its crises are nothing but crises of its valorisa-tion. On the other hand, the fact that it causespeople harm is an inevitable part of its packagein crisis and in boom. Modern democracies,where politicians generally care about nothingexcept the well-being of the country, are the

adequate form of government for the capitalistmode of production. The emancipation of pol-itics from individual capitalist enterprises is anecessary condition for the existence of generalcapitalist relations. Nation states are not capi-talist players on the market – they rather makemarkets possible.We have found not much help for making senseof this society in sociological Marxism with allits classes, strata and social groups, with its‘power relations’ and ‘objectively progressiveinterests’, which allegedly give rise to the rightstrategy. We do not follow the wide-spread ‘re-alism’ which consists of doing stuff one doesnot want and to not talk about the stuff one ac-tually does want. The lesser of two evils is stillan evil. We do not want to be ‘somehow’ suc-cessful, but rather do we want a particular cri-tique to succeed.We do not understand the Soviet Union as ‘statecapitalism’ nor do we think the ‘experiment’unfortunately deviated from and betrayed itstrue course after a few years. We do not fol-low the cult of the working class nor any otherLeninist-Stalinist-Maoist nonsense. We do notbelieve that insight follows from one’s socialposition in a positive (Autonomia) or negative(Marxism-Leninism) way. Arguments do nothave a standpoint, they are either correct orwrong, insufficient, incomplete. Declarationsof love towards the workers, ‘the people’ and‘the little man’ are absent from our texts since

this prevents a proper critique of their wrongconsciousness. But this critique is necessarybecause we need them in order for anything tochange. The kind of anti-capitalism, which sus-pects evil parasites behind everything and con-spiracies everywhere, will not be found in ourtexts; however, arguments against this rubbishwill be.

Though our published results and conclusionsmight be misinterpreted as dogmatic we do notclaim at all to have monopolised the truth. Onthe contrary: this journal is an invitation to cri-tique. Every verdict based on scientific criti-cism we welcome.

The Wine and Cheese Appreciation Society ofGreater London is the rather small group be-hind this journal. We are not in the businessof being the vanguard of the working class norare we self-sufficient intellectuals writing aboutMarx behind closed doors. We want to criticise,discuss, engage, argue.

Our group is part of the network “Junge Linkegegen Kapital und Nation”. This journal con-tains both articles produced by us and transla-tions of texts by other groups in this network. Ifyou want to discuss our articles, offer critique,ask questions or want to be informed about ourupcoming public meetings get in touch at

wineandcheese@hush.com or

http://www.junge-linke.org/en.