Below is an excerpt from a talk presented by Jack Barnes over the 1994–95 New Year’s weekend entitled "So Far From God, So Close to Orange County: The Deflationary Drag of Finance Capital." Among other topics, the talk addresses the deflating debt balloons that collapsed in Mexico and Orange County, California, in the mid-1990s. The full text appears in Capitalism’s World Disorder. Copyright ©1999 by Pathfinder Press, reprinted by permission.

BY JACK BARNES  
So, the world’s propertied families have been fighting among themselves more and more to use credit to corner a bigger cut of the surplus value they collectively squeeze from working people. They have been blowing up great balloons of debt. But ever since the 1987 stock market panic, and at an accelerated pace since the onset of world depression conditions at the opening of the 1990s, the capitalists have been plagued by the problem that first one balloon, then another, and then yet another begins to deflate. And they have no way of knowing which balloon will go next until they start hearing the "whoosh," and by then it is often too late.

All of us were children once and have blown up balloons. They can expand very slowly, very gradually. But then try to let the air out. That is harder to control. Remember? The balloons can get away and ricochet all over the room.

With returns on investments in capacity-expanding plant and equipment under pressure since the mid-1970s, owners of capital have not only been cost cutting; the holders of paper have been borrowing larger and larger amounts to buy and sell various forms of paper securities at a profit. They blew up a giant balloon of debt in Orange County over a period of years; the bondholders thought they had died and gone to heaven. Then the balloon began to deflate, as they learned the hard way that interest rates go up as well as down. When the balloon international bankers had inflated in Mexico in the 1980s began to collapse, the bondholders stepped in and blew it back up for a while. But in Orange County, the more local officials borrowed to make a killing using public funds to gamble with bond merchants, the greater their vulnerability became. Earlier this year, when rates started rising and low-interest bond issues were suddenly no longer available, the moment of truth arrived.

Now the capitalists and their public representatives--and not just in Mexico or Orange County--have been given another warning of the long-run possibilities of an uncontrollable deflation.

Over the past couple of decades, upturns in the business cycle have relied on floating large amounts of fictitious capital--ballooning debt and other paper values. The capitalists are now paying the piper for the lack of sufficient economic growth during that period to keep rolling over the loans.

The financial press has a term for this explosive process; they call it "de-leveraging." Among other things, this means we will be seeing more breakdowns like the bankruptcy in public "trust funds" in Orange County. Now I will admit, if you had asked me which of the thousands of local and state administrations was most likely to go belly up, I would have been hard put to guess Orange County. The spiritual home of Ronald Reagan and site of John Wayne Airport, Orange County has a median income in the top 2 percent of households in the United States.

Remember those pieces of paper with the cute names we mentioned in "What the 1987 Stock Market Crash Foretold"1--the Fannie Maes, Ginnie Maes, Farmer Macs? They are interest-bearing securities supposedly guaranteed by quasi-government agencies that buy up mortgages and second mortgages on homes and farmland. It was these bits of paper--cut apart, repackaged, and jazzed up as roulette chips labeled "derivatives"--whose declining prices imploded on Orange County and got it in such a jam.

1The resolution, adopted by the 1988 convention of the Socialist Workers Party, is available in issue no. 10 (1994) of New International, a magazine of Marxist politics and theory.
 
 
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