By Andy Ford (Warrington South CLP member)
Donald Trump’s fraud trial is giving a fascinating insight into his ‘business empire’, but also into the worthless world of 21st century capitalism.
We are taught from school, all the way to university Economics courses, that companies thrive or die on the basis of profits. Of course that is ultimately true, and Karl Marx wrote entire books on the dynamics of profit (‘surplus value’), on the rate of profit and its economic and social effects.
But in the short term, what is crucial is cash flow – more money needs to come in each year than goes out. And modern capitalism is nothing if not short term.
Donald Trump’s tax returns claim to show that his businesses have never been profitable. Of course that was window dressing to avoid paying taxes, but there is also a truth in those statements.
Overpriced assets
Cash flow can come from sales or revenue, investors or loans. It is now clear that much of Trump’s cash flow was loans – secured against overpriced assets. In one example Trump built a casino, borrowed money to pay for the land and construction work, and then sold bonds secured against the resulting asset – which was massively over-valued. He then used the money from the bonds to pay off the original construction loans, and walked away with the rest. The bonds were owed by the company running the casino. When the casino defaulted the bond holders had to salvage what they could from the resulting wreck, at a fraction of Trump’s inflated asset value.
The trial is really about who overvalued the assets, not really whether it happened. Various executives and members of Trump’s family have been claiming at the trial that they knew “little of the details”, or it was dealt with “much further down the organisation”, or that they did not understand the emails they have been proven to have received or in one case, that they wrote. “I am not an accountant” was Ivanka Trump’s defence.
The banks must have known, really, what was going on, but as long as everyone was making money – who cared? It was better for them to give further loans, at low or near-zero rates, to stave off default, rather than foreclosing on the debts. In the words of Karl Marx, “It is one thing to share out profits; but quite another to share out losses.”
“Zombie” companies
But Trump was not, and is not, alone in these methods. Think of the Glazers and Manchester United. Uber has only made a profit in one year of its existence, and yet, is still trading. Across the world economy, ‘zombie companies’ owe $2 trillion on their loans that they will probably never repay (see here). It’s not even a new idea – the great 19th century Russian writer Nikolai Gogol described just such a scam in his hilarious novel ‘Dead Souls’.
When interest rates were low, it all worked, and the capitalists and spivs, the banks and their tame accountants and management consultants made their fortunes. But as the rates rise the whole thing threatens to unravel. Trump’s trial is part of that process.
