The credit crunch one year on

In the shadows of the opening ceremony of the Beijing Olympics, the effects of the slow-motion implosion of the global capitalist economy one year on from the start of the credit crunch are becoming apparent in China. Whilst many factories have been shut, apparently to reduce pollution for the period of the Games, there are questions whether many of them will reopen when the medals have been awarded.

China’s double digit growth rate of recent years, which has driven up world prices for raw materials including metals and oil, has slowed in each of the past four quarters. Six out of 11 economic measures including new orders, export orders and output indexes have seen record lows while 14 out of 20 industries have reported a contraction in output. The recent, rapid decline in the value of the dollar against the Chinese yuan has raised the costs of exports to the US. And profits are falling as Chinese workers press for increases in their ultra-low incomes.

In opening its borders to foreign investment – it surpassed the US as the top destination in 2003 - China provided a seemingly limitless supply of cheap labour to globalising corporations. The result was an overabundance of manufactured commodities. The Chinese government was obliged to fund the US foreign debt that enable American consumers to buy from China what they had previously made at home. Now exports to the US and Europe are in decline.

The end of the globalisation boom – which had been interrupted by an accelerating series of global financial crises throughout its 30-plus years – became apparent from 2004 onwards when hard-pressed American consumers reached the limits of their ability to service the spiralling debt. The resultant credit crunch - when banks stopped lending to each other exactly one year ago today - is no more than a sign of a much, much deeper malaise.

In the UK, the Bank of England’s Monetary Policy Committee remains paralysed by the crisis, unable to reduce interest rates to stimulate the economy for fear of adding to already spiralling prices. New Labour’s hints of measures to breathe life into the housing market seem likely to have the opposite effect – stopping all activity until the October budget statement makes Alistair Darling’s intentions clear. In the UK, household debt is accelerating whilst house prices have fallen by almost 11% over the last twelve months.

Niall Ferguson, the right-wing and revisionist economic and political historian, is certainly not holding his breath about the future. Writing in the Financial Times credit crunch anniversary number, Ferguson notes that US house prices have fallen faster than any time since the Great Depression of the 1930s. Despite capital injections of about $300 billion, shares in at least 40 US banks are down 70% or more and many are set to fail.

“One year on, what began as a US crisis is fast becoming a world crisis. Small wonder only a handful of global equity markets are in positive territory relative to August 2007, while more than half have declined by between 10 and 40 per cent. The US slowdown will also affect many emerging markets less reliant on exports than China. At the same time, the global slowdown is about to kick away the last prop keeping the US recession at bay …. But, as in the 1930s, the critical phase is not the US phase. It is when the crisis goes global that the term ‘credit crunch’ will no longer suffice."

It is not “when” it goes global. Recession is already a global phenomenon beginning to show up in necessarily retrospective statistics. Germany, France and Japan look set to join the lengthening list of economies heading downhill, which already includes the US, Canada, Spain, Ireland, Italy, the UK, the Baltics and New Zealand. As the sub-title of our book A House of Cards, published a few months into the credit crunch, reads, it is a matter of moving “from fantasy finance to global crash”.

Gerry Gold
Economics editor