A system beyond repair

The global economy is in bad shape, nowhere more so than in the UK and each panic measure only makes matters worse. Following a total of 2% cut in the previous two months, the Bank of England has reduced its rate by a further 1% to 2% – equal to the lowest rate since the Bank of England was founded in 1694, when capitalism began to make its mark. That’s how serious the crisis is.

The sudden and brutal deterioration in the economic outlook across Europe also prompted the European Central Bank to cut its main policy rate by three-quarters of a percentage point to 2.5% – its largest reduction ever – just hours after Sweden’s central bank cut the country’s official borrowing costs by a record 1.75%.

This is the first time that UK interest rates have plumbed these depths since rates took on their current, central role in attempts to minimise the effects of recurrent crises. This was following the 1944 Bretton Woods arrangements to restart the normal business of making profits following the Second World War’s destruction of productive capacity and people.

The Bank of England’s decision is a futile bid to stimulate the economy by getting people spending again and cutting the cost of loans. But the banks are not rushing to play ball as they are mainly interested in rebuilding their shattered balance sheets. Suddenly the banks have become “risk averse” after decades of encouraging debt. Output in the UK fell by 0.5 per cent in the third quarter of this year. Unemployment is rising sharply. Consumer and business spending are stagnant while investment in housing is falling. Yet sharper declines in output and bigger rises in unemployment are expected.

Analysts are warning of the threat of deflation. The Financial Times
warns today: “This is not a normal slowdown. Falling commodity prices, collapsing demand and a damaged financial system may well turn some inflation indices negative: spells of falling prices are quite possible. If consumers start expecting prices to fall, this could uncork the poison of deflation.”

The voice of global capitalism is also concerned that panic measure following panic measure “risks spooking investors, causing long-term interest rate spikes and prompting flights from currencies”. Judging by the plummeting pound against the dollar and euro, this is already beginning. With reports that the government is about to start printing money – regarded as the “nuclear option” – in a yet another attempt to reflate the economy, the position with the pound can only deteriorate.

The financial crisis in the US is taking its toll on other countries. The huge volumes of Treasury bonds issued as part of an effort to reverse the economic slump threaten to stop access to credit by – and therefore bankrupt - Latin American governments facing financing needs of an estimated $250bn next year, The risk is that Latin American and other emerging market borrowers may be “crowded out” from credit markets by a US fiscal deficit that could exceed $1,000bn next year

And China? The source of cheap labour which was the motor of globalization is receiving criticism for its recently announced Keynesian “New Deal” programme pouring money into roads, docks and other export infrastructure. Critics say China should encourage spending to turn savers into big spenders.

The inevitable failure of all of these attempts to stave off the effects of the global financial and economic hurricane lead to just one conclusion: the capitalist system is out of control and beyond repair. And New Labour is undoubtedly preparing other, sinister and repressive measures to deal with the massive social unrest that is heading to a community near you in 2009.


Gerry Gold
Economics editor