Friday, June 12, 2009

Crisis over? Who are they kidding!

Finance ministers in Italy for this weekend’s annual meeting of the G8 capitalist countries aren’t short of sources to help them interpret economic statistics, and they’re getting plenty of advice about what needs to be done. The trouble is that not only are the statistics contradictory, but so is the advice.

The International Monetary Fund has revised its previous 2010 global growth forecast of 1.9 per cent sharply upwards to 2.4 per cent, because it thinks the wave of government intervention – which it encouraged – is going to bear fruit. The Chinese government, for example, has implemented a $585 billion stimulus package in fixed assets like apartment buildings and roads. One result is that China’s oil refineries have returned to production on a grand scale.

In the real world, however, things are sharply different. China’s exports - a key measure of the health of the global economy – fell by a worse-than-expected 26.4 percent from May 2008, while imports plunged by a quarter. This is the seventh month in a row that they have both fallen, and the pace accelerated from April.

Nevertheless, in a new round of hyped confidence in the prospects for profit, stock markets around the world are roaring ahead. The price of oil is soaring and there is even talk that the “recession is over”. Nothing could be further from the truth. What is happening is that the meltdown of the global economy is taking place at a slower pace – but it’s still melting.

The World Bank’s International Development Association (IDA) provides grants and loans to the world’s 78 poorest countries, and already this year the IDA has received a record number of requests for help. It now says that the world economy will shrink by 3% this year - much more than its previous forecast of 1.75%. "Most developing country economies will contract this year and face increasingly bleak prospects," World Bank president Robert Zoellick said.

Despite its optimistic forecast, the IMF has warned that there could still be another $3 trillion in losses for the financial sector as a whole before the crisis is over. Interest rates are beginning to move upwards on both sides of the Atlantic as buyers of government debt take fright at the prospects for inflation contained within the phenomenal printing of money that has kept the financial system on life support.

Some analysts are now weighing the prospects of a new, more catastrophic financial collapse starting in Eastern Europe. Latvia is truly facing economic catastrophe – output is shrinking at a rate of 20% a year – and, with massive credit provided by Swedish banks, some say threatening to take the rest of Europe down with it.

Latvia’s parliament is today considering emergency measures to its 2009 budget to attract funds from the IMF and European Union. The measures include a 10 percent lower old age pension, a savage 70 percent cut in the pensions of pensioners who still work and a 20 percent cut in state sector salaries, with allowances for parents reduced by 10 percent. "Yes, with yesterday's decisions the state has really been saved from bankruptcy," Prime Minister Valdis Dombrovskis claimed.

Meanwhile, all the major parties in Britain are considering where the axe will fall in order to stave off state bankruptcy in the coming period. And the crisis is over? Who are they kidding! The costs of saving the Latvian state or any of the capitalist states and the global capitalist system are unsustainable for the majority of the world’s population. For us, the future lies in replacing production for profit with production for need.

Gerry Gold
Economics editor

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