Debt contagion spreads

In the aftermath of Davos, the annual skiing trip for the bankers, businessmen and tame governments of the global economy, one key theme runs through the post-mortems in the wake of the economic and financial crash: the free market requirements of corporations are in open conflict with the political constraints of a world of capitalist nation-states.

The Financial Times’ Martin Wolf, who moderated the “economic outlook” session sums it up like this: “We have a globalised economy, but politics remains local. In times of crisis, the pressure to look after the former dominates the latter.” What Wolf is indicating is that local “politics” either gets in the way and/or is not up to the job. He is right but Wolf fails to grasp that the contradiction between globalising corporations and nation-state politics is insoluble.

So struggling to take much if any comfort from the less-than-impressive signs of a return to growth after renewed and unprecedented overdoses of “stimulus”, the talk in darkened corners is now turning to “rebalancing the global economy” with all the unspecified pain for millions that brings in its wake.

The crash exposed massive over-capacity in production around the world, after decades of the increasingly credit-led investment needed to maintain the expansion on which capital feeds. In the last 12 months, many countries have relied on individual attempts at rescuing domestic economies, creating export-led growth as a result.

But it isn’t happening.

Whilst the stimulus enabled banks to refill their capital balances, and, particularly in China allowed production to continue and even grow, it has failed to get people buying. Consumers aren’t consuming.

In countries like Spain, the United States and the United Kingdom and its nearest neighbour Ireland, as well as some of the countries of the former Soviet Union consumption was funded by borrowing against absurd inflation in property prices. Property prices have collapsed, so consumption collapsed. It can’t be restored to previous levels. The patient has suffered a near fatal illness.

Growth certainly hasn’t returned to countries like the Ukraine where GDP fell 14% last year. All across the world unemployment is high and soaring, hours and wages are being cut. Pensions wiped out. In the US, where some of the production numbers look positive, Lawrence Summers, Barack Obama’s principal economic adviser, admits “what we are seeing in the US and perhaps in other places, is a statistical recovery and a human recession”.

The obscure language of the financial commentators can be difficult to untangle at times, but the threatening messages are getting clearer day by day. They speak on behalf of the global investors, speculators who move vast funds to the source of highest return. And the message to governments is this – those with an excess of debt had better give up on stimulus pretty soon to avoid the growing threat of state bankruptcy that is spreading like a global contagion.

Italy, Portugal, Spain, the UK, Iceland are joining Greece - which has its hand out for help to the International Monetary Fund and the European Union – in the emergency ward. Those with excess savings like China had better get their people increasing their consumption pronto, or face the consequences.

No wonder the political crisis is growing in all the major economies. Cut spending and the economy will dive (or die); don’t cut spending and the state faces bankruptcy. In short, there are no answers within the present framework. That doesn’t mean the forces of extreme reaction will give up and go home. If conventional nation-state politics won’t work, there is always the danger of unconventional “solutions”.

In our draft Manifesto of Revolutionary Solutions we set out our proposals to bring this obscene and increasingly dangerous system to its end. Join the discussion.

Gerry Gold
Economics editor