Wednesday, July 13, 2011

Second wave of the crisis reaches land

In pursuing what the prevailing law defines as their perfectly legitimate individual interests, investors are collectively destroying the universe within which they – and we – all live. As agents of the capitalist way of doing things they have no alternative.

The latest assault on Italy, where investors are bailing out of banking and the market rate of borrowing has soared underlines, what is surely obvious to all – the second wave of the crisis which erupted in 2007-8 is now underway.

The punitive rates of interest charged for the loans needed by Greece, Portugal, Spain, Ireland, Italy and Iceland to avoid default only ensure that such defaults are inevitable.

Rating agencies have now declared Ireland’s debts to be worthless. Greece is virtually certain to default in the immediate future. The recession – decline in production – in each of these debt ridden countries is deepening. A collapse of the euro as a currency, leading to an immediate slump in trade, is a distinct possibility.

The formerly mighty US is locked into a political impasse over proposals to reduce its staggering $14 trillion debt mountain. If it is not sorted out soon, the US government will come to a default and the unthinkable – a dollar default – comes closer.

Occasionally, in struggling to find solutions to the impossible contradictions which dog their attempts to explain the deepening crisis and find solutions, a rare commentator will be found shedding light on the inevitable consequences of following the current path.

The Financial Times’ Martin Wolf is one member of this rare breed. In a recent column reviewing the crisis in the eurozone he revealed another two of the impossible contradictions that are skewering the global economy -

- the more successful a country is in reducing its debt burden in order to be able to return to growth, the deeper its recession gets. Latvia’s GDP, for example has dropped 23% since the crisis erupted.

- the more successful a country turns out to be in cutting its costs, the worse the debt burden becomes.

The solution? Wolf says “debt restructuring [a polite term for state bankruptcy, default, and debt cancellation] is merely a necessary condition for an exit. It is unlikely, in all cases, to be enough.”

His chilling prediction sets the scene for the coming months. “Some economies may just wither away.”

Putting it simply, mounting and ongoing resistance to the measures – “austerity” hardly begins to encompass it – being used to attempt to reduce unsustainable global levels of debt, means that debt must now be “restructured”, wiped out.

But the debt grew throughout the last 40 years to fund growth. So growth must now give way to contraction. Latest estimates suggest that the value of Greece’s debt must be reduced by 75%. And so must its production. And not just in Greece.

Grasping how markets, governments and corporations are driven by forces more powerful than the sums of their parts is vital. We have to get to grips with the contradictory forces at work in the capitalist economy and show that the system itself is broken and unsustainable.

Cuts in services, £9000 fees for university courses, soaring unemployment, inflation, mounting house repossessions, privatisation and attacks on pensions are the consequences of the crisis that broke in 2007-8.

What is coming up the line as the second wave of the global tsunami advances will shake society to its foundations. At the same time, it will create opportunities for transcending capitalism and creating a rational, sustainable economy. It’s a chance we can’t afford to squander.

Gerry Gold

Economics editor

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