With Spain
no longer able to borrow on the money markets, German banks downgraded and key
indicators pointing towards a massive international downturn, the global
economy is heading towards a new meltdown.
As the G7, the group of the world’s richest countries, held
an emergency teleconference to discuss the financial crisis in the eurozone,
and its implications for the global economy, they got the news that a tipping
point had been reached in Spain .
After weeks of denial, Cristobal Montoro, the country’s finance
minister appealed for European leaders to allow the country’s troubled banks to
get direct financial help. The country's high borrowing costs effectively
excludes it from accessing credit markets.
Mariano Rajoy, Spain ’s prime minister, warned that
the country was in a situation of “extreme difficulty”. But the European Union
only allows bail-outs through the agency of government, so Spain ’s appeal
is certain to fall on deaf ears.
This morning, German banks became the latest victim of the
contagion of economic and financial crisis as it spreads rapidly throughout Europe and ricochets around the rest of the world.
Credit rating agency Moody’s downgraded seven German banks
and their subsidiaries, including Commerzbank, the country’s second largest, as
well as one German subsidiary of a foreign group. The agency said its decision
was taken because of "increased risk of further shocks emanating from the
euro area debt crisis," and the banks' inability to compensate for losses.
The inseparable connection between finance and economic
activity – the production and exchange of goods and services it reflects – is
underlined by a warning on contracting global money supply. The measure of cash
and overnight deposits for China ,
the eurozone, Britain and
the US
has been contracting since the early spring. China 's money supply has been
falling at the fastest pace since records began.
According to Telegraph
columnist Ambrose Evans-Pritchard, “any further falls risk a full-blown global
recession”. The relationship between money and real production is a two-way
street. As the global slump deepens
irretrievably, pressure on governments and central banks to print more money
must appear in inflation – a consequential decline in the value of money –
somewhere in the system.
The current contraction of money supply is closely connected
with commodity prices which are falling hard, with Brent crude oil down to a
16-month low of under $97 a barrel. Sliding commodity prices are also the
result of contracting production.
The predictive power of money supply figures serve to
confirm the expectations of production managers throughout the world recorded
in the country by country purchasing managers’ indexes (PMI). Figures below 50
indicate a contraction. The euro zone PMI fell to 45.9 in May, down from 46.7
in April. Germany ’s index
dropped to 49.6, down from 50.5, and that of France fell from 45.9 to 44.7.
In Britain ,
the PMI for manufacturers plunged to 45.9 in May from a downwardly revised 50.2
in April, its lowest reading since May 2009 and the second-steepest fall in the
survey's 20-year history. Analysts had expected a more modest dip below the
50-point mark that separates contraction from expansion, to 49.8.
"This is a collapse, this is a huge decline. We're
still a little bit above the lows we hit in the depths of the 2009 recession,
but we're heading that way sharply," said Ross Walker, an economist at
RBS.
The deepening global crisis has already left hundreds of
millions of victims in its wake as they’ve lost jobs, homes, savings and
pensions – and any hope of a future in the current, capitalist system. Capitalism
isn’t working – let’s make it history before the world is plunged into an
unprecedented depression with all the political consequences that entails.
Gerry Gold
Economics editor
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