Edgy markets make “growth” seem hollow

The eyes and ears of the world’s biggest gamblers will turn towards the US Federal Reserve announcement this evening.

Better known as ‘investors’ in the capital markets, they anxiously await a decision on whether the Fed would begin winding down the life-support system which has sustained the US - and hence the global economy - since the 2007/8 crash.

Every month, the Fed has been inventing an additional $85bn dollars which it lends to the government by buying its bonds. Like every other form of credit, government bonds are a promise to pay interest and repay the capital.

The new money is supposed to find its way into the production of real value through loans made to businesses. This, the story goes, leads to growth, a higher quantity of profits, and increasing taxes which can be used to make the repayments. 

But with competitive pressures forcing corporation taxes downward globally, governments have to extract an increasing proportion of their tax income from wages earned and purchases of commodities made by the majority, the 99%. Us.

For the last five years the US economy – still the world’s biggest - has been at the centre of efforts to restore the economic damage that was the inevitable result when the credit-fuelled boom crashed in 2008.

The decision to reduce credit creation through ‘quantitative easing’ is driven by consumer price inflation and unemployment indicators.

If price rises show signs of getting out of control there’s cause for concern as it signals the likely onset of political unrest. The Arab Spring was triggered three years ago today by impossible economic conditions as food prices rocketed due, in part, to speculation in commodities funded by emergency credit flooding on to the market in search of quick profits.

If unemployment drops to 6.5% in the US (7% in the UK) – not expected for some considerable while yet – the alarm bells will begin to ring. Although it will be trumpeted as a success for the policy, a continuing reduction in unemployment could threaten profits as wage bargaining gathers strength.

At a hearing of the House of Lords’ economic affairs committee on Tuesday, Mark Carney, governor of the Bank of England (BoE), tried to calm investors’ nerves. He said that even if the Fed slowed the pace of its bond-buying, it would still be printing money and remained far from selling the trillions of dollars worth of bonds it had bought over recent years.

The BoE holds £375bn-worth of UK gilts, a significant part of the global total of government bonds. Carney is warning of the unpredictable consequences of even a hint of a start to selling off this historically unprecedented vast accumulation of stored up credit.

Carney has another proposal up his sleeve - the BoE would raise interest rates before trying to sell its stock of government debt.

Interest rates set by central banks (not those charged by the likes of Wonga) have  been running at historically low levels since the crash. At 0.5% in the UK, and effectively negative when measured against inflation of more than 2%, interest rates are just another side of the highly volatile loose credit regime of emergency measures that have kept the economy afloat.

Those with pensions or savings of any kind are losing out massively as the ConDem coalition tempts a new generation into a lifetime of mortgage debt slavery.

Mixing his messages, Carney said yesterday that interest rates would stay low until unemployment falls to 7% which the Bank of England predicts will happen in 2016.

Britain’s current economic growth is, of course, based on low-wage jobs while fuel prices soar and a huge rise in homelessness as the house price bubble makes homes unaffordable, as austerity cuts hit the most vulnerable.

Carney’s warnings of the risks of unwinding cheap credit and that "a return to growth is not the same as a return to normality" means that the global economy is fast approaching another great crash.

Gerry Gold

Economics editor