Beware the light at the end of the tunnel

Some optimists are saying that things are beginning to look up because of a fall in unemployment, particularly in the US but also to some small extent in the UK. Yesterday, those closer to the action put things in perspective.

Ben Bernanke, chairman of the US Federal Reserve, dampened the optimism that had seen stock markets rise. January’s fall in the unemployment rate to 8.3% “understates weakness in the U.S. labour market”, he said. “It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work. There are also a lot of people who are either out of the labour force because they don’t think they can find work or in part-time jobs.”

That’s another 15.1%. Bringing the total to more than 23%.

But what about the unexpected 243,000 increase in jobs? Bernanke wasn’t impressed. He’s keeping the interest base rate as near to zero as it can go – at 0.5%, until 2014 - to avoid a further brake on the economy. And even with inflation below the 2% target, the fact that it remains above the interest rate means that businesses are being paid to borrow. No wonder there’s a few jobs appearing.

Meanwhile, millions of families have already lost their homes and millions more are stuck with impossible mortgage payments on houses whose market value has dropped like a stone. As Bernanke put it “the amount of negative equity in the United States is about $700 billion (£447 billion), which is enormous and so there is no conceivable programme [that will get] everybody in the country above water.”

The US is only one part of the global capitalist economy, albeit a very large one, and the health of the two are inseparable. The increase in US jobs is supposed to reflect confidence that there’s a solution in sight for the eurozone crisis, but who’s kidding who?

The process of dismantling the monstrous, decades-long accumulation of credit and debt is underway. “They” call it “deleveraging” and tell us that we’ve all been living way beyond our means. The consequences are just beginning to appear.

Greece was gripped yesterday by another general strike as its government again postponed agreement to the €130 “bail-out” that would see wages slashed by another 20-30%, another 15,000 public sector jobs eliminated, and pensions chopped. People with good jobs, homes and cars last year, are this year homeless, hungry and cold on the streets.

Spain’s economy shrank 0.3% in the last quarter of 2011, and is expected to be officially in recession in 2012. France cut its growth forecast from 1% to 0.5%. Unemployment in the eurozone has been rising throughout 2011, hitting a new record of 16.5 million in December, and it is expected to continue rising throughout 2012. In the 27 EU countries, 23.8 million are unemployed – 9.9%.

And don’t forget Iceland, where the banking crisis hit early and hard. It is now on the brink of new catastrophe. Thousands of households face poverty and loss of property because of loans that, in some cases, have more than doubled as a result of the last currency crash and subsequent price inflation.

The International Labour Organisation says this in its Global Employment Trends 2012: “After three years of continuous crisis conditions in global labour markets and against the prospect of a further deterioration of economic activity, there is a backlog of global unemployment of 200 million – an increase of 27 million since the start of the crisis.”

Astonishingly, the ILO says that 400 million new jobs will be needed to avoid a further increase in unemployment. “Hence, to generate sustainable growth while maintaining social cohesion, the world must rise to the urgent challenge of creating 600 million productive jobs over the next decade.”

That is simply not going to happen. Even the ILO admits that a “dangerous third stage” in the world economic crisis is on the cards, noting that “policy space has been seriously limited, making it difficult to stop, or even to slow down, the further weakening of economic conditions”. The light at the end of the economic tunnel is actually a train crash in the making.

Gerry Gold
Economics editor.

Not holding back the tide

US President Obama has re-appointed Bob Bernanke as chairman of the US central bank the Federal Reserve for a second four-year term. You can see why.

Bernanke is an expert on the Great Depression, and has sophisticated views about what he sees as policy errors that brought it about following a catastrophic financial crisis. Sounds familiar?

Bernanke is justly famous for the ideas on monetary policy he adopted from Milton Friedman – Margaret Thatcher’s economic mentor. These ideas were a big factor in the introduction of quantitative easing designed to increase the flow of credit (and debt) once interest rates had fallen to zero. “QE”, as it’s become known, is credited with a slight slowdown in the rate of economic deterioration.

It was back in 2002 that Bernanke referred to the use of the ‘helicopter drop’ of paper money directly into the hands of the population, bypassing the banks as a way of restoring demand. Astonishingly, that policy was used for real during the invasion of Iraq.

The effect of his policies can be seen in the White House’s latest estimate of its budget deficit: $2,000bn – that’s $2 trillion - higher over the next 10 years than it had predicted as recently as March.

As the recession drives US unemployment beyond 10%, those losing their homes through foreclosure have spread from the sub-prime mortgage holders in the poorer areas to the middle classes, and the numbers are increasing. Government income from tax is being hit hard, and the cost of the limited benefits that the US states do provide – food stamps and short-term payments to the newly unemployed - is accelerating.

And, despite optimistic predictions about a recovery, the White House’s near-term revised expectation is for the US economy to shrink by 2.8% this year – far worse than its previous estimate of a 1.2% decline.

It’s not just the White House that got it so wrong. The Congressional Budget Office released sharply higher deficit projections predicting the 10-year deficit would reach $7,140bn, some $2,700bn more than it had thought in March. The newly published figures on the rising tide of debt don’t even include the effect of Obama’s latest plans. Bill Gale, a senior economist at the respected Brookings Institution says taking these into account implies a ‘deeply alarming’ deficit increase way in excess of $10 trillion over the next decade.

The only conclusion to be drawn from the latest US figures is that the economy is way beyond the control of Bob Bernanke. Four decades of globalisation have ensured that the financial and economic juggernaut can not be guided, let alone controlled by the pilot of even the world’s most powerful economy.

As the global capitalist crisis deepens, it exposes the absurd optimism – indeed, the helplessness - of those supposedly in charge of putting things right. Indeed, the pink pages of the financial world’s most prestigious daily, The Financial Times, are sprinkled with perplexed mutterings. On the back of this week’s “Fund Management” review, for example, is the headline: “Time to ditch all economic models”. Writer Vince Heaney argues that the “efficient markets hypthothesis”, - the EMH, has a “lack of relevance to how financial markets actually work”. In other words, the Friedman-Thatcherite-New Labour dogma that market forces must be allowed to prevail has been exposed as a formula for disaster. Heaney goes on to warn of coming “extreme events” in the financial markets.

Bernanke’s middle name is ‘Shalom’. It means peace, but don’t expect it anytime soon.

Gerry Gold
Economics Editor

G20 reduced to spectators

There they were on a warm spring weekend in Horsham, West Sussex, with a simple agenda: agree a plan to prevent the global economy from slipping from recession to deep slump, or at least suggest an outline of a strategy that their bosses could sign up to at the G20 summit in London next month. 

In the end, the communiqué issued by finance ministers and central bank governors was blandness itself. They pledged to “take whatever action is necessary until growth is restored” and ensure that “all systemically important financial institutions, markets and instruments are subject to an appropriate degree of regulation and oversight”. 

Meanwhile, the United States is going its own sweet way with more plans to try and rescue American banks together with implementing its  “stimulus” package while berating the Europeans for not doing the same. No commitments were offered in Horsham about keeping trade and markets open to prevent the spread of protectionist measures. 

Should we have expected anything more from this gathering? I think not. It’s important to restate that the capitalist economic system, at national and global levels, is not some logical, controllable process which finance ministers and central bank governors can manipulate as and when they please. 

Setting aside for a moment the anarchic nature of a market, profit-driven system, economic and financial structures have historically developed according to their own inner logic. The state and the economy are relatively independent. One cannot substitute for the other, even though they are interdependent and bound together historically. The state has responded to different circumstances, falling in line to either catch up with what’s happened or to facilitate new forms of activity. 

To blame Thatcher and Reagan, for example, for today’s financial crisis because they promoted deregulation during the 1980s is to confuse cause with effect. Deregulation proved necessary to summon up the finance for a new expansion of capital that corporations embarked on following the break-down of the old economic order in the early 1970s which had been based on fixed exchange rates and capital controls. Further deregulation in the 21^st century, which saw bank repackaging and selling off assets and loans, created space for them to lend to consumers as the only way they could buy goods (and houses) in order to sustain "growth".

Governments and central banks were happy to join in this new “golden age”, as Gordon Brown so wonderfully described it in June 2007 in a speech to the City when he was still chancellor of the exchequer. In fact they cheered the whole process on. That’s ended in calamity and the same politicians are struggling to understand let alone control the forces at work. No one, for example, knows the real scale (and certainly not the value) of “toxic” debt in the system. 

Meanwhile, the impact of the crisis in Britain is mounting. Ten people are chasing each job centre vacancy and the dole queue is expected to reach over three million next year. Unemployment among 16-to-24-year-olds is already running at more than 15%. 

Today, the Bank of England warns of a 1930s-style depression, saying that households are displaying early symptoms of being caught in a  “debt deflation trap” where debts become harder to repay as prices and wages fall. The amount owed on mortgages, loans and credit cards has risen by 165% since 1997. 

Some, of course, are trying to talk capitalism back to health. US federal reserve chairman Ben Bernanke, claims to have seen the “green shoots of recovery”. How should we estimate this prognosis? Perhaps he’s recently watched Being There, where Peter Sellers, a humble gardener, metamorphoses into Chauncey Gardiner and is mistaken for a financial expert. Chauncey’s remarks about how the garden changes with the seasons are interpreted by the president as sound economic and political advice. Say no more.

Paul Feldman
AWTW communications editor