Osborne's 'recovery' built on sand

Just as the ConDem coalition is trumpeting a “return to growth” – one that is more apparent than real – their hopes for a sustained economic recovery have been shattered by the eruption of new phase of the global crisis.

Late last night Turkey’s central bank joined India’s in emergency measures designed to stem the flight of capital from their countries as investors continue to withdraw funds from “emerging” economies around the world.

In attempting to reverse the collapse of its currency, the lira, and against opposition from prime minister Tayyip Erdogan, who is in the midst of a corruption scandal and desperate to maintain growth in the run-up to an election, Turkey’s central bank raised interest rates to levels which shocked economists, more than doubling its overnight borrowing rate from 3.5 percent to 8 percent.

The Reserve Bank of India’s rate rise of 0.25%, small by comparison, is the third since September. But the country is struggling with 10% inflation, a halving of its projected growth rate to 5% and the value of the rupee falling 11% last year as investors moved their money out of the country. The Congress party government of Manmohan Singh, also battered by a corruption scandal, faces an uphill battle in elections due by May.

These are just two of the countries whose problems were dramatically accentuated by the US Federal Reserve’s decision last month to slow the creation of credit by way of “quantitative easing”, aka printing of money.

The flight of capital was already underway long before the Fed’s decision. Just suggesting the possibility of reducing the $75 billion a month programme of money creation in June 2013 was enough to start the ball rolling. Now it shows all the signs of turning into a rout, a panic.

So-called “emerging” countries are those willing and able to provide global investment funds with favourable high-profit conditions – including cheap labour, low taxes, and government-funded infrastructure. They became the home for trillions of dollars of the new credit, invented in the desperate attempts to resuscitate the world economy following the 2007-8 crash.

Ironically, throughout the half-century leading up to the crash, global corporations had taken advantage of cheap labour by the transfer of manufacturing from the relatively high-wage, richer, “developed” economies to the ultra-low wage economies. In doing so they reversed the competitive drive for productivity which tends to increase the ratio of fixed capital investment to the quantity of labour. The rate of growth of productivity – the quantity of value produced per hour of labour – slowed as a result.

So, globalisation of manufacturing and finance led to two significant results – a slowing in the rate of productivity growth, and far more volatile markets for finance capital, which was invested in easily tradable emerging countries’ bonds and currencies rather than in factories, roads and other infrastructure.

 

In the wake of the crash, capital investment to replace ageing facilities, let alone new manufacturing, came to a virtual standstill. As a result, in 2009, productivity growth turned negative. The emergency rescue measures managed a reversal. A temporary reversal.  The trend has continued downward ever since.

That, in brief is the back-story to the Financial Times’ warning for the ConDem’s absurdly euphoric chancellor Osborne. “Scratch beneath the surface, however,” says the FT’s economics editor “and Britain’s deepest economic challenge just got deeper.

“The problem is that the trend the Bank of England, the Treasury and economists want to see most – an end to productivity stagnation – appears to be absent. In the latest labour market figures… total hours worked grew 1.1%, indicating that output per hour worked fell again in the final quarter.

“Unless Britain’s productivity performance improves, the economy can catch up its lost ground with people working longer and unemployment falling. But once this is done, prosperity will stagnate, as it has for the past six years.”

To say that the dynamism of capital is waning is to put it mildly. Add in the flight of capital from India et al and you have the recipe for another global crash. Whatever the ConDems’ fantasies, capitalism isn’t working and the so-called upturn is built on sand.

Gerry Gold

Economics editor

US economy on the brink

The self-created mirage of recovery that helped sustain the tattered remnants of the American Dream evaporated yesterday as reality came calling.

The desperate measures taken to halt the imminent sacking of hundreds of thousands of public sector workers was only one event in a day of reckoning.

Five stark paragraphs comprising the statement issued by the Federal Reserve - America’s central bank - reeks of the stench of exhausted defeat. The first outlines the problem. It needs no interpretation:

Information received since … June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in non-residential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

In the action paragraphs, the committee explains that base interest rates will be kept at their historic low, but reiterates that “resource slack”, which means massive overcapacity in production, eliminates any hope of anything changing for years or decades to come.

In what is seen as a reversal of previous policy, the Fed is intent on printing even more money in a bid to stimulate the economy. It plans to use the income from repayments on mortgages it bought during the financial meltdown of 2008 to pump out more dollars.

If nothing else it gives a new meaning to recycling. Once the money has been captured from American families, the figures just keep moving around inside the Federal Reserve’s computers. Paul Ashworth of Capital Economics called the decision a "symbolic gesture".

Yesterday, Obama recalled the members of the House of Representatives back from their summer recess so that they could pass an emergency bill approving $26bn (£16.4bn) funds for states which have run out of money, and $16.1bn to extend funding for the Medicaid healthcare programme for low-income Americans.

Without the emergency aid, states would have laid off police, teachers and firefighters and all of the key services would have ceased functioning. The states themselves have suffered during the recession through a loss of revenue through sales and property taxes. The aid will only get them through the current financial year, however.

Those who claim that public spending is the answer to the economic crisis have had their fingers burnt by the US experience. Obama’s government has spent trillions in a various stimulus packages – all to no avail.

That’s because the crisis of capitalism is global and marked by the classic symptoms of over-production, over-capacity and falling demand. The boom was artificially fuelled by mountains of credit and debt which inevitably proved unsustainable and led to the implosion of the financial system. Without easy credit, consumers are in general spending what money they have on necessities like food and shelter.

It all adds up to the American economy being on the brink of collapse, adding to the sense of political crisis gathering around the Obama presidency.

Gerry Gold
Economics editor

The American dream is a nightmare of foreclosures

Las Vegas – known best for its gambling haunts – now has a new reputation. It’s America’s No.1 city for foreclosures, with more people losing their homes here than elsewhere in the country.

Artist Emily Kennerk has created a 22-hour video installation which shows an image of every home foreclosed in 2009. (Foreclosure is the legal process whereby a bank or lender obtains a court order that terminates the borrower’s right of redemption. It is harsher than repossession).

Describing her installation, Kennerk says as you walk around the town you can’t help but see “this ghost town is forming around you. It’s broader than Las Vegas. This is the first generation that’s going to have to deal with the death of the American dream”.

More than four million US homes have been repossessed in the past three years. A website currently lists 2,304,257 foreclosed properties in the US. In the state of Nevada where unemployment stands at 14%, more than six out of ten of all home sales are currently from foreclosures.

At the start of the sub-prime mortgage crisis, back in September 2008, the US Treasury took the mortgage giants Fannie Mae and Freddy Mac into government “conservatorship”. These two mortgage corporations were set up under Roosevelt’s New Deal during the Great Depression of the 1930s. Along with Ginnie Mae (the Government National Mortgage Association) they currently guarantee $5 trillion in US mortgages and 96.5% of all newly originated mortgages in the US.

So far the government has injected $145 billion into them to cover their losses. The mortgage market now is almost a wholly owned subsidiary of the United States government, according to former Federal Reserve chairman Paul Volker. "Almost all the mortgages made now are insured by the government, bought by the government, and the guys at Fannie Mae and Freddie Mac are the market . . . It’s clear Fannie Mae and Freddie Mac need to go. "

But the US is not only affected by a housing crisis. The malaise goes far, far deeper. Three trends have come together. Economists estimate that the annual incomes of the bottom 90% of Americans have risen only 10 per cent in real terms over the past 37 years while the incomes of the top 1 per cent have tripled.

Thus, a “slow economic strangulation”, which began well before the Great Stagnation, now means that income mobility is declining just as inequality rises sharply. Even families with a gross joint income of $70,000 per year, are only “a pay check or two from the streets” as one Minneapolis worker puts it. Medical expenses are a nightmare. Even families on twice the US median joint income have to borrow heavily to have essential, life-saving operations.

Arthur Miller’s 1949 play, Death of a Salesman, dramatised the anxieties arising from US Great Depression of the 1930s and the reliance on credit to provide necessities. During the Cold War years, such plays were seen as an attack on great American dream. But in today’s Great Stagnation, following the years of easy debt-fuelled consumer credit, which analysts call the “Great Moderation”, it’s certainly not playwrights who are pricking the dream-bubble.

The inability of the capitalist system, not only to ensure the fundamental necessities of life, but the very notion of a positive future is self-evident. Cities and states are staring at bankruptcy while trillions of government dollars have failed to revive the economy. As American comedian George Carlin quipped: “It’s called the American Dream because you have to be asleep to believe in it.”

Corinna Lotz
A World to Win secretary

US confronted by double crisis

The warnings about the dangerous state of the global economy are flying thick and fast. Earlier this week, a senior banker told City financiers that capital markets had suffered a heart attack over the summer. “If we stay stuck,” Hans-Jörg Rudloff, chairman of Barclays Capital said, “the patient will die”. Then the half-yearly forecast by the Organisation for Economic Cooperation and Development published on Thursday urged action by the United States Federal Reserve to counter the threat of a recession.

The report makes sober reading. It underlines the reality that the shock-waves on the property and share markets are not a blip or “market correction” but rather the beginning of a protracted and deepening recession. Using the word “ominous”, the organisation’s chief economist, Jean-Philippe Cotis spelled it out: “Our diagnosis is a slow-down. We cannot rule out a recession.” He added that the OECD now expected the US to grow at 1.9%, against an earlier projection of 2.2%, as the housing sector exerted a "longer and more potent-than-expected drag". Cotis admitted that analysts had been taken by surprise by the “spread of this financial risk beyond the boundaries of the US” and called for a more active fight against “"predatory lending", as well as "more pugnacious" rating agencies.

The crash in the US housing market has led to a continuing credit crisis bringing, not only the Fed, but also the Bank of England and the European Central Bank under increasing pressure. Yesterday, the Fed responded by injecting another $31.3bn (£15.5bn) into the banking system and the European Central Bank pumped €42.2bn (£28.5bn) into the money markets. Yet more signs have emerged that the US financial and economic crisis is worsening. The property market is at its weakest since the dip after the 9/11 attacks, the Dow Jones plunged and the dollar fell on foreign exchange markets.

The sharp decline of the US economy and the prospects of a long-term downturn are clearly destabilising the global financial and economic order. It’s also more bad news for the US presidency, which is already in terminal decline as one Bush adviser after another quits the White House. Even if there were solutions to the economic crisis, Bush and his diminishing circle are tied down by a morass of insoluble problems that originate deep within the political and state system in Washington itself.

There is an almost unanimous agreement that the war in Iraq has failed. Even former supporters of Bush and the invasion of Iraq have turned critical. One right-wing commentator, Timothy Garton Ash, has noted that “there are now only about three people in the world (G Bush, R Cheney, D Rumsfeld) who would not acknowledge that US policy over Iraq was deeply flawed and inconsistent”. But the realisation that invasion has been an unmitigated disaster does not translate into an ability to change strategy or learn from errors. Garton Ash points to the strange fact that the failure to build a viable state structure in Iraq is a kind of mirror image of the governmental and constitutional crisis within the American leadership circles themselves, hampered by, he notes, the disproportionate influence of lobbyists and funders, and an absurdly dysfunctional election timetable. One senior military officer, Garton Ash reported, has compared the malfunctioning of the US government to that of the Hapsburg empire as it staggered into the First World War, an event from which, of course, it never recovered.

Corinna Lotz
AWTW secretary