Global economy heading from contraction to destruction

It’s no wonder that prime minister Cameron now sees no prospect of a “recovery” in the foreseeable future. He’s just stating the obvious.

Twelve European countries are in recession – meaning they have suffered at least two consecutive quarters of contraction: Belgium, Cyprus, the Czech Republic, Denmark, Greece, Ireland, Italy, the Netherlands, Portugal, Slovenia, Spain and the UK.

Germany, the so-called European economic powerhouse, contracted by 0.2% in the first quarter of 2012, after two quarters of less than 1% growth. In France, the growth rate has been less than 1% for four years. In the last three quarters it was 0.0%, 0.3% and 0.2%.

Recession is declining production. It finds its expression in rising unemployment.

The global employment situation is already alarming and shows no sign of recovery in the near future, according to the International Labour Organisation in its World of Work report 2012, optimistically sub-titled “Better jobs for a better economy”.

How do you even begin to comprehend the meaning of 25% unemployment in Spain, rising to 50% amongst its young people? 

These rates are already comparable with those the 1930s Great Depression when while unemployment in the US never rose above 25% in some countries of Europe it soared as high as 33%. In Germany the unemployment rate reached nearly 25% in 1932. In the UK in the same year it peaked at just over 22%.

And what of the future? The evidence shows that the contraction has hardly begun.

A survey out today shows that the eurozone's manufacturing sector slipped further into decline last month. Firms cut workers at the fastest pace in more than two years in April after new orders fell for the 11th straight month.

The ILO report shows that soaring unemployment is going hand-in-hand with a prolonged investment deficit – another sign that the crisis has entered a new phase.

With no hope of increasing consumption, large firms, seeing no possibility of profits from investment, are holding on to unprecedented levels of cash. In some economies, more optimistic small firms have difficulty accessing credit that would allow them to invest and create jobs, because banks, seeing no hope of a profitable return, aren’t lending 

As the effects of only recently adopted austerity programmes begin to bite, even taken together with monstrous injections of further credit from the European Central Bank, and their cumulative effects are seen, voices of alarm are beginning to predominate in the pro-growth camp.

Lawrence H. Summers, former US treasury secretary, knows a thing or two. This week he warned:

Once again European efforts to contain crisis have fallen short. It was perhaps reasonable to hope that the European Central Bank’s commitment to provide nearly a trillion dollars in cheap three-year funding to banks would, if not resolve the crisis, contain it for a significant interval. Unfortunately, this has proved little more than a palliative. Weak banks, especially in Spain, have bought more of the debt of their weak sovereigns, while foreigners have sold down their holdings. Markets, seeing banks holding the dubious debt of the sovereigns that stand behind them, grow ever nervous. Again, Europe and the global economy approach the brink.

The brink of what he doesn’t say.

This inevitable self-feeding spiral of contraction was triggered in 2007 when the capitalist economy reached the limits of five decades of growth funded by clouds of fantasy finance. But these five decades started from a low level. The tidal retreat of the 1930s left a mountain of surplus capacity exposed.

The BBC’s Stephanie Flanders economics editor quotes economists at Citi who say “it's been the worst four years for the UK economy in at least 100 years: worse than what happened in the 1920s and 1930s, and worse than anything in the 1970s and 1980s”. “Leaving aside the war”, she told viewers recently.

Since there’s no prospect of a recovery, and austerity is making a bad situation worse, the turn from contraction to destruction is next on the agenda for global capitalism. We need to learn the lessons from history about the political consequences of slump and depression – and quickly – to block the process through mass action aimed at a transfer of power to the 99% asap.

Gerry Gold

Economics editor

Spectre of Great Depression looms over Spain

A new phase of the financial and economic crisis threatens to drag Spain and other so-called “peripheral” countries in the eurozone into a 1930s-style depression and trigger a renewed global crash.

Spain’s failure to raise all the foreign loans it requires has sent markets tumbling and renewed pressure on the ailing euro. The European Central Bank’s decision to rein back on cheap loans to cash-starved commercial banks also adds to the sense of crisis.

Astute observers like economist and academic Nouriel Roubini believe that the pressure on countries like Spain and Portugal to slash spending coming from the European Union, the ECB and the IMF, could trigger major events.

“Japan had a Great Recession, and a Great Stagnation, but it never had a Great Depression,” he says. “But recession in some eurozone countries could become a depression, just like the 1930s.”

Earlier this week, treasury minister Cristóbal Montoro, presented the Spanish parliament with the harshest budget since the death of dictator General Francisco Franco. Prime Minster Mariano Rajoy described the situation as “extreme, at the limit and exceptional”.

This was the day after news came that youth unemployment in Spain's rose to 50.5% in January compared with an average eurozone youth unemployment rate of 21.6%. Total unemployment is up by 10% in a year to stand at 4.75 million.

The Spanish government agreed the details of a savage budget, brushing aside a 24 hour general strike which saw more than 1 million people take to the streets on March 29 against laws making it easier to sack workers.

Spending cuts averaging 17% and a further freeze on public sector workers’ wages will be imposed along with sharp rises in gas and electricity bills. Business taxes are being reduced. These measures can only accelerate the contraction of the economy already predicted to be 1.7% smaller this year.

But it wasn’t enough to satisfy the profit-hungry investors. Despite the severity of the budget measures, Spain’s debt was still forecast to rise to record levels, soaring to 80% of annual income.

In the latest auction of its bonds intended to raise the funds needed to keep the economy breathing, and the acid test of the market’s reaction, investors showed that they were losing confidence in the Spanish government’s ability even to make the interest payments. They forced up interest rates and only bought two-thirds of what was offered.

In Spain, as in other countries, the people have reached the limits of their endurance and a new kind of response is maturing. The Assembly of the Neighbourhood Los Austrias in Madrid played its part in mobilising for the general strike.

As Global Voices correspondent Lidia Ucher put it, the movement that sprung up on May 15 “has been a turning point in terms of supporting the calls of a part of civil society, organised in collectives, neighbourhood assemblies, and local or individually-led associations. In this general strike, the citizen movement has taken different forms in the streets, neighbourhoods, social organisations, and digital social networks.”

This new movement is seeking creative ways for all affected to join the action. Among the proposals from the neighbourhood assemblies was for those without jobs to support the withdrawal of labour, with a consumption strike, taking to the streets without paying to consume food for 24 hours. Another was to involve women in a “care and gender strike”.

Together with the Arab Spring, and the revolutions in North Africa, the 15M movement has been the inspiration for the worldwide Occupy movement. As the global capitalist crisis continues to seek its victims, the new movement for democracy should seek to go beyond more inventive protest which the state can cope with.

We need a strategy for mobilising millions of people to actually defeat the present political and economic system, which M15 rightly identified as the problem not the solution. Our aim has to be the creation of a not-for-profit society of ecologically sustainable production satisfying the needs of the 99%. That’s the only alternative to a capitalism heading for a new Great Depression.

Gerry Gold
Economics editor

Toronto is a turning point

The failure of the G20 summit in Toronto to find a common approach to tackling the global economic and financial crisis had an air of inevitability about it. After all, capitalism is not exactly a rational system where sensible men and women come together to sort out an international crisis.

If that were really the case, the 20th century would not have experienced two catastrophic world wars, for example. Nor would the inter-war years have been dominated by the calamity of the Great Depression in Europe and America, which only ended when the major powers took to the battlefields.

In reality, what the Toronto communiqué – which apparently took all of 54 hours to negotiate – heralds is another period of intense competition and rivalry. In an abandonment of the unity of the past three crisis-era Group of 20 summits, the leaders decided to adopt "differentiated and tailored" economic policies for each country. Earlier proposals for a unified approach to limiting the activities of major banks by imposing tighter capital requirements were also put on the back burner.

In other words, it’s every country for itself. Sound familiar?

President Obama’s plea not to start cutting budget deficits too soon because it might harm the “recovery” was simply ignored. All the major economies are cutting deficits – and America won’t be far behind. Obama, it was noted, praised Britain’s “courageous budget” of last week.

He is aware that his stimulation package has failed to revive the US economy. On the contrary, unemployment continues to grow despite an increase in state spending. The recession has wrecked the finances of many states too, which are dependent on local property and sales taxes.

The small southern California city of Maywood is disbanding its police force and firing all public sector employees. Every service is being contracted out. US states have an estimated $200bn budget shortfall, equivalent to 30% per cent of all state budgets. The federal government’s deficit is about $1.3 trillion and rising.

The impotence of the political elites who gathered in Toronto reflects a stark reality of the problematic and contradictory relationship between capitalist nation-state systems and the globalised economy. Masked while the world economy expanded, this conflict has worsened since the 2008 meltdown of the banks.

Modern globalisation has created immense economic and financial forces that are greater in their impact and power than the sum of their parts. They are way beyond the control of even the most powerful states. Take, for example, the financing of government borrowing through what is known as the bond market. This isn’t some single marketplace, with a sign outside the door but is a series of inter-linked buyers and sellers in Europe, Asia and America, trading electronically around the clock.

Participants include commercial and investment banks, hedge funds, insurance companies, pension funds and – of course – the governments that guarantee interest on fixed-term bonds. Identifying all the various buyers and sellers globally is a task in itself; “bucking” this market is virtually impossible because states never know when they might come under attack. Just ask the Greek government.

Toronto, with its insistence on halving budget deficits by 2013, makes the transition from recession to depression much more certain. The political classes in every country are locked in a deadly embrace with economic and financial forces too powerful and inaccessible to cope with. So they take it out on ordinary workers, cutting their wages, pensions, jobs and services.

Remedial, curative action is not an option, just as it wasn’t in the 1930s. Telling the bond markets to take a running jump off a short pier, that they can whistle for their interest payments, for example, requires something quite different and quite revolutionary. The G20's failure at Toronto is a turning point. Now it’s our opportunity to seize the initiative.

Paul Feldman
Communications editor

70 years on - preventing a new apocalypse

Business editors are scouring the world for signs of a recovery. But, despite government intervention to stimulate the credit markets, including the temporary effects of car-scrappage schemes, latest figures show the UK capitalist economy facing its worst nightmare.

Business investment is dropping sharply and debt is being repaid faster than new loans are being issued.

In the second quarter of the year:

• Businesses slashed investment spending at the fastest pace since records began in 1966
• Fixed capital formation fell by 4.5 per cent.
• Business investment for the second quarter of 2009 is estimated to be 10.4 per cent lower than the previous quarter a much sharper decline than the 3.6 per cent expected by economists, and 18.4 per cent lower than the same period last year.

“The further sharp decline in business investment signals serious threats to Britain’s long-term recovery,” said David Kern, chief economist at the British Chamber of Commerce.

“Unless this trend can be reversed, the ... productive capacity of the economy will be damaged, and the country will lack the necessary capital stock to sustain a recovery.”

Business investment has dropped more sharply over the course of the recession than in the downturns of the 1970s, 1980s or 1990s.
Hopes that increased lending is working have been knocked sideways. Consumer spending fell by a further 0.7 per cent in the second quarter, following a 1.3 % drop in the first quarter, and the issue of new credit and debt has gone into reverse. For the first time since records began in 1993 debt is being repaid faster than it is being issued

Figures from the Bank of England show that outstanding loans to companies and individuals declined at a record pace in July. Private non-financial corporations – which form the backbone of the nation’s economy – paid back £8.4bn of debt during the month, a 1.7 per cent overall drop in their bank credit and the largest decline since records began in 1997.

The intertwined worlds of finance and production are locked in a downward spiral, and in the UK at least there is no sign of it ending. Nor can there be any until the credit-induced levels of overcapacity accumulated in the globalisation decades are eliminated. Capital values are deteriorating fast, but must be destroyed outright before there can be a return to profit-led accumulation.

Seventy years ago today the Great Depression of the 1930s turned into armed conflict, as the capitalist powers, aided and abetted by Stalinism, embarked upon an orgy of destruction on a scale unprecedented in history, World War II.

Today, the crisis facing humanity is immeasurably worse as climate change induced by capitalist overproduction threatens life on earth. Wildfires threaten to engulf Los Angeles, famine stalks Ethiopia and Kenya as crops fail, and sea-levels are rising as glacial ice melts.

Millions throughout the world must be mobilised to prevent a return to the demolition of productive resources, lives, cities. This requires the transfer of land, factories, offices and financial institutions into forms of democratically-controlled collective ownership, replacing for-profit production with producing for need in a way that is compatible with sustaining life on this planet.

Gerry Gold
Economics Editor

'Honey - I shrank the economy', a nightmare by Brown & Darling

The graph from the Office of National Statistics, showing Britain’s incredible shrinking economy, surely has a much bigger immediate impact on our ability to grasp what is happening than the many thousands of words pouring from journalists’ keyboards and spewing from politicians’ mouths.

What it reveals is that the recession is rapidly turning into another Great Depression. ONS figures show that the British economy shrank by a massive 4.9% in the year to the end of March 2009. According to economic historian Angus Maddison, this contraction is the biggest since 1931, the year when the Ramsay MacDonald Labour government collapsed and the prime minister formed a national coalition with the Tories.

"Clearly this is now the worst peacetime recession since the 1930s," said Michael Saunders, chief UK economist at Citigroup. "The worst contraction then was a year of around -5pc; this year will not be hugely different." The Great Depression only ended when preparations began for World War Two.

The ONS also announced that GDP (gross domestic product) in real terms in the first quarter of 2009 fell by 2.4% compared with the previous quarter. Yet only a month ago, the ONS still estimated a decline of 1.9% for the same period.

It is important to understand the reason for the revision: the rate and scale of the collapse are both so great that they overwhelm the predictive statistical techniques which the ONS use. Largely based on inferring trends from historical data, the ONS is no longer able to accurately approximate the immediate past, let alone say much about the present or the future. When more of the real concrete evidence came in, the shock of the new took most of those supposedly in the know by surprise.

Put simply, things are getting much worse and faster. Output of the production industries fell 5.1%, but construction output fell 6.9% compared with a fall of 5.0% in the previous quarter, and it is set to deteriorate further, as investment in machinery and new buildings has slumped.

And what of the future? With tax income declining and having tested the limits of its ability to issue new debt, the New Labour government is caught between denial and a charade of lies about the cuts it will have to make if it remains in power after the next election. So much so that, according to the unelected autocrat-in-waiting Lord Mandelson, it has either postponed or cancelled its comprehensive review of public spending.

The Bank for International Settlements (BIS), in its annual report is forced to acknowledge that the crisis shows that the “presumed benefits of diversification derived from the creation of financial conglomerates” were – wait for it – “an illusion”. Well, who would have thought it!

The shattering of the financial illusion resulted in a financial collapse, which in turn precipitated the economic collapse now taking place, ending another delusion – a boom based on debt-driven consumer spending. As to the notion of a swift recovery, the BIS report is sobering. It warns: “The very speed of the recent downturn could create larger than average second-round effects. In particular, if the propensity to save were to rise further in the industrial economies – as could easily happen, given the high overhang of household debt and dramatic reduction in household wealth – contractionary impulses in the global economy could be prolonged.”

Don’t say we haven’t been warned. The echoes of 1931 are resounding across the globe, reinforcing the urgency of our developing practical alternatives to capitalist slump which tackle the roots of the crisis by replacing a profit-driven economy that relies on illusions with one designed to meet the needs of people and the planet.

Gerry Gold
Economics editor