Warnings of new economic collapse mount

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.

China is far from exempt. Previously seen as an economic bright spot, its managers also expect the worst, recording negative figures. HSBC’s preliminary PMI for China fell to 48.7 in May from 49.3 the month before. The index has been below 50 for seven consecutive months.

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

The fate of Greece a warning to all of us

Greece has “reached the limits of the social and economic system”, according to its public order minister Christos Papoutsis, and its “people cannot take any more”. It’s a message that will reverberate around the whole of Europe this year.

As unemployment soars to new highs in Britain, especially among young people, the system has indeed reached its “limits”. To those charting the course of the rapidly deepening crisis, the Greek drama is just the full-dress rehearsal. A global slump of terrifying proportions is threatening, only held back by central banks making cheap credit available to stricken banks and the printing of money by state agencies.

Papoutsis is a hated figure inside Greece. He is a minister from Pasok, who amazingly still call themselves “socialist”, who joined with others on Sunday to impose yet more savage cuts in spending, reduce pensions and sack thousands of public sector workers. Yesterday, the Greek cabinet under Lucas Papademos, the unelected prime minster and Goldman Sachs advisor, met in the wake of the violent protests that accompanied the vote in parliament.

On Sunday, Papademos bullied the Parliament into agreeing the terms of the latest IMF, European Central Bank (ECB) and European Union bailout. He threatened the country with a much worse result if Greece were forced to leave the eurozone in the wake of a default.

Papademos is well-qualified to act as the voice of capitalist finance. Amongst his many posts, he was senior economist at the Federal Reserve Bank of Boston in the 1980s, and vice-president of the ECB from 2002 to 2010. His assault on democracy forced coalition parties to expel more than 40 MPs for failing to back the bill.

Clearly shaken by the riots and burning buildings in the centre of Athens, Papoutsis was begging for mercy. "The government is making superhuman efforts”, he said. “From now on, Europe has to take the responsibility", washing his hands of any further responsibility.

But his appeal fell on deaf ears. Eurozone finance ministers cancelled today’s meeting with Greece when it became clear that the Athens government had again failed to deliver on the latest round of assaults designed to consign its people back to and beyond the poverty of the 1930s. They want more cuts and an undertaking that whoever wins April’s general elections will implement the EU’s demands. Democracy? Forget it.

The day after the vote in Athens, credit ratings agency Moody’s went fishing for more and bigger victims. They put the UK, France and Austria on negative outlook. By raising the prospect that the three countries would lose their triple A ratings due to exposure to the eurozone debt crisis, Moody’s issued instructions to these governments: the pace of the assault on living standards must be accelerated and its scope broadened out to the rest of Europe’s population.

Every day, further evidence emerges of the unstoppable catastrophic implosion of the capitalist economy. In the last quarter of 2011, Greece’s GDP dropped by 7% compared with the same period last year, a steeper decline than the 5% recorded in the third quarter, according to preliminary data published by Elstat, the national statistics body. Greece’s economy has now shrunk in every quarter but one since mid-2008.

It’s not only Greece that has reached the limits of the social and economic system. It is now time to make a leap to something new. As with the Telaithrion Project in Greece, in every country people are experimenting with different ways of living and producing the necessities of life and a great deal can be learned from them. The Transition Initiative has gone global since its launch in 2007.

But the challenge is to go beyond alternatives. Whilst the current profit-seeking capitalist system exists it is obliged to drive up the rate of exploitation of what corporations see as theirs to take – human labour and the natural resources of the planet. The system must be dismantled and its components used to build anew. Let’s compost capitalism.

Gerry Gold
Economics editor

Global meltdown closer as risks pile up

Action taken by governments of the rich capitalist countries to reduce their deficits has produced a dangerous accumulation of risks for the world economy, warns the United Nations Conference on Trade and Development.

A fully-fledged recession will hit key advanced economies in 2012, even dashing hopes for what is bizarrely termed “expansionary contraction”. UNCTAD warns: “In today’s highly integrated global economy, the contractionary contagion will affect all countries and … emerging and developing economies need to prepare contingency plans.”

Other end-of-year reports on the prospects for capitalism in 2012 do not make happy reading for the world of government and politics, let alone those operating the crisis-ridden financial system.

According to the European Central Bank’s latest financial stability review, the probability of two large eurozone banks defaulting simultaneously “has been sharper and larger than in the past, pushing this measure of systemic risk to heights not observed since its inception in 2007”.

Having warned on Monday that the eurozone debt crisis could spread to engulf further member states, “creating risks to financial stability that could reverberate around the world”, the ECB has announced emergency, unlimited three-year loans to the major commercial banks

The ECB hopes this will tide them over the holiday period and avert the catastrophic collapse they face in the New Year.

But where will the money come from? The UK government has failed to stump up its hoped-for contribution to the latest £200 billion eurozone. bail-out fund which is already £50 billion short.

This was despite it being brokered via the International Monetary Fund to make it appear that Britain wasn’t contributing directly to Europe. And this adds to the problems of the biggest US money market funds having cut their lending to European banks to a further record low.

Meanwhile, ratings agency Moody has warned that Cameron’s prized triple-A rating for Britain is under threat from slowing growth, a worsening crisis in Europe, or any hesitation in the Coalition’s assault on living standards
New York economics professor Nouriel Roubini has for years been a front-runner in facing-up to the reality of the crisis. His forecast is for “a perfect storm of a double-dip recession in the US, a disorderly scenario in the eurozone and a hard landing in China” should policymakers continue to avoid “the tough decisions that are required to address their fundamental economic, financial and fiscal problems.”

The trouble is, policymakers aren’t in control of the global meltdown. As a nameless European Commission official quoted in the Financial Times has it: “You kind of always hope that someone, somewhere has a solution. And then one day it sort of dawns on you that no one here does.”

Every action that the governments or central banks take falls short of what would be needed because the social and political consequences are so profound. On the one hand they’re trying to create conditions for a return to growth. On the other hand, they’re obliged to follow the logic of capitalist “creative destruction”. They have to eliminate surplus productive capacity left over from the decades of credit-financed boom – at whatever cost to the billions of ordinary people whose lives are being smashed.

If humanity is to have any kind of decent future, the worldwide protests against the financial system and the effects of austerity must merge with the Arab uprisings and form a global movement of revolutionary people’s assemblies. The aim for 2012 has to be the replacement of the destructive capitalist system of exploitation with a not-for-profit, democratically-controlled system of sustainable production for need.

Gerry Gold
Economics editor

Rating agencies tighten the screw

Moody’s has joined other credit rating agencies in downgrading its assessments for France and Spain when it comes to repaying loans. What logic is unfolding here?

The full name of the credit rating agency – Moody’s Investors Service – says it all. The analysis these agencies make and the actions they take are intended to assist those with money to magnify the value of their investments.

Over the last few months, as the crisis has deepened, the significance of Moody’s and the small number of other similar agencies has grown and grown.

In many ways they provide the information needed to allow the operation of the free market, advising investors on the credit-worthiness of borrowers, and helping borrowers to improve their attractiveness to lenders.

Informed investors profit from crisis, as they speculate against future market prices for shares and bonds.

Moody’s cut in Spain’s rating and its warning to France measures the deterioration in conditions in those countries as the recession exposes the weakness of the banks.

The downgraded ratings don’t just measure, however. They have a dual role. They are intended as a direct intimidation to those countries’ governments (and to all the others who are next in firing line).

Unless you take action to ensure that you overcome your difficulties in making these payments, the increased cost of borrowing more will make life impossibly difficult. It’s the classic money lenders’ threat.

The objective conditions that provide evidence for the downgrade are slowing growth, and accelerating recession leading to falling tax revenues which, in turn, make it more and more difficult for governments to make the interest payments due on the money they’ve borrowed.

So the rating cut also translates into a more severe assault on the lives of the people who live in the countries affected. The news about Spain and France came just as trades unions in Greece prepared for a 48 hour strike supported by the burgeoning network of new organisations that have formed to fight the impact of the mounting attacks on living standards.

For governments subservient to the capitalist economy, like the ‘socialist’ Pasok in Greece, cuts are not optional.

For the millions of people whose wages and pensions are melting away, whose jobs are being destroyed, health, education and social support systems being swept from under their feet, fighting the cuts is not optional either.

What resolution can there be to these opposite interests?

Strikes, protests, demonstrations, occupations are all now everyday events. Last Saturday’s occupation of towns and cities throughout the world is an important part of the answer to Moody’s symbolic measure of the power of capital.

But only a part. The regulation of finance demanded by many protestors is not an option for capital either.

This is an epochal moment providing both the necessity and opportunity to replace the rule of capital.

Those who claim to the know, like Mervyn King, governor of the Bank of England, are warning that “time is running out” for the global capitalist economy and that even dealing with Greece and the eurozone crisis will not provide the “solution”.

He is right there. The capitalist system has plunged into an irreversible crisis in which the only answer for the ruling classes is to punish the overwhelming majority through an unprecedented assault on living standards, services, job and right.

In all the temporary and permanent occupations of towns and cities, the question to be raised is not how to better manage capitalist society but how to achieve the democratic ownership and control of the banks, the factories, the mines and the supermarkets.

Gerry Gold

Economics editor

Panic as new meltdown looms

On the eve of the third anniversary of the collapse of Lehman Brothers – the investment bank which became the icon of the crash of 2007/8 – the world’s financial markets are once again in a febrile state little short of panic.

Exposure to Greek debt this morning led the ratings agency Moody’s to downgrade two French banks, indicating how close to another financial meltdown we are.

A Greek default, which will threaten the euro as a trading currency, seems impossible to avoid. Interest charges on lending to the Greek government have gone off the scale. One three-year bond, which was trading at 20% in June, now commands an astonishing 172%.

Jeremy Warner, the Telegraph’s senior business commentator, warns: “Greece is already effectively a cash only economy. Most forms of credit has effectively dried up, the Greek banking system is finished, and capital controls to prevent what little money that remains from leaving the country are surely only a matter of time. European banking must prepare for the worst as far as Greece is concerned.”

Charges on Italy’s €1,900bn debt mountain have also soared to record levels. The desperate Berlusconi government is offering state-owned properties and power companies for sale to the managers of China’s investment funds.

As the second phase of the global capitalist crisis breaks through, stark new figures tell the human story of millions of lives throughout the world, already wrecked by failed and now abandoned attempts to bring about a return to growth.

In 2010, 46.2m Americans fell below the poverty line, taking the rate to 15.1% of the population from 11% in 2000. More US citizens are living in poverty than at any time since records began more than 50 years ago according to the US Census Bureau.

With the more affluent having so far managed to stabilise their income, the 2.3% drop in median household income of all Americans in 2010 from the previous year masks a much greater decline for those below the line. Increasing long-term unemployment has depressed wages and left many without any income at all.

The number of Americans without health insurance rose by nearly 1m people to 49.9m. Nearly a quarter of American children are now living in poverty. Their number increased for the fourth year in a row to 22%, the highest since 1993.

Across the border, Mexico had 53 million people - half the country's population - living in poverty in 2010, according to the Monterrey Institute of Technology, with almost 20% in extreme poverty. Even for those working, according to the Bank of Mexico, 95% of the 800,000 jobs created in 2010 paid only $10 a day.

In Greece, poverty has visibly increased on the streets of the capital of four million, where people huddle in sleeping bags in empty alleys and can be seen rummaging through rubbish containers, looking for food or scraps of metal or glass to sell.

NGO Klimaka estimated the population living on the streets has increased by a quarter to 17,000-20,000 over the past two years. With Greek unemployment now over 16%, the new homeless come from all walks of life.

In the UK, the number of homeless families rose by 10% to 44,160 households in the past year, the first increase since 2004. Real incomes for UK families have dropped by 3.5% in the last year, according to the Institute for Fiscal Studies (IFS).

IFS researcher Robert Joyce, predicted the future in quietly measured tones: “The current economic downturn began more than three years ago, and may seem like old news. But, as in other developed countries, the most severe consequences of the recession on UK living standards have only just begun to be felt, and will continue to be felt for years to come.”

The global economic contraction the collapse of Lehman Brothers set in motion is driving debt-strangled Europe and everywhere else towards a second, far more devastating implosion. The Arab Spring could well be followed by the European Winter.

Gerry Gold

Economics editor