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

America's crisis takes a turn for the worse

The sharp swing against the Democratic Party in the US mid-term elections will inevitably deepen a political crisis in Washington which centres on the inability of the state to halt the historic decline of the American economy.

Obama’s inability to make any impact on a worsening economy drove voters to desperate political extremes in a rage against “big government” and its perceived failures. Conservative Democrats turned to the Republicans, whilst the Republican Party has been turned inside out by the ultra-right Tea Party movement.

The Tea Party’s God-fearing, evolution-denying, extreme nationalist representatives want to fast-track US deficit reduction by immediately shutting down government spending, including social security and publicly-funded education. One of the first decisions to be made by those newly elected will be whether to renew the programme that funds extended unemployment benefit. It runs out on December 1.

Significantly, as the electoral dust settles, the Federal Reserve – America’s central bank – is readying itself for a last throw of the dice aimed at stimulating demand. The Fed is about to announce a second massive programme of quantitative easing – printing of money to you and me.

Some are saying that Federal Reserve chairman Ben Bernanke will release a “wall of money” and as much as another $1 trillion will flood into the economy through the buying up of government bonds. It will add to the $1.75 trillion already created in the attempt to prevent financial Armageddon in 2007/8.

If it happens, the value of the dollar will fall, push interest rates down, halt the house price decline, stimulate investment and consumption and make exports from the US more attractive – or so the theory goes. But that kind of American Dream is pure fantasy.

Reality tells a different story. Despite an already declining dollar which makes US produced goods and services cheaper in international trade, they struggle to compete with commodities made by dollar-a-day labour in China, SE Asia, and Latin America. Last year US imports ($2.404 trillion) vastly exceeded exports ($1.842 trillion) in spite of a weaker dollar.

Further reductions in the value of the US currency can only accelerate the competitive downward pressure on living standards throughout the world. When US workers are obliged to buy foreign goods to feed and clothe their families they know they are cutting their own throats. The Dream is long gone.
And, despite Obama’s previous stimulus package, the Great Recession is rapidly turning into the worst slump ever. The so-called “recovery” has failed to restore the millions of jobs lost since 2008. Quite the opposite. One in 10 – close to 15 million of the American workforce – are counted as unemployed and the number is rising.

Those obliged to work part-time has more than doubled since the beginning of the recession from 4.5 million to 9.5 million. The number of “discouraged workers” no longer in the labour force because they gave up looking for work increased by more than 70% in the year to September 2010. When the unemployed, underemployed or discouraged or added together, the total reaches 17% of the workforce.

With incomes declining sharply, house prices are continuing to fall and eviction totals are mounting. Seven million homes are “delinquent” because payment deadlines have passed, are in repossession proceedings, or have already passed into the hands of the lenders. Homelessness is soaring, putting pressure on shelters which have started to charge fees of $7 (£4.50) per night.

“Big government” in the shape of the capitalist state has indeed failed because the crisis is global, with a logic and momentum beyond the reach of individual states and governments. The US election outcome provides an historic opportunity. Americans should begin the task of creating new forms of economic and political democracy in which they can forge a path to a society based on the satisfaction of the needs of the many and not the corporations. Both the Republicans and Democrats stand in the way of this much-needed social liberation.


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