The list of countries hit by the wave of withdrawal of
speculative investment capital lengthens by the day. Countries amounting to
half the global economy are being forced to spend currency reserves, raise
interest rates and consider controls over the movement of capital.
A contagion of capital flight is hitting Argentina, India,
Indonesia, Russia, Brazil, South Africa, Hungary and Turkey. A dramatic
reversal in the global marketplace, which began in May and is accelerating with
every new shock statistic, is forcing the governments of “emerging” economies
to savage the living standards for their already low-income populations.
Each country has a different story to tell: worse or better
attempts at managing their economies; higher or lower levels of foreign
currency reserves; more or less extremes of corruption of government ministers;
levels of civil unrest ranging from the benign to insurrectionary. But the
source of the crisis invading their borders lies elsewhere, beyond their
control.
Investors on the global financial markets – better known as
speculators, or gamblers – were spooked last May by the US Federal Reserve’s
announcement of its intentions to begin reducing its $85 billion per month
programme of credit creation. The withdrawal of funds – known by the jargon
quantitative easing – began soon after and has recently been accelerated.
The Fed will have taken many factors into account in the
central bank’s decision to reverse the programme of credit creation which –
together with the sharp reduction in take-home pay – has been a key factor in
the jobless economic “recovery” following the 2007-8 crash.
Ballooning levels of “margin debt” figured high among the
triggers for the decision. These are investments
made with money borrowed on the expectation that the Fed would continue pumping
credit into the economy. Indicators suggested that these investments had
reached danger levels, threatening another financial collapse.
China’s central bank is also being obliged to follow a
similar path. Having fought the global recession with a huge programme of
credit-financed construction of cities, roads and railways it recently made
tentative steps in opening its borders to volatile international investors.
Some analysts estimate that foreign financial institutions
now have almost $1 trillion tied up in the Chinese economy, either as
investment in or loans to corporations. George Magnus, senior independent
economist at UBS, says that the Chinese banking system resembles that of Japan
during the 1980s in the years leading up to that country’s financial crash.
“If the dollar were to appreciate it could cause problems
for those banks that have borrowed in dollars. Anywhere you have a banking
system that uses a non-domestic currency, there is a possibility of a mismatch
that could cause issues when the value of your liabilities runs away from you,”
said Magnus.
In China, which became the manufacturing powerhouse for the
global corporations in the last century, growth has slowed for 11 of the last
14 quarters. The Markit/HSBC manufacturing Purchasing Managers Index fell to a
six-month low of 49.5 in January, suggesting the overall factory sector
contracted again from December.
With 50 being the dividing line between growth and
contraction, the omens are very bad indeed for a global economy depending on
China sucking in raw materials and components and assembling them for sale back
to the richer half of the world.
In the US, manufacturing grew at a substantially slower pace
last month as new order growth plunged the most in 33 years. Some blamed the
severe weather, as if things will improve along with the seasons. So the
world’s two biggest economies are in deepening trouble.
Assessing the long-term prospects for humanity including the
impact of environmental degradation and climate change, Christine Lagarde,
managing director of the International Monetary Fund, is calling for a new
Bretton Woods arrangement.
She said in a BBC
lecture that such a meeting was needed to restore economic sustainability
and reduce global tensions. She was invoking the spirit of multilateralism and
a return to the “brotherhood of man” philosophy promoted by economist John
Maynard Keynes at the 1944 meeting in the United States.
To this listener her lecture invoked only the spirit of
Humpty Dumpty. She would be better off getting ready for global Meltdown II.
Gerry Gold
Economics editor
