'Go time' has arrived

The sudden appearance of the global contraction over the summer is inducing a state of chaos amongst the governments of the world’s major economies.

Three years after the financial crash all attempts to bring about a recovery lay in ruins.

Italy’s Berlusconi government yesterday announced VAT-rises as a further provocation to mass street protests and strikes against its previous round of austerity measures in an attempt to forestall a downgrade of its debt.

Greece's finance minister Evangelos Venizelos pledged to speed up delayed privatisation and market “reforms”, while his Irish counterpart said Dublin was considering making a deeper fiscal adjustment than planned next year to boost market confidence.

"We are in the middle of a peculiar war – if we lose, we lose everything," said Venizolos. "If we don't complete structural reforms, if we don't change the way the state and the economy work, we will be stuck."

The problem, however, is that even if they do what the IMF and European Central Bank demands, they will still be stuffed.

Britain’s economy is heavily dependent on the service sector which slowed at the fastest pace in a more than a decade last month while orders for new construction have fallen to the lowest since 1980.

Today’s call by 20 “leading economists” for the government to abandon the 50p tax rate for high earners to boost the economy – as if it would make the slightest difference – shows how far from reality these apparently learned men and women have drifted.

The US economy which needs close to 200,000 new jobs each month to prevent a dive into recession added no jobs at all in August. President Obama’s expected plan for a $300 billion job creation programme is certain to meet powerful Republican opposition and a replay of the political deadlock over the debt ceiling.

When governments rushed to the rescue of the bankrupt banks they took on responsibility for the three decades-long accumulation of credit. They attempted to shore up the already tumbling house of cards with props made of unrepayable sovereign debt, adding immense sums to existing deficits.

Government after government launched slashing attacks on all programmes of expenditure – health, education, social services, transport, police - you name it, under the guise of “austerity”. Wages were frozen, effectively reduced by rising prices, and pensions undermined.

But each and every one of the brutal attacks on their populations made only a small contribution to the deficit reduction. Every austerity programme so far introduced is founded upon an expectation of a return to growth which has not been and can not be forthcoming.

As Mark Dow, hedge fund manager and former IMF economist, puts it for Reuters global news agency:

“I am not by nature an alarmist. But the cancer is metastasizing at an ever-accelerating rate. Italy, Spain and even France are now genuinely at risk. Failure to stem the tide now could well undermine faith in the modern global capitalist system — a system already stretched by political polarisation and income inequality — with potentially massive social implications. In short: It’s go time.”

Amongst Dow’s proposals are to drive Greece, Portugal and Ireland out of the eurozone, allowing their economies to disintegrate, their populations to be abandoned to their collective fate. These are the kind of horror scenarios now being openly debated.

“Go time” it most certainly is – but not in the way Dow envisages. Time is up for the capitalist system of production for profit which is clearly beyond repair. And the bell has surely tolled for the political elites that know only how to force their populations to shoulder the burden of a crisis they didn’t create.

Gerry Gold

Economics editor

The 'nether world' of capitalism

The propaganda that accompanies the cutting, slashing and burning of government spending is all about “securing the fragile recovery”. It is used in every country from Iceland, Greece, Ireland, Spain, to the US and Britain - to justify what in effect adds up to crashing the economy.

But don’t get the idea that anything else can be done within the capitalist framework. After decades of credit-led expansion the logic of capital now demands its opposite – ruthless contraction. It turns public pronouncements into lies, and politics inside out. Ireland’s government won’t be the last to find itself in trouble.

The economic trajectory of country after country, region after region confirms that the slide from recession to depression. The Organisation for Economic Co-operation and Development last week cut its forecast of UK economic growth in 2011 from 2.5% to 1.7%. The Institute of Directors is forecasting UK growth of 1.2% next year. In real terms, these figures represent a decline in activity.

The eurozone, having pumped billions of euros into recovery measures, achieved relatively strong second-quarter growth of 1% to the surprise of the markets. But the “recovery” was short-lived. Despite the export of capital goods from Germany to China, growth slowed to 0.4% in the third quarter. Euro zone unemployment rose to 10.1% in September and it is forecast to go higher next year. In the United States, another round of “quantitative easing” – aka printing money – is under way in an increasingly desperate bid to boost economic activity.

The World Bank predicts that China’s growth will slow in 2011 from attempts to constrain the country’s uncontrollable credit boom. Lending by its vast, unregulated underground financial market is sending the prices of staple foods soaring and triggering social unrest. The average price of 18 staple vegetables is 62% higher than a year ago.

Inflation is eating away at incomes not only in China. Commodity speculators have driven up the price of food worldwide, while transport and energy prices in Britain are set to soar. The inexorable fall in consumer spending power – VAT is going up to 20% in January – can only deepen the contraction.

Desperate times lead to panic measures, as the so-called rescue plan for Ireland’s bankrupt banks shows. Ireland, however, is only an extreme example of the rotten core of the global financial system, which has been on state life support since 2008. All the talk of the dangers of “contagion” and the threat to the euro itself indicates that another crisis-point has been reached.

We are not the first to analyse the destructive side of capitalism. In 1848, Marx and Engels wrote in their Communist Manifesto: “Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells … In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed."

No amount of counter-propaganda against spending cuts can halt the inexorable contraction of the global economy. Avoiding the consequences means that the system must be replaced as a matter of urgency. Today’s general strike in Portugal against budget cuts and student actions in Britain against soaring tuition fees are only flashes of the struggles ahead. Going beyond resistance to putting an end to capitalism is the real challenge.

Gerry Gold
Economics editor