Spin gives way to the real world

Last week a photo-opportunity thinly disguised as the G20 emergency economic summit; this week, the real world has reasserted itself. London endured days of synthetic bonhomie that saw world leaders grinning from ear to ear as if everything was under control. Now the smiles have vanished and a new phase of the global crisis is emerging.  

The G20 summit had nothing all to say about the fact that the global financial system is still drowning in unknown volumes of toxic assets. Some estimates put these as high as $1.4 quadrillion. A quadrillion is a thousand trillion, while a trillion is a thousand billion (just imagine a very long line of 0s). Anyway, there is still no market for many of these “assets” because financiers are not sure if they’re worth any more than the paper they are printed on (they're not). 

So the great unravelling of 30-odd years of fantasy finance has a long way to go and government schemes to help the banks out have only served to weaken state finances. Now it’s payback time. As one commentator in the Financial Times put it: “There lies the dilemma: the old capitalist model may be bust, but so is the government.” The Institute of Fiscal Studies estimates a government deficit of nearly £40 billion. Coming up are tax rises and public spending cuts, leading to higher unemployment and reduced living standards. 

A number of major economies are at the same time close to collapse, notably Japan’s. The country’s industrial output fell 38% in the last 12 months, mostly after October when the bankruptcy of Lehman Brothers triggered a global economic meltdown. Observers point out that no major economy imploded at this speed in the 1930s. Japan’s export markets have disappeared and at the same time the yen has appreciated while the dollar has fallen, making it even harder to sell goods abroad. 

Now Tokyo is planning a substantial devaluation of the yen to cheapen the cnountry’s goods in a desperate attempt to save its economy. This would almost certainly set off a protectionist response through what is known as competitive devaluations. Taiwan is already devaluing its currency and Korea, Singapore, and Sweden may follow. China, where unemployment is now an estimated 20 million and rising sharply, would be next. The US would retaliate if competing economies devalue and the recession would definitely become a slump. 

In the end, the G20 was all spin and no substance, obscured by the effortless charm of the Obamas. No one should be surprised at this. The political elites have no answers because they are essentially part of the same social system that produced the economic and financial crisis in the first place. There are solutions to the crisis – but they lay outside of the existing political and social framework, which is why the G20 failed and why it’s each state for itself despite all the warm words about global co-operation. 

Ultimately, it’s about who controls economic and financial resources and for what purpose. So long as they remain out of the reach of the majority in society, the crisis will deepen because the interests of profit will predominate and dictate the shutting down of workplaces and spending cuts. The Visteon car parts workers in Enfield have occupied their plant in response to its sudden closure with minimal compensation. Their action, if replicated on a large scale, would challenge the very concept of capitalist ownership and open up the possibility of a successful struggle for power itself. This is the revolutionary road we have to go down in order to avoid the looming global catastrophe. 

Paul Feldman
AWTW communications editor

Hoping for the best - preparing for the worst

When the Governor of the Bank of England says it out loud, it’s because it has already happened. As Mervyn King said himself, he’s not paid to make predictions. It’s why only six months ago he didn’t even acknowledge the possibility. So, in confirming the obvious he says the UK economy faces its deepest recession since the post-war years of 1945 and 1946, and its worst peacetime decline since 1931.

He has also warned that unless governments around the world are able to bring the banking crisis to an end, the consequences for the economy could be even worse. Can they do it? Can they hell! And the gamblers on the financial markets know it.

When Barack Obama’s treasury secretary Timothy Geithner this week presented the vaguest outline of his $2 trillion plan to buy the banks’ bad debt (how crazy can he be?) investors started piling in – but to buy Japanese government bonds. Rather than attracting funds to the promise of a recovering US economy, Geithner’s offer actually drove them away. In fact, the extent of US government bail-outs, far from easing the credit crunch, has actually forced up the cost of borrowing. Buyers of government debt are demanding higher returns because of the risk.

As one leading commentator explained: “Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation.” The switch from American to Japanese bonds is no vote of confidence, however. In fact, it’s a desperate move because the crisis in Japan is perhaps the gravest of all.

Japanese companies are forecasting an 83% decline in profit this year. Next week’s figures are expected to show that economic output is falling at almost three times the pace of contractions in other major economies and could plummet by as much as 50% by the middle of the year. With the world economy in freefall, external demand has collapsed, especially in “emerging markets” of south-east Asia. Exports from Japan fell by almost a quarter in the fourth quarter as global credit markets seized up.

Toyota, Toshiba and Hitachi are forecasting losses and have fired thousands of workers. The sackings have intensified in the last two weeks, with Nissan, NEC and Panasonic announcing a combined 55,000 job cuts. The jobless rate surged to 4.4% in December from 3.9 percent, the biggest jump in four decades. “You’re getting mass unemployment,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo, Schulz. “It’s really scaring the households.”

Obama’s America is also shedding jobs at a record rate. The number of Americans collecting unemployment benefits rose to a record 4.81 million in the last week of January as companies such as Caterpillar and Home Depot slashed jobs. The U.S. lost 2.6 million jobs last year in the biggest workforce reduction since 1945. “The housing sector was already weak, and now we are seeing deeper employment reductions,” said Brian Bethune, chief financial economist at IHS Global Insight. “Every round of job cuts means fewer people who can get a mortgage and buy a house.” Sales of properties with mortgages in default accounted for 45% of all transactions at the end of 2008.

There is a last throw of the dice left to try and get the capitalist economy off intensive care – the printing of money (or “quantitative easing” as it is euphemistically known as). Governor King said that the Bank of England was moving in that direction. The capitalist press regards it as a "last chance solution" (or should that be "saloon"?), with the Evening Standard saying: “These are uncharted waters; in unprecedented times, Mr King can only hope for the best.”

At the same time, the ruling elites are preparing for the worst. In Britain, New Labour is in government but hardly in power and is disintegrating under the tsunami of events. These are also unchartered waters politically and we should redouble our efforts to build a movement for change around the demands of the People’s Charter for Democracy.


Gerry Gold
Economics editor