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

Dollar 'time bomb' adds to turmoil

The reaction to the global meltdown has so far consisted of so many variations on a common theme: governments deepening their debt to provide backing for too-big-to-fail stricken banks and central banks inventing new money. The single lyric on the hymn sheet is “save the system, return to growth!”

But it hasn’t been enough to do the trick and everyone knows it. The universal collapse in demand, trade and credit is forcing a new round of consolidation on struggling global corporations. The world economy is hanging on a hardly-functioning financial system while the boom on stock markets is a purely speculative bubble.

Every country is affected, and no government is able to act on its own. The only result of any significance from the G20 in Pittsburgh was the recognition that the unfolding global crisis has outpaced, outgrown and outstripped the 30-year-old political arrangements for managing international economic affairs.

There is a time bomb waiting to go off amidst this turmoil. This is the plan to replace the not-so-mighty dollar as the currency used to trade in oil. The dollar would be replaced by a basket of currencies in addition to gold, according to reports. This move would signal the demise of the United States as the world’s leading capitalist economy, which has used the pre-eminence of the dollar to borrow vast amounts to fund the country’s huge trade and government deficits

The October editions of the International Monetary Fund’s World Economic Outlook and the Global Financial Stability Report make for sobering reading. They tell us much about the contradictory forces at work in the economy.

* Reducing excess productive capacity means much higher levels of unemployment are inevitable but this will reduce demand further.
* More intense rates of productivity are needed to reduce costs and restore profitability, but falling prices mean already over-indebted consumers defer purchases awaiting even lower prices.
* More regulation is needed, but the “ability of lenders to diversify funding sources” – like the unregulated derivatives markets at the heart of the crisis – “need to be retained”.
* The financial system must be restored to health, but the reported losses from banks have reached only half the expected levels so far.
* A much greater degree of coordinated government intervention is likely to be needed to support a recovery of production to just a fraction of pre-crisis levels, but can’t continue without rising interest rates strangling that very same recovery.

The global gurus are also pretty sure about one other thing: they’ve no idea if their prescription for “unwinding” the current level of intervention will work, or lead to a new crash. They’re giving no guarantees. This is how they put it: “Given that this is uncharted territory for policymakers, some experimentation may be appropriate to test market conditions. If warranted, reinstatement of some facilities should not be viewed as a setback.”

In other words, they haven’t a clue. You wouldn’t buy a used car from them.

In Britain, Tories and New Labour are vying to carry out the IMF's instructions to slash public spending to pay for bailing out the bankers. Neither party is really letting on about their real intentions, however. Commenting on yesterday’s speech by shadow chancellor George Osborne, the Financial Times noted:

“The effects of these measures – grim though they are – are dwarfed by the scale of the budget deficit. Mr Osborne has announced plans to save £7bn ($11bn) per year by the end of the next parliament, with changes to the pension age – beginning in 2016 – eventually contributing up to £13bn. The budget deficit this year? £175bn.”

Balancing the books will, therefore, require cuts so immense that they will destabilise society and create social upheaval. The state is undoubtedly preparing for such an eventuality and we would be well advised to do the same.


Gerry Gold
Economics editor

Dollar collapse looms

Northern Rock’s problems are a mere blip by comparison with the crisis now emerging on the other side of the Atlantic, where the fall in the value of the once almighty dollar threatens to bring down not just the American economy but the entire global trading system with it. Ironically, Saudi Arabia, one of America’s staunchest allies, could have started what may become a domino-type collapse of the dollar. The US has relied on foreign funders to finance the gigantic $800 billion annual deficit between exports and imports by investing in American assets. The money markets have also enabled the US government to run a massive budget deficit by showing a willingness to buy what are known as Treasury bonds – effectively lending Washington the money to finance activities like the occupation of Iraq. Without these sources of finance, the United States – which is the world’s most indebted nation – would be bankrupt.

Behind the dollar’s plunge to a 15-year low against other major currencies, including the Euro, is the credit crisis which was itself prompted by the collapse in the US subprime mortgage business. This in turn is depressing property prices in America and Robert Shiller, a Yale university economist, told a US congressional panel this week that he feared “the collapse of home prices might turn out to be the most severe since the Great Depression”. Alan Greenspan, former Federal Reserve chairman, told the Financial Times that double-digit falls in house prices from their peaks would not be surprising. The Congressional committee heard from experts who said a 15% fall in house prices would wipe out $3,000 billion of household wealth.

Within hours of the hearings, the Federal Reserve took panic action and slashed interest rates by 0.5% in an attempt to resuscitate the American economy before it collapsed into recession. For the money markets, as well as those countries like Saudi Arabia loaded down with dollar bills, the rate cut was a signal that perhaps this was the right time to cut and run and the currency’s value plummeted. Historically, the Saudis have linked their currency to the dollar and have always matched US interest rates. Not this time, however. The Saudis’ refusal was taken as a signal that the oil-rich feudal kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East. As if that wasn’t enough, only last month the Chinese started a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasury bonds if Washington imposes trade sanctions to force a Yuan revaluation.

"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas. "Saudi Arabia has $800 billion in their future generation fund, and the entire region has $3,500 billion under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

There is also evidence that global investors are shunning the US bond markets. Foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. "This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said. Financier Jim Rogers commented: "If Ben Bernanke [chairman of the Federal Reserve] starts running those printing presses even faster than he's already doing, we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems."

Paul Feldman
AWTW communications editor