'Grow or die' measure heads south

The purchasing managers indexes (PMI) are key “grow-or-die” measures of the health of the capitalist economy. They show that it is in serious trouble.

August surveys of the purchasing managers who work for the global corporations in manufacturing, construction and services show the relentless logic of capitalist contraction that behind the clouds of financial storms.

With any figure above 50 indicating expansion – the growth which is the heartbeat of the profit economy – and any number lower indicating a widely-feared contraction, the overall index compiled by JP Morgan fell to the brink from 50.7 in July to 50.1 in August.

It is no wonder that stock markets went into freefall earlier in August as those in the know rushed for the exits.

In the UK, the world's most indebted nation, where the Coalition is dependent on rapid growth to reduce the government budget deficit, the PMI of 49 shows the opposite trend dominating: its economy is shrinking, joining Greece, Ireland and Portugal on the way down.

The marginally positive US figure at 50.6 turned out higher than had been expected, but still showed the weakest manufacturing activity since July 2009.

Whilst the official measure in China recorded a minor improvement in factory production to a hardly impressive 50.9, a parallel compilation by HSBC and Markit Economics stayed in negative territory at 49.9. This suggests that the sector continues to contract – no comfort for those who imagine that the Asian powerhouse will save the major economies and the global economy at a stroke.

Despite the use of every conventional and several unconventional methods of intervention, the concerted efforts of national governments, central banks, and the International Monetary Fund have failed to bring about a recovery even to the levels of production achieved before the 2007/8 crash.

European banks, in particular, are in dire trouble which partly explains the hysteria over the Coalition’s modest plans to separate retail and investment banking. Central banks and official bodies are reportedly in panic mode.

Other figures from the US are predictors of much worse to come. Production levels worldwide, bloated by decades of unsustainable credit expansion have to decline when the markets become saturated and US consumption, which grew hardly at all in the wake of the emergency measures taken to resuscitate the economy, is now flatlining at best.

Hardly surprising since the share of production costs received by US workers as wages, salaries and benefits was driven down throughout the era of corporate globalisation. In the wake of the 2007/8 credit crisis it plummeted to a historic low of 58% in 2010 even as corporate profits soared. US workers, the so-called “middle-class”, can no longer afford to be the pumped-up credit-enhanced consumers who used to absorb so much of the world’s output.

As Mike Whitney writes in the Market Oracle:

Not only is labour getting a smaller and smaller piece of the pie, but, also, financial engineering – spurred-on by low interest rates and deregulation – has given rise to consecutive credit bubbles which have transferred a larger share of pension and retirement fund-wealth to Wall Street speculators. So, working people are not just getting screwed on their labour, the government and central bank are actually helping to facilitate the pilfering of their savings.

Some economists and politicians in the US like Carmen Reinhart are arguing for "debt forgiveness for low-income Americans" including “debt repudiation, principle write downs on underwater mortgages and amnesty on delinquent student loans”.

Whilst these radical measures are dressed up as a necessary precursor to a return to growth, they show that at least some of capitalism’s defenders are beginning to see the light.

But, more significantly, they reflect a growing awareness that the revolutionary wave spreading from the Arab Spring, throughout North Africa and into Europe is washing up on American shores.

Gerry Gold

Economics editor

The great contraction

Signs of a great contraction of the global conomy are appearing throughout the world, pushing aside any lingering notions of the return to growth that capitalism requires.

Following six months of stagnation, the Bank of England said today that the near-term outlook for growth had worsened since February, while prices would rise, and that first-quarter growth had been slower than it had predicted. Governor Mervyn King also blamed the extra public holiday for the royal wedding, and disruption to supply chains from the Japanese earthquake, for the slowdown.

Since the recession started, the financial sector has shrunk by 9% - twice the 4.7% decline in the economy as a whole to the end of 2010. As big banks continue to offload loans and reduce balance sheets, the process is likely to constrain the economy’s growth rate for years to come.

In the United States, the independent Consumer Metrics Institute (CMI) presents a stark truth emerging through the clouds of delusional confidence. Last week it report that “after a week-long pause our Daily Growth Index resumed its movement into record territory, setting a new all-time low representing a 6.39% year-over-year contraction on May 3, 2011”.

Revised official figures from the US Census Bureau more than confirm the CMI’s more accurate grip on the reality of deepening decline. It reported that 2010 "furniture and home furnishings stores" sales were 3.6% weaker than previously reported, turning an 0.8% gain into a -2.4% contraction while "miscellaneous store retailers" dropped some 6.7%, nearly wiping out the earlier 7.6% alleged gain.

Japan, the world’s third largest national economy, is struggling to recover from the effects of the earthquake and tsunami which overwhelmed the inadequate and badly maintained defences of Tokyo Electric Power’s Fukushima reactors, forcing the closure of swathes of production across the world. Latest estimates from Goldman Sachs economists indicate a contraction of 0.2% in 2011 revised down from an 0.7% gain.

In the eurozone, Greece’s economy contracted by 4.5% in 2010 and is expected to shrink by another 3% this year. German consumers have been hit hard with a 2.1% monthly contraction in spending. The overall drop is 1.7% for the year, and it is now at the lowest level since November 2009. The German thrift is even more remarkable given that unemployment is lower there than anywhere else in Europe. In Spain the March 1.4% fall in retail sales extended the string of losses to twelve consecutive months. In bankrupt Ireland, house prices are down by at least 33% from their peak - the largest contraction in Western Europe since the global economic crisis began.

In Serbia, the International Monetary Fund, which provided a loan of €3 billion in 2008 are busy strong-arming the country’s government into revising its shrinking GDP figure for 2009 sharply downward from a contraction of 3.1% to over 6%As a result, Serbia’s debt – and the payments to be made by its increasingly unwilling population – will be sharply higher than previously thought. Tens of thousands have attended anti-government rallies.

Meanwhile, bonuses for chief executives at 50 major US companies bounced back by an average of 30.5% in 2010, the Wall Street Journal has reported. This was the biggest gain in at least three years. Goldman Sachs chief executive Lloyd Blankfein's total compensation, including a cash bonus, had been raised to $19 million in 2010. His pay package includes a salary of $600,000, a cash bonus of $5.4 million and stock awards of $7.65 million for 2010.

But while investment banks like Goldman Sachs prosper – having moved into commodity futures in a big way – the productive economy is going to hell in a handcart. The banks left over from the crash may be too big too fail – but the global economy itself isn’t.

Gerry Gold

Economics editor

Economic 'growth' a very dirty business

If anyone needed convincing about the direct link between the in-built growth drive of capitalist economy and climate change, they can thank the European Union’s energy chief for clearing up any confusion.

Who can forget the dramatic graph in Al Gore’s film, An Inconvenient Truth, which showed the upward curve in greenhouse gas emissions from about the mid-1980s. What Gore did not bring out was that this curve was matched by another showing the growth in commodity production during what became known as globalisation.

In other words, the reckless expansion of production regardless of fossil fuel burning and other carbon emissions, the ruthless exploitation of resources for profit, was too much for nature to cope with. Climate change kicked in. Yet another of capitalism’s unintended consequences, except this was one is deadly for all of humanity and every species.

As we know, climate change talks aimed at negotiating a new treaty to replace the half-hearted Kyoto agreement have collapsed, first at Copenhagen and then at Cancun. It’s every country and region for itself now.

That’s the context behind the statement by Günther Oettinger, the EU's energy commissioner, that increasing the notional target for cutting emissions from 20% to 30% by 2020 was not on because it would weaken fabled “growth” prospects and force industries to move to Asia.

If we go alone to 30%, you will only have a faster process of de-industrialisation in Europe," adding: "I think we need industry in Europe, we need industry in the UK, and industry means CO2 emissions." Europe could only adopt a tougher target if other major economies were also willing to do so, he said. "We are willing to go to 30% if big global partners will follow us, but if not we won't."

In others, competition with countries like China for markets to sell more goods to people who can barely afford their utility bills as a result of the crisis, is the only way to go. And damn the consequences. Emissions have fallen during the recession, and a cynical
Oettinger’s response was to say: “So do we need longer and deeper crises?" Look at our deficit – we need growth, and we need more industry."

In their increasingly desperate bid to kick-start economies deep in recession and weighed down by household, corporate and government debt, the capitalist class will drive down not only wages and working conditions but also environmental standards.

These are viewed as an additional cost of production and so will be ditched, circumvented, ignored or abandoned in an attempt to increase profit margins. That was clearly the case with the Gulf of Mexico disaster, where BP and others were indicted for cutting costs at the expense of safety considerations.

So even if there is a resumption of “growth”, it will be an extremely dirty business in every sense. That’s another good reason why society has to kick capitalism’s growth habit. As the call-out for our February 26 teach-in says:

Capitalism’s relentless, in-built drive for continuous expansion is destructive in every sense. It inevitably leads to its opposite – contraction – and with it the destruction of jobs, living standards, pensions and public services that we are seeing now.

And it’s destructive because profit-driven growth always comes before the sustainable use of resources. Insatiable growth has a direct connection to climate change and habitat loss. So how can we kick the growth habit? What’s the alternative to profit as an incentive? How can we create a natural relationship with nature?

Register for “Kicking capitalism's growth habit - building a sustainable economy” and help work out the answers.

Paul Feldman
Communications 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

G20 won't bail out the eco-system

Whatever the communiqué issued by G20 leaders says today, it will not address the climate crisis. Rather it will present the shared thinking of governments desperate to get the global capitalist economy rolling again at any cost. 

Just what a disaster this would be is set out in a report published this week by the Sustainable Development Commission (SDC), created to advise the government, but consistently ignored by it. 

Prosperity Without Growth moves within an inch of stating that capitalism itself is unsustainable – but then falls at the last hurdle! It rejects the idea that rogue individuals or incompetent regulators are responsible for the crisis, insisting that the economy “was undone by growth itself” and adds: 

“For the last five decades the pursuit of growth has been the single most important policy goal across the world. The global economy is almost five times the size it was half a century ago... This extraordinary ramping up of global economic activity has no historical precedent. It’s totally at odds with our scientific knowledge of the finite resource base and the fragile ecology on which we depend for survival. And it has already been accompanied by the degradation of an estimated 60% of the world’s ecosystems.” 

The report boldly questions the thinking behind the idea of a “Green New Deal”, which has become fashionable as an allegedly sustainable way of getting the economy out of its crisis. After offering some faint praise for a “green stimulus”, the report scathing adds:  

“Nonetheless, the default assumption of even the ‘greenest’ Keynesian stimulus is to return the economy to a condition of continuing consumption growth. Since this condition is unsustainable, it is difficult to escape the conclusion that in the longer term something more is needed. A different kind of macro-economic structure is essential for an ecologically-constrained world.” 

The questions that follow are what is this new “macro-economic structure” and how are we to achieve it? In his foreword, the report’s author Tim Jackson, economics commissioner of the Sustainable Development Commission, says a return to “business as usual” is not an option. Prosperity for the few founded on “ecological destruction and persistent social injustice” is no foundation for a civilised society, he rightly insists.   

Yet the 12-point plan the SDC then puts forward for consideration by the world’s leaders could never be implemented within the present economic and financial framework. Because the problem we face is not simply about “growth”, but “growth in pursuit of profit”. And if capitalism were to somehow move outside of the pursuit of profit – it would no longer be capitalism. And you can’t see capitalism voting to put itself out of business anytime soon. Put that way, it’s inconceivable that the SDC’s admirable programme can be achieved without transforming the fundamentals, creating a sustainable not-for-profit economy based on co-ownership and co-operation. 

The report says that “questioning growth is deemed to be the act of lunatics, idealists and revolutionaries” but even if that is true, our ranks are growing. The vast majority of those on Saturday’s “Put People First” demonstration and yesterday’s anti-capitalist actions know only too well that the G20 leaders and the system they represent will never “put the planet first”. They can only ever “put profit first”. That’s why Obama and Brown constantly talk about the “need to restore growth”. 

“Nature doesn’t do bailouts” was one of the slogans of the climate camp, pitched yesterday outside the City of London Climate Exchange. And the Archbishop of Canterbury said last week that God would not be stepping in to halt climate change either. So then human society -  the conscious and most active part of nature – will have to do it, rescuing the planet’s eco-system and us at the same time.

Penny Cole
Environment editor