Interest rates at minus as 'perfect storm' looms

When you borrow money you pay interest to the lender. The rate you pay is the cost of borrowing and lenders derive their profits from it. At least, that’s the way it is supposed to work.

Not any longer. On July 5, the European Central Bank cut its deposit rate to zero. That means it stopped paying interest on money deposited with it.

As a consequence, six countries with economies for the moment at the edge of the economic storm now offer negative returns for government bonds maturing in two years or less: Germany, Finland, Denmark, Switzerland, the Netherlands and Austria.

Investors in effect have to pay them to look after their money. It’s a kind of parking fee. Rather than receiving interest on the loan the investors are so desperate to find a home for their money as the crisis escalates, they are willing to pay for it to be stored. 

And as a further consequence, more than half of Europe’s money market funds investing in government bonds – so-called “securities” - have closed. Not only is there no money to be made, but, because the interest rates are negative, it means that the value of investments will fall.

Switzerland’s two-year bond yield is the lowest of the six, at minus 0.55%, while Austria’s comparable government bond yield edged down to a negative 0.01% on Tuesday.

This morning, Japan joined the stampede. The Bank of Japan scrapped the 0.1% lower limit on the rate it would pay for government bond purchases, opening its door to the possibility of buying debt with negative returns.

And in the US, policy makers “are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labour market,” said chairman of the Federal Reserve Ben Bernanke yesterday, using typically guarded language to disguise the seriousness of the situation.

Over the past 60 years the world’s economy was transformed. Production expanded, the population ballooned, the flow of commodities pouring out of factories turned into a flood.

Big and small companies operating from within national boundaries and subject to the home countries regulations expanded beyond their borders, becoming the transnational and global corporations so powerful that their requirements – for more growth from which more profits could be siphoned - determined national policies.

Regulation on the movement of capital was removed to allow the expansion of credit needed to fund continuously expanding investment. The ballooning of the credit (and debt) industry spawned a generation of brilliant, creative, inventive young people discovering ever new ways to make money out of money.

The amount of interest-bearing credit extant in the world soared, to become ten then, 20, 60 times larger than the real, substantial things of value in the world, like food, clothing, cars, roads, factories, computers,

And the velocity of its movement around the world accelerated as the power of those computers and the carrying capacity of the networks that linked them spread worldwide.

All that came to an end when the ability of people to repay their debts reached its limit, triggering the 2007/8 financial meltdown.

With the bursting of the bubble, global expansion has turned into its opposite - global contraction. In reality, interest rates have been effectively negative for years since central banks reduced their policy rates to below inflation in the wake of the crash to try and encourage more borrowing.  

The technical term for this is “financial repression” and millions of people around the world have felt its effects in unemployment, lost home, pensions, soaring food prices, and increasingly brutal austerity programmes.

Negative interest rates are a sign of increasing desperation in global economic and financial circles. Leading economist Nouriel Roubine is convinced that 2013 will produce a “perfect storm” as a number of factors come together to derail the global economy. You can’t say we haven’t been warned. 

Gerry Gold

Economics editor

Markets bleeding Ireland dry

“International investors”, better known as the hedge funds and other financiers who gamble and speculate with other people’s money, are queuing up to turn the screws hard on the beleaguered Irish government.

Deep in slump, Ireland is obliged to borrow more money to service the additional loans it incurred in its €33 billion bank bailout. Like many countries, the crash and ensuing recession has substantially reduced its tax income. So Ireland is forced to sell more and more government securities, known as bonds, on the money markets.

But it’s the markets that determine the “yield” – the interest rates that the government will have to pay. And because Ireland is currently rated the sixth-riskiest national borrower in the world, just ahead of Portugal and Iraq, they are insisting on increasingly punitive borrowing rates that the Irish people will be made to pay for in one way or another.

Yesterday, Ireland sold €1bn of securities due for redemption in 2018 at a yield of 6.023 per cent, up from 5.088 per cent in June, the National Treasury Management Agency in Dublin said. It also sold €500m of 2014 debt at an average yield of 4.767 per cent, compared with 3.627 per cent at an auction in August. The cost of 10 year debt fell slightly but remains close to 4 per cent higher than that paid for German bonds –regarded as the safest in the eurozone.

Meanwhile, across the Irish Channel, the amount of new public sector borrowing in Britain, hit £15.9bn for August, a record for that month, as the Coalition government ratcheted up its warnings of the severity of the cuts to be announced in October. The UK overtook Japan to become the world’s most indebted country in 2007. Its interest payments were £3.8bn in August - almost three times the £1.3bn it paid last year.

There can be no doubt that the market traders have more than an eye on the prospects for the mythical global recovery, since it is that, as well as governments’ determination to implement brutal cuts, that will determine their ability to service the mounting debt.

So the latest statistics from the Organisation for Economic Co-operation and Development (OECD) the club of 33 rich, developed countries will have set the red lights flashing on traders’ screens around the world. According to the OECD’s composite leading indicators, measures designed to indicate a turning point in a country’s economy, the effect of the massive panic interventions to reverse the effect of the global financial meltdown of 2007-8 peaked earlier this year. “The pace of economic expansion is waning”, as they put it. The “recovery”, such as it was, appears to be over.

The news will have delivered a sharp shock to the ConDem government which based its June Budget on the IMF’s return to growth prediction of 2.7% for 2010 and 2011. They’ll be busy re-aiming their cuts towards the worst case 40% aired during the spending review.

These are the objective forces at work in the global economy. The autumn hurricane of capitalist debt is certain to overwhelm the puny campaigns of resistance being talked up by trade union leaders. Effective opposition has to set its sights on replacing the capitalist system of finance and production before a second stage of the meltdown plunges the world into outright Depression.

By creating a network of People’s Assemblies, we could initiate a programme of closure of the speculative financial markets, repudiation of unrepayable debt, and replacing banks with not-for-profit, socially-owned co-operative banks, credit unions and building societies. That would open the prospects of socialising the assets of the manufacturing corporations and the creation of an alternative, sustainable economic system.

Gerry Gold
Economics editor

Counting the cost of the meltdown

While the International Monetary Fund suggests that the recession has bottomed out, all the signs merely indicate a pause in the crisis before a further lurch towards slump in the coming months.

The recession continues to deepen in Chile and South Africa, for example. Further shocks are to be expected as commercial property values decline, and rising unemployment forcing more workers to default on mortgage and credit card debt adds another twist to the downward spiral.

Germany’s economic ministry is working with its central bank on measures to deal with a second credit crunch expected early next year. Hartmut Schauerte, the economic state secretary says firms with weak balance sheets may struggle to roll over loans as they come due in coming months. Negotiations with banks could prove "very difficult", he admits.

The UK government’s gamble with quantitative easing, its last-ditch largely failed attempt to restore the flow of credit by printing money, is looking dangerously inflationary and is leaving buyers of government bonds increasingly jittery.

The costs of slowing the decline to slump, let alone any return to growth, are appearing in many forms. Alongside short-lived government sponsored scrappage schemes designed to clear millions of over-stocked cars, billions have been poured into “restructuring” the industry worldwide – the costs of mothballing factories and sacking workers.

Where workers have resisted – as in the now ended 77–day occupation of Ssangyong’s plant in South Korea – the price included the mobilisation of state forces in scenes evoking dystopian medieval pitched battles, with besieged workers armed with slingshots and bamboo staves taking on company thugs, helicopters dropping teargas and taser-wielding riot police.

UK tax income has fallen as economic activity has shrivelled and, at best, will continue at low levels for the foreseeable future while government borrowing to bail-out the banks will result in huge cuts in public sector spending in every area, whoever wins the next election.

It’s already beginning in at least 12 of the 50 states in America, and many more of its counties and cities. They have begun slashing services and forcing unpaid holidays on their employees as revenues from sales taxes, property taxes, investment income and service/building fees continue to plummet.

California's economy, the world's eighth largest, is expected to register a jobless rate near an agonising 13% next year. That state's attempt to reduce its massive $24 billion budget deficit includes three unpaid days a month for state workers to save $820 million. The unemployment figures leave out many of the illegal migrant workers from Mexico on whom the economy depended in the boom times. The loss of remittances is having a devastating impact on the families they left behind.


Michigan, home state of the bankrupt car industry in Detroit, has scheduled six days – a day a week- on which it won't pay about 37,400 employees to save $21.7 million by September 30.

The corporate-sponsored backlash against Barack Obama’s modest proposals for a state health insurance scheme in parallel with the existing for-profit schemes run by insurance companies are the palest of indicators of the political struggles to come.

Obama’s crisis also signifies that this is not the period when capitalism is prepared to grant reforms. Quite the reverse is true. For the mass of the world’s population there can be no acceptable solution to the deepening crisis without a wholesale transfer of productive resources to common ownership subject to democratic control.

Gerry Gold
Economics 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

New Labour's borrowing bombshell

When the government borrows, who does it borrow off? This question from a reader arose in response to Monday’s crisis budget, when chancellor Darling announced record sums of borrowing. It’s an arrow that gets straight to the heart of the problem.

The straightforward, short-term answer is that the government offers to borrow money from anyone who wants to lend it. In exchange, it offers “government bonds” or gilts, the original form of securities which, in the old days, were considered relatively low risk, because they were guaranteed by the state. And, so the theory went, governments can’t go bankrupt, because they control the issue of money – one of the many forms of credit.

In the longer term, there’s the question of paying the loans back, with interest. Governments raise the money to repay borrowing by taxing the creation of value, and value is created when people work, by the people who do the work. But the historically unprecedented scale of the expansion of credit over the last 30 years has changed things out of all recognition.

Now Martin Wolf, chief economics commentator at the Financial Times, says “the horrific numbers” in the pre-budget report might well lead to a questioning of the creditworthiness of the UK government. “A creditworthy government”, Wolf says, can shift excess debt from the private sector on to the backs of taxpayers. An uncreditworthy government cannot. If the cost of debt becomes too high, the latter will be forced into default, either openly or via inflation. In the UK’s case, inflation would be triggered by a flight from sterling.”

In other words, if the government is unable to raise the money through taxes to repay the “horrific” level of borrowing it will be in default, be bankrupt, become a failed state. A bit like Zimbabwe. In fact, the markets are already beginning to consider this possibility. The cost of insuring against the British government defaulting on its gilts in the next five years surged this week.

Darling makes assumptions about the future trajectory of the economy that don’t impress anyone. Wolf says “…the Treasury surely remains too optimistic: despite the scale of the shock to the world economy and the financial system, it assumes an annual peak to trough decline in GDP of a mere 1 per cent; an economic recovery in the second half of next year; and then a return to trend growth at 2¾ per cent a year, despite the need to shift output into capital-intensive, export-oriented manufactures. This is not plausible.”

That’s putting it mildly. The effects of the crisis have already erupted onto the high streets with big names Woolworth’s and MFI in administration, Curry’s and PC World making big losses. In and around Llantrisant, the home of the Royal Mint in Wales, hundreds of jobs have been blown away in a few hours, in Bosch car components, Oreal and Budelpack cosmetics, Hoover, the Serious Food Company and Ferrari’s – a chain of bakery shops.

Yesterday, representatives from the building industry and car manufacturers got to the head of the queue of those trying to persuade the government to help them stave off bankruptcy. They went away empty-handed, apparently. The government’s tax income is destined to fall off sharply for years to come.

There’s a bit more to this excellent question. Earlier attempts to raise impossible levels of taxes have produced social unrest and political change. In 1381, the most extreme and widespread insurrection in English history, the Peasant’s Revolt, was triggered by the poll tax. It was the beginning of the end for a society based on exploitation through landownership. Attempts by Charles I to raise money without recourse to Parliament contributed to the English Civil War and his execution in 1649. On March 31 1990,there were riots in London against the Community Charge, commonly known as the poll tax. Watch this space.

Gerry Gold
Economics editor