Edgy markets make “growth” seem hollow

The eyes and ears of the world’s biggest gamblers will turn towards the US Federal Reserve announcement this evening.

Better known as ‘investors’ in the capital markets, they anxiously await a decision on whether the Fed would begin winding down the life-support system which has sustained the US - and hence the global economy - since the 2007/8 crash.

Every month, the Fed has been inventing an additional $85bn dollars which it lends to the government by buying its bonds. Like every other form of credit, government bonds are a promise to pay interest and repay the capital.

The new money is supposed to find its way into the production of real value through loans made to businesses. This, the story goes, leads to growth, a higher quantity of profits, and increasing taxes which can be used to make the repayments. 

But with competitive pressures forcing corporation taxes downward globally, governments have to extract an increasing proportion of their tax income from wages earned and purchases of commodities made by the majority, the 99%. Us.

For the last five years the US economy – still the world’s biggest - has been at the centre of efforts to restore the economic damage that was the inevitable result when the credit-fuelled boom crashed in 2008.

The decision to reduce credit creation through ‘quantitative easing’ is driven by consumer price inflation and unemployment indicators.

If price rises show signs of getting out of control there’s cause for concern as it signals the likely onset of political unrest. The Arab Spring was triggered three years ago today by impossible economic conditions as food prices rocketed due, in part, to speculation in commodities funded by emergency credit flooding on to the market in search of quick profits.

If unemployment drops to 6.5% in the US (7% in the UK) – not expected for some considerable while yet – the alarm bells will begin to ring. Although it will be trumpeted as a success for the policy, a continuing reduction in unemployment could threaten profits as wage bargaining gathers strength.

At a hearing of the House of Lords’ economic affairs committee on Tuesday, Mark Carney, governor of the Bank of England (BoE), tried to calm investors’ nerves. He said that even if the Fed slowed the pace of its bond-buying, it would still be printing money and remained far from selling the trillions of dollars worth of bonds it had bought over recent years.

The BoE holds £375bn-worth of UK gilts, a significant part of the global total of government bonds. Carney is warning of the unpredictable consequences of even a hint of a start to selling off this historically unprecedented vast accumulation of stored up credit.

Carney has another proposal up his sleeve - the BoE would raise interest rates before trying to sell its stock of government debt.

Interest rates set by central banks (not those charged by the likes of Wonga) have  been running at historically low levels since the crash. At 0.5% in the UK, and effectively negative when measured against inflation of more than 2%, interest rates are just another side of the highly volatile loose credit regime of emergency measures that have kept the economy afloat.

Those with pensions or savings of any kind are losing out massively as the ConDem coalition tempts a new generation into a lifetime of mortgage debt slavery.

Mixing his messages, Carney said yesterday that interest rates would stay low until unemployment falls to 7% which the Bank of England predicts will happen in 2016.

Britain’s current economic growth is, of course, based on low-wage jobs while fuel prices soar and a huge rise in homelessness as the house price bubble makes homes unaffordable, as austerity cuts hit the most vulnerable.

Carney’s warnings of the risks of unwinding cheap credit and that "a return to growth is not the same as a return to normality" means that the global economy is fast approaching another great crash.

Gerry Gold

Economics editor

'Going for growth' will bring new attacks

If Europe’s voters think “austerity” is bad for their health, it’s nothing compared to what some of the advocates of “growth” have in mind as the next stage of the crisis unfolds.

People like Mario Draghi, president of the European Central Bank, know all too well that providing trillions of euros in cheap loans to banks has not led to increased lending.

The eurozone is firmly in recession so plan B is on the agenda. As far as Draghi is concerned, the aim is “structural reforms” like “labour-market flexibility” and increased competitiveness through speed up and lower wages.

In other words, living standards have to be driven down faster and further for there to be any chance of the eurozone coming out of recession.

What Draghi’s plan confirms is that the crisis has entered a new, more dangerous phase - economically and politically. The deadlock is absolutely clear in Greece.

The rejection of the draconian EU-IMF bail-out terms in the Greek election cannot be satisfied by any political deals amongst the minority left parties. Demands by Alexis Tsipras, leader of the Syriza party to tear up the deal cannot be met because the global capitalist economy is imploding.

Some like to say that “austerity isn’t working” and should be abandoned in favour of growth. The Guardian’s Seamus Milne remarks: “Cutting jobs and pay while increasing taxes isn't reducing borrowing and debt, let alone leading to economic recovery. It's deepening recession, increasing debt and destroying jobs and squeezing living standards across the eurozone – in countries such as Spain and Greece, catastrophically – as well as in Britain.”

This is stating the blindingly obvious but ignores a salient fact. Forced to contract by its own logic, capitalism is beyond the control of any political initiative that leaves the system intact.

The reality is “going for growth” just means moving to the next stage of a brutal contraction that will see workers sacked, factories closed, shutting down unprofitable production, driving up rates of exploitation.

New measures by the Con Dem coalition in the Queen’s speech like reducing public sector pensions and making it easier to sack workers, are part of this process.

The scale of what has to come if the current system is to survive is too terrible to contemplate. Attention must now turn to the means by which a new system can be created.

The interdependence of politics and economics rules out talk of a new direction for the economic system without a new political arrangement that removes the power of global corporations to dictate to governments.

Seismic shifts in electoral results in Europe follow on from mass movements in North Africa and the Middle East which have toppled regimes that ruled throughout the latter part of the twentieth century.

With unemployment soaring, anger cannot be contained and will explode on the streets  throughout Europe in the coming months.     

Replacing a bankrupt for-profit system with new forms of common ownership can only be carried out by new political formations, not co-existing with the world of capitalist corporations and global financial institutions, but challenging and replacing them.  

People’s assemblies, where everyone participates in the decision-making, can take the place of a five-yearly cycle of voting for representatives who immediately become subjects of capital.

A global network of people’s assemblies can establish democratic control over the financial and productive resources of the world, protecting them against the threat of destruction, turning them to the satisfaction of need. 

We should not ignore the other message from Greece, where an openly fascist party won 20 seats in parliament. People’s assemblies have to become the future shape of democracy because the old political order is crumbling but does not intend to go quietly.

Gerry Gold

Economics editor 

Don't pay the price for their follies

As the minor surge of festive consumer hysteria peters out, analysts are preparing for an unprecedented perfect storm in 2009 with unpredictable economic and social consequences.

Market researchers warn that over 1,600 UK retailers will be driven out of business this year, triggering thousands of job losses and leaving more than one in ten shops empty.

Experian said trading conditions for survivors would be the worst for at least 30 years and there would be knock-on effects at suppliers, manufacturers and service providers. 

The economy is in such a precarious state that two of the UK’s largest mortgage lenders, Halifax and the Nationwide, have decided not to release house price forecasts for next year. Nationwide said it could be irresponsible to make a forecast, given the market's dependence on confidence. 

In attempting to reinvent himself as a critic of “unbridled free market dogma”, Gordon Brown is also trying to play the confidence trick. “To those who know that the only solution for our economy and environment is a global solution - expanding growth and tackling climate change together - let us say that we will work with Europe, America and others,” Brown said in his New Year message. 

Being tied hand, foot and brain to the capitalist system of production and exchange he can envisage nothing else but “growth” as the solution when in fact it is the heart of the problem. An economy that has to expand constantly in order to fatten shareholders is inherently unstable and liable to collapse (and has also precipitated climate change). This is the dreadful and unacceptable price ordinary people are facing as a result of the follies of global economic and political elites. 

Forecasters now have their hopes pinned to Barack Obama’s $800 billion stimulus package of infrastructure projects. But, as the New Year broke, hopes were already being dashed. It’s a small sum when measured against the problems in the global economy, including a financial system that has come close to collapse and remains seized up. 

Action by Russia’s energy company Gazprom to cut off gas supplies to Ukraine in mid-winter highlights the sudden, sharp contraction in gross domestic production (GDP) and industrial production in the latter country. Both have dropped rapidly since August. By November, GDP was 14% down on a year earlier and industrial production was down by 28%. It’s no wonder that Ukraine can’t pay its gas bill. 

Japan's Economy Ministry reported a 16.2% year on year fall to November. Worse still, output is expected to decrease by a further 8.0% between November and December, taking the year on year decline in December over the 20% mark. Similar sharp reductions have been reported in Germany, and Spain as recession turns to slump. 

Instead of making predictions we must now turn to policies and actions – not to restore the system to profitability based on unsustainable growth, but to make the changes that can establish society on different foundations altogether.  

When a campaign of protest failed to stop the closure of the local post office and shop, a small rural community in West Wales took matters into their own hands. They have set up a not-for profit community enterprise to take over and ensure continuation of essential services. A small beginning, but one of myriad examples of collective responses, worker-managed, democratically-run organisations working out the social relations that will form the basis of sustainable production for need. 

Gerry Gold
Economics editor