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

A tipping point is reached

It’s difficult to know which of two momentous pronouncements yesterday has the most profound significance for the future of the global capitalist economy.

Is it the Bank of England’s expected decision to reduce the base interest rate to 0.5%, and start to print money – an initial £75 billion – with which it will bypass the commercial banks and lend direct to businesses, if it can find any that want to borrow?

This means that “monetary policy in its conventional form has ceased to operate”, according to the Financial Times’ Martin Wolf. A better example of what is meant by “a tipping point” would be hard to find.

Or is it the also expected admission from global giant car-maker (and financial services company) General Motors that there are now serious doubts about its ability to continue as “a going concern”? Continued deterioration in the availability of credit together with slumping demand for vehicles of all kinds has driven it to the brink of collapse.

The fact is that the complete breakdown of the credit system and the implosion of production are tightly intertwined.

Interest rates were last reduced to historic lows to deal with the dot.com crash of 2001/2, ushering in a period of frenzied speculation, which intersected at its pinnacle with the beginning of the downturn in consumption in 2004.

The global credit system closed for business in mid-2007 when it became clear that the effects of the deepening recession were irreversible. Financial institutions and investors recognised, however dimly, that the possibility of tempting consumers back into the shops to restart growth was gone. It was called a “collapse of confidence”. Share prices continue to tumble.

Despite trillions of dollars, pounds, yen and roubles being poured into the banks and the auto giants, and virtually unlimited guarantees to underpin new lending these attempts at resuscitating the system have failed. There's just too much over-capacity already to tempt new production. Too many unsold cars.

Neither can the crash be reversed by “quantitative easing” - increasing the money supply to induce spending, touted as the last throw of the dice. Governments have embarked on this desperate measure because interest rates are close to zero, property and commodity prices are dropping as demand has evaporated, and nothing else is working.

There will be attempts to bypass the banks and shovel cash into consumers' pockets directly - the “helicopter drop” approach favoured by the current chairman of the Federal Reserve, Ben Bernanke.

This can only make an unprecedentedly bad situation a whole lot worse. There’s talk already in the US and the UK about “fiscal collapse” – tantamount to state bankruptcy.

Obama’s team is reported to be working around the clock, not on a solution, but “to form an approach” to the disintegration of the auto industry. They must be getting very tired.

Obama, Brown, Darling, Mandelson, Wolf, and Mervyn King, the Bank of England’s governor and every one of the fantasists of the capitalist world are pinning their hopes on a recovery, sometime, not this year, maybe later. Maybe never.

As the conference called by the Left Economics Advisory Panel for 25 April puts it, “Capitalism Isn’t Working”. The conference is scheduled to discuss policy solutions for the crisis. They will have to be founded upon collectively-owned, co-operatively managed, not-for-profit ecologically-sound production, distribution and exchange. And that includes the banks. Nothing less will do.

Gerry Gold
Economics editor

Capitalism heads for year zero

Barack Obama yesterday raised the spectre of an irreversible crisis, with the situation getting “dramatically worse”, if his spending plans to boost the US economy were delayed. Is he being alarmist? And will his plans for a $775 billion “shock therapy” package work? 

How can we assess the likely success of these and related measures being proposed by governments around the world? Estimates of the extent of the financial and economic crisis have varied widely, continuing to worsen since the sub-prime mortgage default problem first began to make its appearance in the spring of 2007, an early but ominous sign of something far deeper. 

One closely-watched indicator is the Bank of England’s base rate. Yesterday the BofE cut its rate yet again, one of the other strategies being deployed to prevent the rapidly deepening recession turning into an economic catastrophe. Now at 1½%, less than a third of its level only three months ago, the rate is lower than at any time since the Bank’s foundation in 1694. It is expected to go lower still. People with savings and pensions have already seen the income from their investments drop by more than half. 

On this measure, the turndown takes the economy back to the beginnings of the epoch of capitalist production. The nearer it gets to zero, the more certain is the resort to printing money, and a further devaluation of currencies already weakened by the implosion of fantasy finance. 

Another indicator is falling production. The collapse in September of the global financial services corporation Lehman Brothers - the largest bankruptcy in US history - marked a new phase of the financial crisis, and its impact on production has been dramatic.  With credit markets remaining frozen, the whole developed world is now characterised by a sudden slowdown in consumption and a virtual stop in industrial production, as we reported last week. 

Retail giants are shrinking and closing as sales dry up. The roll call of historic names lengthens day-by day. Nissan in Sunderland, widely regarded as the epitome of efficient modern car plants globally, announced a cut of 1,200 jobs, nearly one in four of its UK workforce. This is just a part of Nissan’s response to demand which has fallen by 25 to 30% already, pushing its stocks of unsold cars to 93,000 in Europe. Estimates put the knock-on effect locally as high as a further 20,000 jobs. 

Nissan’s workers will not trust Lord Mandelson’s pledge to help then find new jobs as quickly as possible. As for their union “leaders”, Unite union joint general secretary Derek Simpson’s offered no resistance, saying pathetically: "The economy will improve and, when it does, Nissan will need these workers' skills again.” Thank you and good night.

The lesson from Obama’s warning on one side of the Atlantic and the flurry of government activity on this side, together with the virtual elimination of interest rates, is that the system is broken at every level and it shows. The US government’s spending deficit is already running at $1 trillion, for example, even before the president-elect’s package is added on. There is, unsurprisingly, a growing reluctance by foreign investors to deposit funds in either the US or UK.  

If the banks can’t and won’t make credit available, if production is being slashed because consumers can’t and won’t buy unnecessary commodities, then clearly there is something fundamentally wrong. In this context, “stimulus packages” make no essential difference.

The alternative is to seize the banks and the corporations, keeping people in their jobs and homes, pending the reorganisation of the economy on rational, not-for-profit, co-operative lines, producing sustainable goods to satisfy social needs. At least we would then have a measure of control over events rather than being passive victims of the unravelling of the capitalist market economy. No one, of course, is suggesting Obama or Brown will do any such thing. They will use the capitalist state to try and save capitalism at our expense. Therein lies the political challenge.

Gerry Gold
Economics editor

A system beyond repair

The global economy is in bad shape, nowhere more so than in the UK and each panic measure only makes matters worse. Following a total of 2% cut in the previous two months, the Bank of England has reduced its rate by a further 1% to 2% – equal to the lowest rate since the Bank of England was founded in 1694, when capitalism began to make its mark. That’s how serious the crisis is.

The sudden and brutal deterioration in the economic outlook across Europe also prompted the European Central Bank to cut its main policy rate by three-quarters of a percentage point to 2.5% – its largest reduction ever – just hours after Sweden’s central bank cut the country’s official borrowing costs by a record 1.75%.

This is the first time that UK interest rates have plumbed these depths since rates took on their current, central role in attempts to minimise the effects of recurrent crises. This was following the 1944 Bretton Woods arrangements to restart the normal business of making profits following the Second World War’s destruction of productive capacity and people.

The Bank of England’s decision is a futile bid to stimulate the economy by getting people spending again and cutting the cost of loans. But the banks are not rushing to play ball as they are mainly interested in rebuilding their shattered balance sheets. Suddenly the banks have become “risk averse” after decades of encouraging debt. Output in the UK fell by 0.5 per cent in the third quarter of this year. Unemployment is rising sharply. Consumer and business spending are stagnant while investment in housing is falling. Yet sharper declines in output and bigger rises in unemployment are expected.

Analysts are warning of the threat of deflation. The Financial Times
warns today: “This is not a normal slowdown. Falling commodity prices, collapsing demand and a damaged financial system may well turn some inflation indices negative: spells of falling prices are quite possible. If consumers start expecting prices to fall, this could uncork the poison of deflation.”

The voice of global capitalism is also concerned that panic measure following panic measure “risks spooking investors, causing long-term interest rate spikes and prompting flights from currencies”. Judging by the plummeting pound against the dollar and euro, this is already beginning. With reports that the government is about to start printing money – regarded as the “nuclear option” – in a yet another attempt to reflate the economy, the position with the pound can only deteriorate.

The financial crisis in the US is taking its toll on other countries. The huge volumes of Treasury bonds issued as part of an effort to reverse the economic slump threaten to stop access to credit by – and therefore bankrupt - Latin American governments facing financing needs of an estimated $250bn next year, The risk is that Latin American and other emerging market borrowers may be “crowded out” from credit markets by a US fiscal deficit that could exceed $1,000bn next year

And China? The source of cheap labour which was the motor of globalization is receiving criticism for its recently announced Keynesian “New Deal” programme pouring money into roads, docks and other export infrastructure. Critics say China should encourage spending to turn savers into big spenders.

The inevitable failure of all of these attempts to stave off the effects of the global financial and economic hurricane lead to just one conclusion: the capitalist system is out of control and beyond repair. And New Labour is undoubtedly preparing other, sinister and repressive measures to deal with the massive social unrest that is heading to a community near you in 2009.


Gerry Gold
Economics editor

The 'great debt unwind' continues apace

Central banks are slashing base rates across Europe in a renewed, desperate attempt to minimise the impact of the unstoppable descent into slump. Their combined efforts can be compared to joining hands in a line to confront an avalanche of snow head-on. You just know what the result will be.

Many, but not all, commentators and analysts have expressed surprise and shock at the unexpectedly large 1.5% cut made by the previously ultra-cautious UK Monetary Policy Committee which is supposed to be motivated by keeping inflation under control. Many of those amazed by the size of the cut simply haven’t cottoned on to the historically unprecedented depth and breadth of the global crisis.

With Britain predicted to be the worst hit by a shrinking economy of the developed countries – the extinction of companies like Royal Worcester & Spode, one of Britain's oldest pottery makers, with its roots stretching back to 1751 is significant – the fear is now that inflation will turn into its opposite. Falling prices may suit consumers but with raw materials' prices volatile and sales falling, many companies will see their margins squeezed even further and be forced out of business.

Indebted consumers with pressures on jobs and housing growing daily, have been forced to turn their back on many goods. New car sales in the UK slumped by 23% last month - in effect, the biggest fall for 17 years. In the US and Europe things could hardly be worse as car sales have declined dramatically – falling as much as 20% on last year. GM, Ford, Chrysler, Peugeot, Fiat, Tata owned Jaguar Landrover and BMW, Honda and Bentley are all in big trouble, closing plants and laying off workers.

Despite appeals and exhortations from Chancellor Alistair Darling, the likelihood that the deep cut in the base interest rate will be passed on in full to individuals and small businesses is close to zero. There are some who are beginning to realise what is going on. Alex Allen, chief investment officer at fund of hedge funds boutique Eddington Capital Management, believes that equities are set for a four- to five-month rally before a "cataclysmic crash" next year.

"At the edges where markets are liquid we've been willing to call the bottom. We're bullish on equities for the next four to five months and then we expect to see the final cataclysmic downleg," he said. "Equities will go to at least 50% below where they are now. It's going to be as bad as 1929," he said. "Equity markets are extremely expensive."

But what is going on now puts 1929 in the shade. In the few years following the Wall Street crash, share markets fell by 90% of their pre-crash value. The scale of today’s burst balloons of credit and debt are unimaginably much greater. A month ago the assets of failed global investment bank Lehman Brothers were auctioned off. The loss in value gives just a hint of what is to come. The auction set a price for Lehman bonds of 8.625 cents on every dollar. Financial firms that sold credit default swaps, therefore, left owing 91.375 cents on the dollar. And this is just a small part of the big, much bigger picture.

Warnings from those who are in the know should be taken seriously. “This time next year, Obama euphoria will be crushed under the weight of the unfolding economic and market meltdown,” says Albert Edwards, analyst at Société Générale. “The crushing weight of the ‘Great Debt Unwind’ has only just begun.” Throwing that weight off and re-establishing the economic and financial systems on a new, not-for-profit foundation is the urgent task at hand.

Gerry Gold
Economics editor

Banks get quids but there's no quo

It is not long since Prime Minister Brown announced a £400 billion bail-out package including a £37 billion gift to the banks, but the big lie has already been exposed. The story a month ago was that the government and the Bank of England were going to do whatever it takes “to maintain the stability of our system and to make sure that there is stability for families and for businesses right across our country”.

In reality, capitalist governments in the UK and in the rest of the world are unable to anything effective to stop or even offset the impact of the global slump. Sales by leading retailer John Lewis dropped 9.8% on the year. Shares in Asia and Europe fell on Friday, heading for their worst month ever, anticipating a deep and long lasting downturn. In a renewed desperate attempt to stave off the worst effects, Japan cut interest rates for the first time in seven years on Friday, expecting severe stress in the global economy to persist, while banking giant Barclays said it was raising £7.3 billion in capital.

The failure of the package of taxpayer-funded public sector debt to deliver the credit needed by small companies and individuals reveals the governments’ total subservience to the privately-owned finance sector. In keeping with their requirement to make profits, as economic conditions deteriorate lenders are tightening terms, making borrowing less available and more expensive.

Despite the shouts of glee from the supporters of state intervention and delight from some over what they dubbed “nationalisation” of the failing banks, including Northern Rock, Royal Bank of Scotland, Lloyds TSB and HBOS, there were no constraints or requirements of any kind placed on how the money should be spent.

Even Vince Cable, the Liberal Democrat Treasury spokesman, has been able to denounce the government’s “utterly pathetic” position, saying: “The whole point about this deal with the lenders was that there was supposed to be a tough quid pro quo. It’s perfectly obvious now that the banks got the quids and there’s no quo.”

As events unfold, Brown and Chancellor Darling are reduced to begging at the rich men’s table. On Thursday, Darling admitted that the government’s requirement that the banks make lending available at 2007 levels simply means “the pool of money is there”. Decisions on whether to lend that money, and at what cost, remained with the banks. “In any banking operation, whether it is lending to individuals or to businesses, there must be discretion,” he said. And Brown added “I urge banks not to change the terms and charges for existing lending to small and medium-sized enterprises.”

In operating the real, brutal laws of the busted capitalist market, the bankers have a far better grasp of what is required than Brown or Darling. “We don’t sense any purpose in providing small businesses with loans that they cannot afford to repay,” said Eric Leenders, executive director retail, at the British Bankers’ Association.

What better reason than this could there be to end the operation of a system of fantasy finance that exists solely to extract value produced by workers in the real, productive economy in order to distribute it as profits to shareholders and dreamland bonuses to City traders? The profit-serving banks should be turned into mutually-owned, democratically controlled not-for-profit institutions. Then decisions can be taken and implemented on how to best provide the essential financial services needed to build an equitable and environmentally sustainable economy.

Gerry Gold
Economics editor

A cornered, frightened government

New Labour came to power pledging to end the “boom and bust” policies of the Tories for ever. Now, as the economy slides into recession and prices soar, the Brown government is paralysed, desperate to divert attention away from the mounting crisis by any means. Scaremongering plans to lock up terror suspects for six weeks without charge fit the bill nicely.

That’s one explanation why the beleaguered Brown premiership is pressing on with the vote tomorrow on proposals to give police powers to hold people for 42 days, despite widespread opposition ranging from former attorney-generals to Scotland’s chief law officer. The move would destroy historic, constitutional rights to know what you are accused of and to be charged promptly or set free.

Another reason for soldiering on is that this frightened government is anticipating social unrest and is amassing an array of measures for the state to deploy as and when necessary. Anti-terror laws are already routinely used against climate camps, anti-arms trade protests and women protesting outside the secret Menwith Hill installation in north Yorkshire. "Anti-terror" powers are used to convict individuals merely for alleged membership of "proscribed" political organisations, for possessing DVDs and for downloading web pages.

A social crisis is looming as the credit-fuelled economy continues to unravel day by day. The number of houses changing hands has collapsed to the lowest level in 30 years, a new survey shows. The fall in sales far exceeds the depths of the last housing crash in the 1990s. Neil Hunt, a Derbyshire-based estate agent, said: "Demand has plummeted to a crisis point with sales at their lowest May level in memory. An avalanche of job losses in the housing industry is beginning to materialise which could make current media stories look like the good old days." At the same time, the Bank of England is planning to increase interest rates in a futile response to rising inflation. It has all but given up on attempts to unlock the credit crunch by pumping money into the financial system and is apparently preparing for the worst. Mortgage rates are likely to rise, increasing the pressure on hundreds of people already unable to cope with rising costs.

On that front, the Office of National Statistics yesterday released factory inflation figures, which showed that prices last month increased at the fastest rate since records began 22 years ago, and most probably since 1976. One of Britain's biggest food manufacturers – Northern Foods – has closed a pasta and ready meals factory in Grantham that supplied Marks & Spencer because the supermarket refused to absorb some of the cost increases. Up to 700 people face losing their jobs. A cooked meat plant in Deeside, north Wales, shut down last week with the loss of 70 jobs, because of soaring prices.

With popular support draining away, Brown now depends for survival on a narrow group of senior police officers (most outside London oppose 42 days), the generals doing the government’s bidding in Iraq and Afghanistan, the spy agencies MI5 and MI6 and some sections of the civil service. And, of course, on New Labour’s own MPs who have helped create an authoritarian edifice by approving endless anti-terror laws and surveillance powers. Something along the lines of the Spanish truck drivers’ border blockade over fuel prices could easily destabilise New Labour. Be warned: Desperate, cornered governments can do desperate things to maintain their grip on power.

Paul Feldman
AWTW communications editor

A perfect economic storm

The Bank of England and the European Central Bank kept interest rates steady this week, despite pressures for a cut to boost economic activity. The central banks were paralysed by contradictory movements in the global economy that render them helpless.

As everyone knows, prices are rocketing, and the things that hit most people hardest are rising the fastest – food, housing, fuel for heating and travel. Lowering interest rates would add to inflationary pressures. At the same time, growth, the one thing that is the essential measure of the health of the capitalist economy, is turning into its opposite - recession and slump.

Amongst the world’s most powerful global corporations car makers Ford, General Motors and Chrysler are shutting some of their most productive factories as demand for fuel-hungry models evaporates. Ford is slashing salaries by 15%, delaying agreed wage increases by three months, ending training programmes, putting a $25,000 limit on life insurance payouts, and sacking as yet unknown thousands of its employees,

The airline industry is shrinking fast. Silverjet, the UK all-business class airline last week suspended all flights. In the US, Credit Suisse analyst Daniel McKenzie expects 2009 domestic capacity “will be in line with where it was in 1998 to 1999, essentially wiping out 10 years of growth for the legacy carriers.” Continental Airlines is cutting 3,000 jobs and taking 73 aircraft out of service. United Airlines is grounding a fifth of its fleet.
According to Giovanni Bisignani, director general of the International Air Transport Association, “oil skyrocketing above $130 per barrel has brought us into uncharted territory. Add in the weakening global economy and this is yet another perfect storm.” Bisignani said 24 airlines had gone bankrupt in the past six months and the sector faced $99bn of extra fuel costs in year ahead. He describes the situation as “desperate and potentially more destructive” than the setbacks the industry had faced in recent years from terrorism, economic slowdown, the outbreak of Sars [severe acute respiratory syndrome] and the war in Iraq.

Despite all of this, shares in airlines have risen. Investors smell profits when companies take action to cut costs. Proponents of the market economy see all this as a necessary shake-out and some are looking for opportunities to revive the economy through new ventures linked to the climate crisis. Ken Lewis, chairman and chief executive of Bank of America, has called for governments to intervene to help accelerate the movement towards renewable energy sources. He says “there is a strong connection between our willingness to diversify our energy sources and our ability to grow the global economy sustainably.”

What’s the betting he was part of the lobby that ensured the US delegation blocked any acknowledgement of the impact of the switch to biofuels on food prices at the UN’s food crisis summit yesterday?

The economic crisis is sharpest in the US and Britain – the two countries weighed down by the largest amounts of debt. Both countries are in a deadly race, to see which one is actually the weakest link in the global capitalist chain and breaks first. Judging by this week’s deeply pessimistic OECD forecast, accompanied by plummeting house prices and consumer spending, Britain could well be in first place.

Gerry Gold
Economics editor