Capitalism is forever blowing bubbles

Usually, this column begins on a serious note, especially when we’re talking about the global economy. Today, however, I bring you the chorus of a song that made its debut in America in 1918 and is better known as the club anthem of West Ham United.

I'm forever blowing bubbles,

Pretty bubbles in the air,

They fly so high,

Nearly reach the sky,

Then like my dreams,

They fade and die.

Fortune's always hiding,

I've looked everywhere,

I'm forever blowing bubbles,

Pretty bubbles in the air.

What’s the connection, you may well ask? Well, with the International Monetary Fund lurching about all over the place and central bankers confessing in public that they are not sure what’s going on in the global economy, you can be sure that there’s real trouble ahead.

One of their real concerns is that the “easy money” policy introduced after the 2007-8 financial crash has had unintended consequences. Instead of stimulating genuine growth in the real economy, the policy has instead created “bubbles” that, unlike the soap version, will burst with real venom.

The IMF once encouraged austerity as a response to the financial crisis and budget deficits. That hasn’t worked, so they’re now telling George Osborne and others to loosen up. But does the IMF know what’s going on? Clearly not,  if Lorenzo Bini Smaghi, the former member of the European Central Bank’s executive board, is to believed.

At the IMF’s spring meeting this week, he confessed: “We don’t fully understand what is happening in advanced economies.” Central bankers have printed $12 trillion in new money, kept interest rates at zero and cut public sector spending.

However, despite this intervention, while there may be signs of growth in a park near you, there’s no discernible movement in terms of “growth” in output, which is the lifeblood of the capitalist system. What is looming, however, is a new phase of financial instability.

Janet Yellen, vice-chairman of the US Federal Reserve, admitted that “in the years before the crisis, financial stability became a ‘junior partner’ in the monetary policy process, in contrast with its traditionally larger role.” Now she is concerned that central bankers are repeating their errors, storing up “financial distortions” for the not-to-distant future.

With returns from the real economy meagre compared with the pre-crash period, there is speculation in all sorts of “assets”. Stock markets around the world are nearing the peaks they achieved before 2007 despite the continuing global recession. Trading in junk bonds – debt – is soaring. In London, house prices are leaping off the charts.

And now we are presented with a new one phenomenon – the “carbon bubble”. The warning comes from Lord Stern, author of the ground-breaking 2006 report on climate change that described global warming as a market failure, and the think tank Carbon Tracker.

Their report published today says that stock markets are inflating an investment bubble in fossil fuels. "The financial crisis has shown what happens when risks accumulate unnoticed," said Stern, who added that the risk was “very big indeed”. The “carbon bubble” results from a massive over-valuation of oil, coal and gas reserves.

Back to the IMF and José Viñals, its head of financial stability. “Put simply, we are in uncharted territory.”

Fear not IMF and central bankers. Coming over the horizon is one Ed Miliband, leader of the Labour Party and wannabe prime minister. In an interview published on the Shifting Grounds website, Miliband says that what is required is a “proper skills system, a proper banking system, an industrial policy, tackling short-termism, infrastructure. It's about a suite of things … that come together and form a body of ideas around responsible capitalism.”

I knew someone out there had the answer.

Paul Feldman

Communications editor 

Junk bonds frenzy points to a new crash

After five years of austerity budgets, the headline on the latest survey from global financial information services company Markit sums it up: “Downturn deepens as business conditions deteriorate in all euro nations”.

Or put another way, the brutal assault on living standards of the people of the eurozone is certain to accelerate as the system’s self-destruct mode strengthens. 

It’s not just the weather that’s gone into deep freeze this spring. Markit reports a worsening of “manufacturing conditions across the currency union”. Germany and Ireland both fell back into recession, while rates of decline quickened in nearly all other nations. France’s rate of slowdown did not actually increase but its present speed of contraction is bad enough, only exceeded by that of Greece.

The survey’s gloomy report adds: “March saw total new orders decline for the twenty second successive month, dropping at the fastest pace since December. Demand was weaker in both domestic and export markets, reflecting lacklustre client confidence. The outlook for manufacturing also deteriorated, as the ratio of new orders-to finished goods inventories dipped to a three-month low.

“Job losses were reported for the fourteenth straight month in March, with steep rates of declines reported in France, Italy, Spain, the Netherlands, Ireland and Greece.”

  

So the terms of the Cyprus bailout “agreed” by its government at the point of a Troika gun, bad as they are, can only be an opening to something far worse.  There’s a huge 60% tax on bank deposits over the guaranteed limit of €100,000, which means that many businesses are closing with the loss of tens of thousands of jobs – 4,500 in the public sector alone– a heavy blow for a population of less than a million. Those in work will pay a “temporary insurance fee” of 1.5% on salaries for access to healthcare.  

The people of Slovenia are next in line for attention by the punishment squad led by the International Monetary Fund and the European Central Bank. Its economy is shrinking rapidly and its budget deficit is ballooning towards 5% of GDP. According to the IMF, “a negative loop between financial distress, fiscal consolidation and weak corporate balance sheets is prolonging the recession”.

This spiral of decline isn’t limited to the eurozone. Markit’s figures for the UK are hardly encouraging:  manufacturing output fell in March at its fastest pace since July last year, along with a further decline in new orders and employment. The Bank of England reported that lending to households and companies contracted in February in spite of its efforts to increase the flow of credit to the real economy.

The Bank of England has, of course, taken part in the unprecedented pumping of billions into the financial system via quantitative easing, aka as printing money. Since the crash started at the end of 2007, central banks around the world have created a staggering $12 trillion of new money in a desperate bid to stave off total collapse.

All this has done is to fuel inflation, encourage speculation in basic commodities like wheat and, all in all, create the conditions for another financial bubble to burst. According to Daily Telegraph finance writer Harry Wilson, huge sums have gone into sales of high-yield debt, formerly known as junk bonds.

In January alone, non-investment grade Asian companies, whose debt is ranked by credit rating agencies as riskiest, sold just over $9bn of high-yield bonds, a year-on-year increase of more 6,000%, he reports.

Wilson warns: “The massive increase so soon after a financial crisis that was caused in part by the credit meltdown has raised fears that less than five years on from the bankruptcy of Lehman Brothers and the near failure of Royal Bank of Scotland and HBOS, the world is setting itself up for another crash.”

Reports of investment banks and other institutions borrowing to buy junk bonds – what is known as leverage – only adds to the tendency towards a new, even more destructive crash.

All attempts to fix the capitalist system are just making things worse. These are the conditions which must make the campaign against austerity into a movement to replace the broken, bankrupt system of production for profit, once and for all time.

Gerry Gold

Economics editor

Greek crisis triggers debt tsunami

A debt tsunami is now sweeping across Europe to Portugal, Spain and Italy and onwards to the shores of the United Kingdom, before crossing the Atlantic to the United States of America, triggered by the financial earthquake that hit Greece yesterday.

Share markets plunged after credit rating agency Standard and Poor downgraded the long-term credit rating of Greece’s government and banks to junk status, the first eurozone member to have its bonds declared worthless. Markets fear that many banks are stuck with worthless Greek bonds and that the world is heading for renewed financial meltdown.

S&P’s action was its response to the decision by the two biggest trade unions in Greece to call a 24-hour strike against the government’s austerity measures for May 5. This will be the third joint strike of the Greek General Confederation of Labour (GSEE) and Federation of Civil Servants (ADEDY) against the government’s budgetary measures since the beginning of the year.

This further deepening of the crisis undermined the bail-out deal for Greece cooked up between the eurozone countries and the International Monetary Fund, prompting the IMF to toss a further $10 billion into the pot. But the additional strings attached can only provoke further anger from Greek workers.

Early warning of the arrival of the tsunami in Britain has now been delivered to the parties contending to be the next government following next week’s General Election. Whilst all of the parties are keeping quiet about the detail of their plans to reduce the government deficit, the Financial Times and the Institute of Fiscal Studies have been doing their sums.

Both the IFS and the FT have identified black holes amounting to more than £30 billion in each of the manifestos of the three main parties.

The FT says the “next government will have to cut public sector pay, freeze benefits, slash jobs, abolish a range of welfare entitlements and take the axe to programmes such as school building and road maintenance – or make a set of equally politically perilous choices”. It has built a computer game enabling its readers to play at being Chancellor, to get the measure of the job he or she will have to do to attract investors to finance its debt.

The IFS said no party had come "anywhere close" to making clear where the axe would fall after the general election. This, it said, was despite the parties' plans implying the deepest cuts in spending since the 1970s and - in the case of the Conservatives - the biggest one-year reduction in public spending since demobilisation at the end of World War II.

The parties are keeping quiet because they too fear sparking a Greek-style revolt (actions taken or planned by university, college and school teachers against cuts are a sign of what’s to come). Never mind New Labour’s “hard choices” to be made, there’s a conspiracy amongst them all.

The IFS, the FT and the rest of the media and the political parties offer no choice at all. Somehow or other the cost of the debt must be paid by the millions of people being persuaded to vote for bailing out the capitalist system with the destruction of their jobs, pensions, health, education and social services.

But there is another way. We can build a better kind of democracy around a different kind of economy. A network of People’s Assemblies can oppose the next government and refuse to accept the cost of bailing out the banks and of putting profits into shareholders’ pockets.

They could decide to cancel the debt, outlaw speculation, close the profit system, and turn the private financial sector into a public service like, but even better than, the NHS.

Vote with your feet – take the revolutionary road on May 22nd.

Gerry Gold

Economics editor