Sick global economy hit by new contagion

The list of countries hit by the wave of withdrawal of speculative investment capital lengthens by the day. Countries amounting to half the global economy are being forced to spend currency reserves, raise interest rates and consider controls over the movement of capital.

A contagion of capital flight is hitting Argentina, India, Indonesia, Russia, Brazil, South Africa, Hungary and Turkey. A dramatic reversal in the global marketplace, which began in May and is accelerating with every new shock statistic, is forcing the governments of “emerging” economies to savage the living standards for their already low-income populations.

Each country has a different story to tell: worse or better attempts at managing their economies; higher or lower levels of foreign currency reserves; more or less extremes of corruption of government ministers; levels of civil unrest ranging from the benign to insurrectionary. But the source of the crisis invading their borders lies elsewhere, beyond their control. 

Investors on the global financial markets – better known as speculators, or gamblers – were spooked last May by the US Federal Reserve’s announcement of its intentions to begin reducing its $85 billion per month programme of credit creation. The withdrawal of funds – known by the jargon quantitative easing – began soon after and has recently been accelerated.

The Fed will have taken many factors into account in the central bank’s decision to reverse the programme of credit creation which – together with the sharp reduction in take-home pay – has been a key factor in the jobless economic “recovery” following the 2007-8 crash. 

Ballooning levels of “margin debt” figured high among the triggers for the decision.  These are investments made with money borrowed on the expectation that the Fed would continue pumping credit into the economy. Indicators suggested that these investments had reached danger levels, threatening another financial collapse.

China’s central bank is also being obliged to follow a similar path. Having fought the global recession with a huge programme of credit-financed construction of cities, roads and railways it recently made tentative steps in opening its borders to volatile international investors.

Some analysts estimate that foreign financial institutions now have almost $1 trillion tied up in the Chinese economy, either as investment in or loans to corporations. George Magnus, senior independent economist at UBS, says that the Chinese banking system resembles that of Japan during the 1980s in the years leading up to that country’s financial crash.

“If the dollar were to appreciate it could cause problems for those banks that have borrowed in dollars. Anywhere you have a banking system that uses a non-domestic currency, there is a possibility of a mismatch that could cause issues when the value of your liabilities runs away from you,” said Magnus.

In China, which became the manufacturing powerhouse for the global corporations in the last century, growth has slowed for 11 of the last 14 quarters. The Markit/HSBC manufacturing Purchasing Managers Index fell to a six-month low of 49.5 in January, suggesting the overall factory sector contracted again from December.

With 50 being the dividing line between growth and contraction, the omens are very bad indeed for a global economy depending on China sucking in raw materials and components and assembling them for sale back to the richer half of the world.

In the US, manufacturing grew at a substantially slower pace last month as new order growth plunged the most in 33 years. Some blamed the severe weather, as if things will improve along with the seasons. So the world’s two biggest economies are in deepening trouble.

Assessing the long-term prospects for humanity including the impact of environmental degradation and climate change, Christine Lagarde, managing director of the International Monetary Fund, is calling for a new Bretton Woods arrangement.

She said in a BBC lecture that such a meeting was needed to restore economic sustainability and reduce global tensions. She was invoking the spirit of multilateralism and a return to the “brotherhood of man” philosophy promoted by economist John Maynard Keynes at the 1944 meeting in the United States.

To this listener her lecture invoked only the spirit of Humpty Dumpty. She would be better off getting ready for global Meltdown II.

Gerry Gold

Economics editor

Osborne's 'recovery' built on sand

Just as the ConDem coalition is trumpeting a “return to growth” – one that is more apparent than real – their hopes for a sustained economic recovery have been shattered by the eruption of new phase of the global crisis.

Late last night Turkey’s central bank joined India’s in emergency measures designed to stem the flight of capital from their countries as investors continue to withdraw funds from “emerging” economies around the world.

In attempting to reverse the collapse of its currency, the lira, and against opposition from prime minister Tayyip Erdogan, who is in the midst of a corruption scandal and desperate to maintain growth in the run-up to an election, Turkey’s central bank raised interest rates to levels which shocked economists, more than doubling its overnight borrowing rate from 3.5 percent to 8 percent.

The Reserve Bank of India’s rate rise of 0.25%, small by comparison, is the third since September. But the country is struggling with 10% inflation, a halving of its projected growth rate to 5% and the value of the rupee falling 11% last year as investors moved their money out of the country. The Congress party government of Manmohan Singh, also battered by a corruption scandal, faces an uphill battle in elections due by May.

These are just two of the countries whose problems were dramatically accentuated by the US Federal Reserve’s decision last month to slow the creation of credit by way of “quantitative easing”, aka printing of money.

The flight of capital was already underway long before the Fed’s decision. Just suggesting the possibility of reducing the $75 billion a month programme of money creation in June 2013 was enough to start the ball rolling. Now it shows all the signs of turning into a rout, a panic.

So-called “emerging” countries are those willing and able to provide global investment funds with favourable high-profit conditions – including cheap labour, low taxes, and government-funded infrastructure. They became the home for trillions of dollars of the new credit, invented in the desperate attempts to resuscitate the world economy following the 2007-8 crash.

Ironically, throughout the half-century leading up to the crash, global corporations had taken advantage of cheap labour by the transfer of manufacturing from the relatively high-wage, richer, “developed” economies to the ultra-low wage economies. In doing so they reversed the competitive drive for productivity which tends to increase the ratio of fixed capital investment to the quantity of labour. The rate of growth of productivity – the quantity of value produced per hour of labour – slowed as a result.

So, globalisation of manufacturing and finance led to two significant results – a slowing in the rate of productivity growth, and far more volatile markets for finance capital, which was invested in easily tradable emerging countries’ bonds and currencies rather than in factories, roads and other infrastructure.

 

In the wake of the crash, capital investment to replace ageing facilities, let alone new manufacturing, came to a virtual standstill. As a result, in 2009, productivity growth turned negative. The emergency rescue measures managed a reversal. A temporary reversal.  The trend has continued downward ever since.

That, in brief is the back-story to the Financial Times’ warning for the ConDem’s absurdly euphoric chancellor Osborne. “Scratch beneath the surface, however,” says the FT’s economics editor “and Britain’s deepest economic challenge just got deeper.

“The problem is that the trend the Bank of England, the Treasury and economists want to see most – an end to productivity stagnation – appears to be absent. In the latest labour market figures… total hours worked grew 1.1%, indicating that output per hour worked fell again in the final quarter.

“Unless Britain’s productivity performance improves, the economy can catch up its lost ground with people working longer and unemployment falling. But once this is done, prosperity will stagnate, as it has for the past six years.”

To say that the dynamism of capital is waning is to put it mildly. Add in the flight of capital from India et al and you have the recipe for another global crash. Whatever the ConDems’ fantasies, capitalism isn’t working and the so-called upturn is built on sand.

Gerry Gold

Economics editor

When a return to 'normal' spells crisis

Gamblers, speculators and investors on the world’s capital markets are watching and wondering what is going to happen now, in the wake of the US Federal Reserves’ decision to begin slowing the growth of credit.

There is widespread concern that the relatively minor reduction of $10bn per month in the US quantitative easing programme - from $85bn to $75bn – will trigger a new, much greater period of volatility than occurred last year, when the proposal for “tapering” was mooted.

The latest World Bank report is couched in terms which attempt to calm and limit precipitate action by the people who manage the world’s capital whilst preserving what they claim are “healthy signs” for the masters of the global economy, if not for the 99%.

Nevertheless the Bank warned that “a severely negative response to the return of monetary policy to normal might lead to capital flows to emerging markets falling by up to 80% for several months.”

Despite its professed humanitarian objectives for eradicating extreme poverty, reducing inequality, improving health and promoting environmental sustainability, in practice the World Bank is a key agency for promoting global capital.

In the 1980s it used a policy of so-called “structural adjustment”, drawing countries hit by crisis into debt dependency in exchange for a damaging involvement in labour-intensive production of commodities for export to the globalising economy. The result was impoverishment for millions.

The Bank became increasingly subject to the demands of corporations which were busy growing into transnational behemoths. In the 1990s it was instrumental in the adoption of the “Washington Consensus”. This involved the dismantling of international controls on capital flows, deregulation of markets, privatisation of public utilities and reducing the independence of national governments.

Now the Bank is attempting to assess the likely consequences of the slowing and ending of five-year post-crash, loose-money global hysteria and to prepare countries for what is to come. Its attempt at being encouraging is hardly convincing, predicting a modest “acceleration” in global growth.

Its assessment of risks and uncertainties provides a more sobering view. In the eurozone area things are particularly gloomy, with the report admitting that there “is still a long road ahead before all of the problems that the global financial crisis laid bare are fully resolved”.

The World Bank acknowledges that the “drivers” of the growth required to come out of recession “remain unclear” and adds: “Moreover with the banking sector still weak and details on a fully fledged banking union still being worked out, the currency bloc remains susceptible to shocks, including a tightening of policy in the United States.”

 

It expresses concern about “significant amounts of spare capacity” that have opened up and “a permanent deterioration in job skills and employability of the jobless”. The report adds: “At the same time, continued sharp credit contractions raise the spectre of deflation, which could exacerbate debt overhang problems and result in a much more muted recovery than considered in the baseline.”

And in China where extreme volumes of credit have limited the slowing of growth since the crash, the Bank warns that “abrupt unwinding of investment in China [there] remains a possibility, which if realised could sharply reduce GDP by 3% or more with significant knock on effects in the region and other economies with close trading linkages”.

Today’s news direct from China won’t be encouraging for the calm, measured approach the World Bank would like to see. The uncontrolled shadow banking sector now accounts for more than 30% of total finance in the world’s second biggest economy, up from 23% a year ago.

There’s a recipe for global volatility, if ever there was one.

Gerry Gold

Economics editor

Global economy faces turbulent 2014

Chancellor George Osborne believes he has found a way to secure continued support from the Tories’ corporate backers while embarrassing Labour sufficiently enough to keep Ed Miliband’s party backing austerity policies into the distant future.

His announcement that another £25 billion of cuts are needed to balance the government’s books and that welfare claimants are the target was a calculated move. His aim, says Osborne, is a smaller state.

Sounding very much like the Tea Party reactionaries in the Republican Party in Washington, Osborne managed to frighten some in his own party who know that

claimants account for a small fraction of welfare spending and wonder where the cuts are going to come from.

But it was music to the ears of the bankers and international moneylenders who finance the UK government’s debt. It provides a guarantee to business that the UK will continue to be a good place to make profits. And it had the desired effect of sending Labour into another spin as they clearly have no alternatives to austerity and support the attack on claimants.

The government also says it intends protect pensions, which is an obvious and cynical attempt at attracting support from the last segment of the population still casting votes. The “triple lock” purports to preserve the value of pension payments by ensuring they rise annually by whichever is the higher of 2.5%, the rate of inflation or average earnings

But the faked appearance of kind-hearted, caring generosity supposedly providing protection from the effects of a further five years of austerity won’t cut much ice amongst the rapidly growing numbers who fare worst amongst all pensioners in the European Union. 

The basic UK state pension of £87.30 a week is equivalent to just 17% of the average wage. Average income for UK pensioners rises to 30% once payments related to earnings are taken into account. But this is still only half the EU average of 60%. The rate is 32.5% in Ireland, 40% in Germany and over 51% in France.

Conditions for pensioners are certain to worsen should the Tories remain in power after the 2015 election, as they ramp up the savage assault on the health and social services so many of the elderly increasingly depend upon and which form a crucial part of their real income.

But whichever flavour of government is in power will be subject to the dramatic changes now beginning to unfold in the global economy. 

The repercussions from the pre-Christmas US Federal Reserve decision to begin a reduction in the rate of credit creation through quantitative easing (QE) will become clearer as the weeks unfold. But the implications are enormous.

The benefits of QE and associated measures in the US have been astonishing for the wealthy but have failed to generate the economic recovery that the Obama administration has been banking on.

The stock market ended 2013 at an all-time high — giving shareholders their biggest annual gain in almost two decades. Corporate profits are at an all-time record peak and expected to grow in 2014. This was achieved by using extreme levels of unemployment to force wages down.

Corporate earnings now represent the largest share of the gross domestic product — and wages the smallest share of GDP — than at any time since records have been kept. And fewer Americans are working than at any time in the past three decades.

The five year post-crash orgy of credit saw $4 trillion dollars pouring into and pumping up stock and property bubbles in the so-called “emerging economies” like the Philippines, Malaysia, Indonesia and Thailand where ultra-cheap labour attracted hot-money investors. 

Watch closely and you could see them burst. Add in the credit chaos engulfing China and you have the makings of a stormy 2014 for the global economy.

Gerry Gold

Economics editor

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

Osborne defends sovereignty of banks not UK citizens

The Treasury is trying to frighten Scots out of voting “Yes” in the 2014 referendum on independence over the question of what a currency union based on the pound would mean. But George Osborne is hardly in any position to lecture others.

Osborne and his crypto-Tory pal Danny Alexander, still nominally a LibDem, are promoting the virtues of a report written by civil servants and academics. The report claims that the “current currency and monetary policy arrangements within the UK serve Scotland well”.

In fact, it is described as “one of the most successful monetary, fiscal and political unions in history”. Leaving aside this sensational claim to a unique place in world history, the sting is in the tail.

The report claims the SNP's preferred option of continuing to use the pound sterling might be rejected by the rest of the UK because it could expose the larger neighbour to risk if Scotland ran into fiscal and financial difficulties.

It concludes that even if a deal could be reached, it would have to include arrangements for Scottish ministers to hand their annual budgets over to Westminster for approval even before they had been voted on at Holyrood.

And it admits that would run both ways, with Scotland wanting some say over British fiscal policy. Bu Con/Dem chancellor Osborne is having none of that. He told an audience of Scottish business people:

"The fundamental political question this analysis provokes is this - why would 58 million citizens give away some of their sovereignty over monetary and potentially other economic policy to five million people in another state?

“Before the rest of the UK could ever agree to enter a formal currency union, any future UK chancellor of the exchequer tied to independence would have to provide the British people with a clear and compelling answer to this question.”

Well maybe the compelling question he should actually answer is, what control do the citizens of any country have over their currency? The answer is, absolutely none. It is outrageous for Osborne of all people to masquerade as the defender of the sovereignty of the citizens of the UK.

The financial sector he serves has created a level of debt that is so uncontrollable that even the global corporations are terrified about the future. The 50% collapse in Tesco pre-tax profits, and bankruptcies in retail are the front end of a collapse in manufacturing that will bring even more downward pressure on wages and working conditions.

And what do governments of nation states, like Britain, mired in an eternal and deepening global crisis do to defend their citizens? Well we know the answer to that. They have so little real control over the economy that they are basically reduced to just two possible actions.

One is to slash public spending in order to try to reduce the deficit. And the other is to print money, introducing liquidity into the economy but at the same time undermining the long-term value of the currency overall.

The real attack on the pound has come from Treasury-authorised quantitative easing in a desperate attempt to shore up the banks. The result is that the majority of us exist every day within a hostile economic and fiscal environment that offers us no security and no control whatsoever.

The real sovereignty question is why do 90% of the people hand control over currency, their public services and their social, political and environmental future to governments who operate on behalf of the minority who stand to gain from the current arrangements? What kind of independence and self-determination do we really have, north or south of the border? To ask the question is to answer it.

This whole independence debate is, not surprisingly, bringing to the fore burning political and economic questions. Neither Osborne nor Scotland’s first minister Alex Salmond have any answers outside of the failed policies they are already pursuing.

Penny Cole

Tell Goldman Sachs to get lost

The cracks in the global economy are widening at a hard-to-grasp rate. Contraction is accelerating in Europe, and growth is slowing in the United States and China, the world’s two largest economies.

One of the key measures of the health of the capitalist economy – Markit’s purchasing managers’ index (PMI) for manufacturing in the eurozone – dipped to a four-month low of 46.5 in April. On this measure anything below 50 means contraction. The composite index for Germany, the eurozone’s largest economy, fell sharply to a six-month low.

Banco de Espana, Spain’s central bank estimates that its country’s GDP was 0.5% lower in the first quarter of 2013 than the same period in 2012. One of the consequences is that migration out of Spain is soaring as people desperate for work move to other parts of Europe.

Greece’s economy is expected to contract a further 5% this year, bringing the total since the crash to 25%. Optimists, with no evidence to support them, hope and pray that the decline will stop there.

Debt levels continue to mount. Overall, eurozone sovereign debt rose to 90.6% of economic output (GDP) last year, the highest on record. Of the four eurozone countries receiving bailout funds only Greece saw its debt levels decrease, from 170% of GDP in 2011 to 157%  – still the highest in the EU. Irish, Spanish and Portuguese debt levels all hit euro-era highs last year, with Portugal close to surpassing Italy as the second most indebted nation in the eurozone.  

Despite all the efforts to arrest the contraction by injecting monstrous amounts of fantasy finance they call “quantitative easing”, and imposing austerity budgets to deal with the debt mountains, some are indicating that the game is up. 

President of the European Commission José Manuel Barroso now believes that the assault on living standards through slashing cuts in government expenditure known as austerity “has reached its limits in many aspects”. Revolt throughout Europe has convinced him that “a policy to be successful not only has to be properly designed. It has to have the minimum of political and social support.”

What his next step might be isn’t clear, apart from lowering the European Central Bank’s base interest rate from its current 0.75%, a move that’s been tried and failed in the US and the UK.

And elsewhere, in the world’s largest economies?

The PMI index for the US fell in April to its weakest level since last November. A similar measure for China dipped to a two-month low at a rate that’s just half a per-cent from contraction territory.

It’s no wonder that the world’s governments are impotent. There are powers greater than all of them. Some 97 of the top 100 multinational corporations pay no corporation tax. So when Goldman Sachs’ chairman and chief executive Lloyd Blankfein says the UK government has to stick to austerity or face the wrath of the markets, you know who actually decides the country’s economic policy.

Amidst the crisis, there’s the best ever opportunity to move to something much better. The capitalist “mode of production”, as Marx called it, has nurtured the social forces who, as he also wrote, have nothing to lose but a world to win. 

For the 99% the question is not how to bring about a recovery for the capitalist system. The best of the global elites have applied their minds to this task and have patently failed.

Instead, let’s look to co-operative, collectively-owned democratically-run productive enterprises like Mondragon in Spain, founded in 1956 and the brand new Vio.me in Northern Greece. These are models we can develop throughout the rest of the economy when we achieve the power to do so. We could begin by telling Goldman Sachs to take a running jump.

Gerry Gold

Economics 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

German corporations demand survival of the fittest

The Eurozone is cracking apart as German-based industrial corporations demand the end of support for poorer, peripheral debt-laden countries so that wages can be forced down. In the back rooms of the financial powerhouses the talk is of leaving Portugal, Ireland, Spain and Belgium to collapse, throwing millions into permanent unemployment.

Why? Because globally co-ordinated attempts to bring the world’s financial institutions back from the brink of Armageddon by printing money, failed to produce anything more than a temporary – and phony – recovery of growth.

Phony, because the figures did nothing to hide the close to 10% unemployment in much of the developed part of the world, rising to 20% in Spain. Phony, because increased manufacturing filled stock levels but didn’t translate into enough increased sales. Phony because investment in China is giving way to inflation and export-dependent growth is slowing there and in India.

And now the debt contagion that is the principal feature of the global capitalist crisis, has spread to local and municipal authorities in the United States and other countries.

More than 100 US cities are already facing the prospect of bankruptcy. American cities and states have debts in total of as much as $2 trillion. In Europe, local and regional government borrowing is expected to reach a historical peak of nearly €1.3tn (£1.1tn) this year.

Cities from Detroit to Madrid are struggling to pay creditors, including providers of basic services such as street cleaning. Last week, Moody's ratings agency warned about a downgrade for the cities of Florence and Barcelona and cut the rating of the Basque country in northern Spain. The debts of Naples, Budapest and Istanbul's have achieved unenviable “junk” status.

You don’t need to try to imagine the consequences. Just look at Detroit. Fifty years ago, Detroit was home to almost 2 million people. Today, many of the once bustling, car-clogged streets of the motor city are largely abandoned. The population is less than half what it was. One in five houses is empty – in some areas it is eight out of ten. Property prices have collapsed to the point where houses can be had for $100, although the average price is $7,500 (£5,000). The city council gives homes away to those prepared to pay the outstanding property taxes.

Now the city authorities, faced with talk of bankruptcy, plan to downsize Detroit by cutting off services, such as policing and sewerage, to large parts of the blighted metropolis in an effort to pressure residents to move to core neighbourhoods of a smaller city.

The mayor of Detroit, Dave Bing, said that his administration cannot afford to go on providing services such as schools, firefighters, buses and rubbish collection to large areas of the city where the population has dropped sharply. The fall in the number of people paying property taxes has left a $300 million hole in the budget.

Bing told the Detroit Free Press that no one will be forced to move but those who remain outside of designated parts of the city "need to understand that they're not going to get the kind of services they require".

In Britain, rising interest rates and declining tax income are hitting hard already, driving the government’s deficit to record levels yet again. This can only intensify the increasingly shaky Coalition’s drive to cut spending, forcing hundreds of thousands out of work.

It couldn’t be clearer. Capitalist society is no longer able to provide the basics of life for the majority. Its replacement cannot come a moment too soon. People’s Assemblies can surely become the organising focus for a new kind of not-for-profit society. Remaking the financial system will be amongst their first tasks.

Gerry Gold
Economics editor

This will be our last blog before the holiday period. We will resume publication on Thursday, 30 December.

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

Crank up the printing machine

Adam Posen, an expert advisor to the US Congress and an influential member of the Bank of England’s monetary policy committee, is urging governments on both sides of the Atlantic to print more money to rescue the economy from impendng disaster.

In the US, Obama is preparing for mid-term elections in November and Posen’s particular worry is about the political consequences of economic collapse. He told a business audience in Hull, England, he said: “Let us not forget that it was sustained high unemployment and austerity, the sense that governments were unresponsive to average people’s dire economic conditions, which led to the rise of extremist intolerant parties in pre-war Europe”.

Posen is right to be worried. The global economy is in its deepest crisis in the wake of conventional and unconventional measures by governments and central banks. Negative interest rates, bailing out bankrupt banks, huge injections of credit borrowed from the money markets, and QE (quantitative easing) – aka printing money – had only a limited, temporary effect. Now it’s game over. Every country is sliding back into recession.

As these conditions mature, they shape the politics of the parties in and aspiring to power, as Posen rightly warns. You can see it in new leader Ed Miliband’s first speech as he sets out to make the British Labour Party acceptable to its capitalist masters. “Growth is our priority,” he declaimed, and “true patriotism is about reducing the debt burden we pass on to our kids.” Makes the hairs on the back of your neck stand up very straight. Or it should do.

So those who express the fear that history will repeat itself, that we’ll see a return to the long depression of the 1930s and the extension of Japan’s continuing 20-year slump to the rest of the world, are getting a hearing.

But there are more strident voices with different, opposed messages. Among them is Liam Halligan, economics editor of the Sunday Telegraph, and chief economist at Prosperity Capital Management, which is a major shareholder in some of the leading companies in Russia, Ukraine and Central Asia.

Halligan first made his mark in the 1990s. As Wikipedia puts it he “was heavily involved in the Russian government’s attempts to stabilise the country’s nascent post-Communist economy”. You might say Halligan turns the old phrase inside out – he puts his mouth where his money is.

Halligan wrote this attention-getting paragraph in his populist weekend column for the Telegraph: “Now, the Western world's policy response amounts to printing money and heaping debts upon debts, while shoving the banking sector's losses on to the general public – and, particularly, their children and grandchildren. This is perhaps the most systematic act of inter-generational theft the world has ever seen. But that's not the point – at least for now. The point for now is that QE and the related fiscal boosts simply are not working.”

Halligan ends his piece warning about the debasement of currencies and calls on Western governments to get tough. His prescription, borrowed from Simon Johnson, a former chief economist of the International Monetary Fund is “to break the financial oligarchy that is blocking essential reform.”

There’s a horrible truth in what Posen and Halligan have to say. The capitalist system at war with itself. The state is in conflict with finance capital which has successfully resisted re-regulation against a backdrop of a global sovereign debt crisis, which the printing of more money can only deepen.

Far from being part of the solution, Ed Miliband and the trade union bureaucrats who got him elected are the problem when it come to mounting serious opposition to Lib-Con cuts and the recession. They are for rescuing the system at any price.

Trade unionists are marching in Brussels today against Euro-wide budget cuts, while a general strike is taking place in Spain. The growing anger of working people deserves a leadership that will go beyond limited actions to settling accounts once and for all with the real problem – the maddened system of capitalism itself.

Gerry Gold
Economics editor

Vuvuzela politics won't beat the banks

On the eve of the G20 meeting in Toronto this weekend, which will see further attempts to bring about a recovery from global economic and financial crisis differences have emerged between the US and Europe. Representatives of the world's 20 richest nations will be arguing over how to "manage their divergence".

US president Barack Obama has criticised the European imposition of austerity programmes of spending cuts and tax increases. At this point, the US is much more concerned with increasing spending to stimulate demand than reducing sovereign debt. This international tension is the political reflection of the battle between opposing teams in the Capitalist Rescue cup.

When the debt-fuelled global financial system went into meltdown in 2008, there was a sudden rush of enthusiasm for a new age of regulation that would, it was said, prevent a recurrence of the conditions that resulted in the worst credit crisis since the 1930s. The ghost of economist John Maynard Keynes was raised from the grave.

In the panic-stricken meantime central banks and governments around the world turned to the injection of ‘liquidity’ in the form of trillions of every currency to prop up the previously hugely profitable but now bankrupt commercial and investment banks and non-bank financial institutions. The marvellous rediscovery of the fool's gold of ‘quantitative easing’, the modern, electronic equivalent of printing money, allowed balance sheets and credit to be further expanded – miraculously treating like with like.

Controversy raged around the world about the actions to be taken over institutions judged ‘too big too fail’. Some were indeed ‘taken over’ by the state. Others were allowed to go to the wall.

Many of the best brains in banking and finance were set to work, tasked with designing a package of measures that would restore a degree of sanity to the madness that had drowned the world in a tsunami of unserviceable credit and debt. The team in favour of regulation, led by the Basel Committee on Banking Supervision, have been on the pitch, slugging it out with their opponents, amongst them the Institute of International Finance. The IIF are worried about the damaging effects of regulation. Basel’s captain Nout Wellink says ‘Raising capital and liquidity standards will reduce the probability of the event of a crisis. We will get greater stability of economic output and associated increases in welfare.” The IIF fought back with a warning that ‘global growth in the eurozone, the US and Japan would be cut by three percentage points between now and 2015 and as a result, 9.7m fewer jobs would be created over the period.’

Amongst the most important of the reforms put forward was to be a return to a more prudent relationship between a bank’s easily available capital assets and the amount of money it lent out.

Despite the chorus of calls for regulation, the pressure for a return to growth continues unabated, and the banks have lost little, if any, of their power. As a result synchronised bubbles and speculative excesses will re-emerge to undermine those who seek to regulate the financial markets.

As the G20 opens, the Financial Times reports that ‘Plans by global regulators to compel banks to set aside billions of dollars in extra capital to cope with future crises are to be pared back after intense lobbying by the industry. The committee is likely to shelve the idea that banks should be forced to maintain a longer term “net stable funding ratio” that aligns the maturity of their assets and liabilities.’

And then comes the bottom line ‘Analysts had also calculated that the Basel III reforms, were they implemented in conjunction with new taxes around the world – such as the liability tax announced by the UK government this week – could have cut a typical bank’s return on equity from 20 per cent to 5 per cent.’ For the capitalists and the masters of finance that would be an entirely unacceptable attack on profitability.

The rest of us need a way of ending the rule of the banks. Protests, resistance, shaking fists or even blasts from the vuvuzela won’t be enough. We need to build the forces which can take the economic and financial systems into social ownership and recast them on a not-profit basis.

Gerry Gold
Economics editor

Not holding back the tide

US President Obama has re-appointed Bob Bernanke as chairman of the US central bank the Federal Reserve for a second four-year term. You can see why.

Bernanke is an expert on the Great Depression, and has sophisticated views about what he sees as policy errors that brought it about following a catastrophic financial crisis. Sounds familiar?

Bernanke is justly famous for the ideas on monetary policy he adopted from Milton Friedman – Margaret Thatcher’s economic mentor. These ideas were a big factor in the introduction of quantitative easing designed to increase the flow of credit (and debt) once interest rates had fallen to zero. “QE”, as it’s become known, is credited with a slight slowdown in the rate of economic deterioration.

It was back in 2002 that Bernanke referred to the use of the ‘helicopter drop’ of paper money directly into the hands of the population, bypassing the banks as a way of restoring demand. Astonishingly, that policy was used for real during the invasion of Iraq.

The effect of his policies can be seen in the White House’s latest estimate of its budget deficit: $2,000bn – that’s $2 trillion - higher over the next 10 years than it had predicted as recently as March.

As the recession drives US unemployment beyond 10%, those losing their homes through foreclosure have spread from the sub-prime mortgage holders in the poorer areas to the middle classes, and the numbers are increasing. Government income from tax is being hit hard, and the cost of the limited benefits that the US states do provide – food stamps and short-term payments to the newly unemployed - is accelerating.

And, despite optimistic predictions about a recovery, the White House’s near-term revised expectation is for the US economy to shrink by 2.8% this year – far worse than its previous estimate of a 1.2% decline.

It’s not just the White House that got it so wrong. The Congressional Budget Office released sharply higher deficit projections predicting the 10-year deficit would reach $7,140bn, some $2,700bn more than it had thought in March. The newly published figures on the rising tide of debt don’t even include the effect of Obama’s latest plans. Bill Gale, a senior economist at the respected Brookings Institution says taking these into account implies a ‘deeply alarming’ deficit increase way in excess of $10 trillion over the next decade.

The only conclusion to be drawn from the latest US figures is that the economy is way beyond the control of Bob Bernanke. Four decades of globalisation have ensured that the financial and economic juggernaut can not be guided, let alone controlled by the pilot of even the world’s most powerful economy.

As the global capitalist crisis deepens, it exposes the absurd optimism – indeed, the helplessness - of those supposedly in charge of putting things right. Indeed, the pink pages of the financial world’s most prestigious daily, The Financial Times, are sprinkled with perplexed mutterings. On the back of this week’s “Fund Management” review, for example, is the headline: “Time to ditch all economic models”. Writer Vince Heaney argues that the “efficient markets hypthothesis”, - the EMH, has a “lack of relevance to how financial markets actually work”. In other words, the Friedman-Thatcherite-New Labour dogma that market forces must be allowed to prevail has been exposed as a formula for disaster. Heaney goes on to warn of coming “extreme events” in the financial markets.

Bernanke’s middle name is ‘Shalom’. It means peace, but don’t expect it anytime soon.

Gerry Gold
Economics Editor

If it can't be fixed, scrap it!

At the end of last week, Lord Mandelson, the authentic, unelected voice of global capital within the New Labour government, stated what he saw as the “simple problem”. He was making a bid for supranational influence in Washington, in a speech entitled “Can we fix globalisation?".

He put it like this: “The stability of the global economy is the sum of sovereign national macroeconomic policies on interest rates, currency levels, domestic spending and demand. There is no mechanism to mediate between these policies or enforce action that would counter systemic risk, in financial markets or at the general level of the global economy.”

Mandelson, who is now effectively deputy prime minister after saving Gordon Brown’s skin, couldn’t have put it clearer: the whole thing is beyond control. Capital does what it has to do, regardless of what policymakers and wonks want. Take pensions, for example. Employers now see their contributions as a major cost to be cut at a time of crisis.

Yesterday, the Organisation for Economic Cooperation and Development warned that the destruction of the value of both private and public pensions threatened to turn the two year financial crisis into a “social crisis lasting decades”. An OECD survey found that private pension plans lost 23% of their value last year, while higher unemployment “leaves little room for more generous public pensions”. At the same time, accountancy firm PricewaterhouseCoopers revealed that for the first time many firms are planning to end their final-salary pension schemes for existing staff as well as new entrants.

What, you may ask, about the total of $5,000bn (about £3,000bn or £3 trillion) already pumped into banks and pledged by governments to stimulate their own economies? Even if you discount the fact, according to Kroll, the world’s leading risk consultancy, in the rush to spend the money, more than $500 billion – at least a tenth of the total - will be lost to fraud and bribery it’s still a load of cash. Surely all that money is doing its job, freeing the credit markets and restarting investment? Surely the upturn is on the way?

No, it isn’t.

The World Bank, another global agency with no power at all to fix the crisis, projects that the world economy will now contract 2.9%, seriously worse than its forecast of a minus 1.75% just three months ago in March.

Capital inflows to developing countries will turn sharply down, says the report, falling by a shocking 75%, leading to a 50% contraction in industrial outputs. Germany, Japan and South Korea are heavily dependent on capital intensive exports to economies like Russia, China and Hungary, so will suffer badly from the reciprocal effect of the accelerating downturn. Shares in Russia have crashed 20% this month already, and its banking system has all but ceased lending due to growing fears about a second wave of financial crisis that could hit the banking sector later this year.

Meanwhile, back in the UK, 16 weeks have passed since the Bank of England began “quantitative easing” after Alistair Darling authorised the creation of £150 billion of new money, widely trumpeted as the last throw of the financial dice. So far, £96 billion has been spent, of which £93.5 billion was used to buy “gilts”, which means it was not lent to industry for capital investment but lent to the government.

But it isn’t working. Overall, lending to private, non-financial companies fell by an average of £1 billion over each of the past six months. It’s OK though, Alistair’s capitalist friends haven’t gone empty-handed. They’ve had £750 million in the form of corporate bonds. It’s amazing how they’ve got away with it for so long, and it’s high time they were stopped. The simple truth is that the capitalist system cannot be “fixed” and instead would benefit from a unique scrappage project much more radical than the one introduced to try and boost car sales.

Gerry Gold
Economics editor

As dole queues grow, so does case for regime change

As the exam period ends in the UK, young people surging through the gates of schools and colleges will be looking for jobs. But with jobs disappearing and unemployment predicted to surge for months to come as a result of the crisis of capitalism, they’ll mostly be disappointed.

The number of people in work fell by 271,000 over the three months to April to 29.11 million, the biggest quarterly drop since comparable records began in 1971. Unemployment rose to 2.261 million in the same period, the highest since November 1996. A third of a million jobs are forecast to go in the public sector in the next period as mass unemployment becomes a reality.

Those still with jobs are just beginning to discover the real meaning of the global economic meltdown following decades of credit-led growth. For capitalist society, the inescapable elimination of productive capacity means millions of people become surplus to requirements and those in work must face an unprecedented ratcheting-up in the levels of exploitation. Wages must fall, working hours must increase, and benefits must be slashed.

Having announced a £401 million loss for 2008, British Airways this week intensified its assault on its employees. As well as eliminating 6,500 jobs since last summer, last month it invited staff to shift to part-time working or take up to a year’s unpaid leave. Now it wants them to volunteer to work without pay for up to a month as their contribution to the airline’s survival. The deadline for volunteering ends next Wednesday. No doubt BA has a plan for something more brutal if too few line up to cut their own throats.

It was just this kind of brutality – and far worse is to come - that was implied when the Bank of England, trying to slow the economic disintegration, was forced to resort to the occult art of “quantitative easing” at the beginning of March. It reached behind the ear of a mesmerised audience and found not just one golden egg – but £125 billion of new money which it poured into the already troubled economy, lending much of it to the government in the form of new debt. In the US, the Federal Reserve has similarly increased the amount of money in circulation by a huge 16.5% in the last year.

But debt, and its opposite credit of all kinds – of which currency is just one – comes with a heavy cost. All credit is a promise to pay, and the value needed to make the payments comes from only one place – people with jobs. When central banks around the world turned to quantitative easing, apparently detaching money from its role as a measure of value, they set off a chain reaction. In reality it meant that the state took on the responsibility of ensuring that the repayment of the debt and its interest will be forcibly extracted from the remnants of the working population for decades to come as the cost of rescuing the system from collapse.

If the capitalist system is to survive, it means that rights to object will also have to be eliminated. And it is these objective forces that destabilise the political process, strip away the democratic mask of parliamentary government, push the BNP forward, encourage racist attacks on Romanians in Belfast, and bring the threat of nuclear exchanges back on to the agenda.

In Iran, a new generation without jobs have led the spectacular upsurge against a reactionary regime. We need to mobilise young jobless in Britain to inspire a revolutionary transformation of a regime led by New Labour that throws people on to the scrapheap straight from school and replace it with a society that puts people’s needs ahead of profits.

Gerry Gold
Economics editor

New improved 'fantasy finance' fuels the crisis

The maelstrom of scandal and political in-fighting that is shaking the New Labour government to its foundations – who knows what other ministers may have resigned by the time you read this – is fuelling the fires of the global crisis of capitalism.

The political meltdown, with its constitutional consequences, has added new dimensions to the economic, financial and ecological hydra-headed mother of all crises. Each of its parts is interacting and adversely affecting the others.

Just the suggestion that Brown would replace Chancellor Alistair Darling with Ed Balls, for example, triggered a negative reaction on the financial markets. The political crisis in the UK is undermining its credit rating – and hence its ability to raise new funds. So Darling is staying on at the Treasury to try and calm the markets if nothing else because it’s either borrow or bust (or should that be borrow and bust?).

Capitalist governments have been competing with each other in their zeal to replace decades of kow-towing to the free market demands of transnational corporations with supersized versions of Keynesian-style intervention to try and get the economy moving.

It’s easy to lose sight of the reason for all of this frenetic activity. The over-riding motivating force is a hopeless endeavour – trying to reverse the inevitable collapse of consumer demand which has exposed the mountains of overproduced commodities and production overcapacity.

To pay for it, treasuries have been pumping more oil on the fire, offering government bonds to the gamblers in the global casino and adding zeroes to their own balance sheets – simply by printing money, aka quantitative easing - to finance the issue of “new, improved” fantasy finance.

In doing so, they are attempting to burden generations to come of their increasingly unemployed populations with unsustainable levels of tax, whilst preparing to greatly reduce spending on health, education, pensions, social services, and the benefits on which tens of millions depend.

According to the Organisation for Economic Co-operation and Development, governments will this year attempt to issue almost $12,000 billion of debt, up from $9,000 billion two years ago (and many times the level a decade ago.) The US alone is projected to sell almost $8,000bn.

The weakest links are showing signs of breaking, however. In Latvia, a bond auction on Wednesday which saw no bidders triggered a minor panic in Eastern European markets. Latvia's economy is set to contract by 18 per cent this year and unemployment is soaring. Already in May, the credit ratings agency Standard and Poor issued a warning reducing the UK government’s triple-A credit rating from stable to negative adversely affecting its ability to raise funds to bridge the gap.

According to the Financial Time’s Martin Wolf, real spending in the UK is forecast to rise by 7.2 per cent alone this year, while the value of goods and services produced shrinks by a (probably over-optimistic) 2.75 per cent. This is the vice that the capitalist system is caught in. It’s also the recipe for hyper-inflation in the near future.

Wolf puts the scale of the problem in its historical context: “A financial implosion can do fiscal damage comparable to that of a sizeable war. Indeed, this is quite likely to prove the fourth most adverse fiscal event since 1800, after the second world war, the first world war and the Napoleonic wars.”

It is time to acknowledge that the cost to ordinary working people of repairing the broken system of production for profit will be just too great, just as the burden of New Labour is too heavy for society to carry. The combined political and economic crisis offers tremendous opportunities to shake not just the Brown government but the entire edifice of the capitalist system. Let’s not miss it.



Gerry Gold
Economics editor

Bankrupt - economically and politically

So now we have it – Britain is officially on the verge of state bankruptcy. And we’re not just talking high finance here but politics as well. This coincidence of the gravest economic and financial crisis of capitalism with the constitutional impasse at Westminster is truly an explosive cocktail.

The assessment by ratings agency Standard & Poor that the British state could lose its top AAA rating because its borrowing levels are too high, sent shock waves through the markets yesterday. This was the despite the fact that S & P’s assessment was based on figures already made known about public debt, which goes to show just how fragile and nervous the financial markets remain.

They have good reason to be. Figures published by the Bank of England almost at the same time as S & P was delivering its judgement, show that printing money in a bid to ease the credit crunch has had little or no effect. The Bank's Trends in Lending report showed that lending by Britain's major banks to businesses and households actually slowed in April. It seems that the £125 billion injected into the system by the Bank has disappeared down a financial black hole.

It’s the same story across the Atlantic, where that other great debtor nation in the global economy has just witnessed the collapse of another major bank, BankUnited in Florida, which was declared insolvent by the Federal authorities. The closure came just hours after Alan Greenspan, former chairman of the Federal Reserve, the US central bank, warned that the global banking crisis was far from over. Greenspan, of course, presided over – no encouraged – the untrammelled, unregulated explosion of the financial system until it became a world of fantasy finance.

The consequences of the ongoing crash are all too obvious. Thousands more British Airways staff are set to be fired as a result of the company’s catastrophic £400 million losses for the year, with chief executive Willie Walsh saying he saw "no signs of recovery anywhere". Others are more dramatic in their assessment. Martin Wolf, the Financial Times’ senior commentator, said the “the fiscal costs of this crisis will be comparable to those of a big war”, adding: “Thursday’s threatened downgrade by Standard & Poor’s is a reminder of those costs. Loss of jobs and incomes will also scar the lives of hundreds of millions of people around the world.”

As far as the S & P verdict is concerned, there is no doubt that huge public spending cuts are on being prepared – whoever wins the next election – because no way is the economy going to “recover” anytime soon and produce the increased tax revenues that would reduce the debt that itself results from bank bail-outs and a slump in economic activity.

The combination of a state edging towards bankruptcy that is planning to slash services and a political system that is rotten to the core, is not only dangerous – it is unacceptable. There is an urgent need to reorganise both the economy and create a new democratic politics, because action on jobs and spending can only be achieved at the level of the state.

Clearly, however, the present capitalist state system is increasingly paralysed by its own crisis and where it has acted in terms of bank bail-outs and printing of money, has made no essential difference in preventing economic meltdown. The background danger is that sinister forces lurking in the background will act of their own accord unless we can mobilise a viable challenge to the status quo with a view to carrying through a fundamental transformation of a failed economic and political system.

Paul Feldman
AWTW communications 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