It's the system, stupid

A sketchy deal on spending cuts which allow the US debt ceiling to be raised is no more than an acknowledgement that law-makers in even the world’s largest national economy can make little if any impact on the deepening crisis.

The credit ratings agencies whose pronouncements are treated as holy gospel say that the America’s AAA rating won’t last. And it’s easy to see why. US debt, already at a staggering $13 trillion, is forecast to rise without pause through to 2016.

As it does so, the cost of financing the debt will have to come out of current budgets, leading to further cuts in health and welfare benefits. Political turmoil in Washington, with Barack Obama looking increasingly like a lame duck, one-term president, only adds to the sense of crisis.

Stock markets nose-dived on news of the vague compromise which, like the UK Coalition’s savage austerity programme, is founded on false expectations of growth. Market speculators immediately turned their attention back to Europe, driving up borrowing rates once again for Italy, where Berlusconi has called an emergency meeting, and Spain, where prime minister Zapatero yesterday postponed his holiday to deal with the crisis.

Throughout the post-war period, the world economy grew as it had to if profits were to be maintained, but the global trend in the rate of that growth has been relentlessly downward. Throughout the period of globalisation a series of ever sharper, deeper and more extensive crises saw the rate plummet and then recover, but the recovery was always weaker than the crash.

During 2007/8, when a series of individual mortgage defaults undermined the extreme fragility of the global house of cards built from credit and debt, the growth rate threatened to turn negative for the first time. This prompted the panic which saw governments and central banks flood the world with more credit, which as debt has now rebounded with such devastating effect.

Sovereign debt quickly overtook private and corporate debt, and now all are in the same boat – with the rudder entangled in a net of credit default swaps, holed below the water line and sinking fast towards a collective default. The long-hoped for “return to growth” is just that – a hope.

Reports on manufacturing this week reveal that output is not just slowing badly in the US the world’s largest producer, but actually shrinking in China, the world’s second largest, and in the UK – the seventh largest.

The universal consequences of the crisis and attempts to fix it include inflation boosted by fantasy finance and unemployment as public bodies cut spending. Corporations respond in their usual ruthless way in a desperate bid to maintain profits.

Foxconn, the world's largest maker of computer components which assembles products for Apple, Sony and Nokia, is in the spotlight after a string of suicides of workers at its massive Chinese plants, blamed on harsh working conditions. The Taiwan-based company currently employs 1.2 million people, with

most of them working on the Chinese mainland.

The corporation’s classic response is contained in its plans to introduce a million robots to its production lines over the next three years to cut rising labour costs and improve efficiency. If it is successful, the products it turns out will be highly competitive, but will flood onto a declining market as the global economy slows further. And because labour is the source of all value, the rate of profit on the whole operation will shrink dramatically.

It’s just another example of the inescapable, contradictory logic that ensures that in the midst of a crisis – and this is unarguably the worst in the short history of capitalist society - any attempt to fix things has exactly the opposite effect. In the 1992 US presidential election campaign, Bill Clinton taunted his opponent with the phrase “it’s the economy, stupid”. Actually, it’s the system, stupid.

Gerry Gold

Economics editor

Greece is the first domino to fall

The global debt crisis has claimed its first sovereign state victim in the shape of Greece, which has effectively defaulted on its international loans. It won’t be the only country to suffer this fate or its population the last to feel its social impact.

The eurozone’s political heavyweights Germany and France sealed Greece’s fate last night when they agreed that private holders of Greek’s mammoth debt will take a hit of €50 billion over three years. Whether the banks and bond holders in the firing line will do so quietly is another question, however.

Not even achieving an agreement in Brussels can paper over the deep divisions between Bonn and Paris about how to prevent the collapse of the euro as a trading currency or prevent financial contagion moving on to other economies like Spain and Italy.

All the 17 eurozone governments could agree was that a "controlled" failure was the only way to prevent the collapse of the single currency and a global financial rout. In the end, the figures are meaningless and only add to the debt mountain facing Greece.

Athens will get another bailout package totalling €159bn. This is on top of the €110bn “rescue package” agreed less than two months ago. The country’s debt is by various manoeuvres, including subsidising interest rates, cut by a quarter.

So get this straight. You give someone more money to pay back existing debt, adding to the total outstanding, extend the repayment period by decades and ask some lenders, including the European Central Bank, to take less in return.

That’s the world of fantasy finance that was built by the banks and has now been adopted as the way to go by governments.

Refinancing is clearly a miracle cure of our age! Shame this arrangement is only available to states facing bankruptcy and not individual households running out of money for housing, food, transport and energy.

The deal means that banks could be forced overnight to write down as losses billions of euros in losses on Greek debts, leaving them short of capital. Financial experts say the

the debt restructuring could also trigger payouts on billions of dollars of credit derivative contracts, used to hedge against or speculate on a Greek default

The emergency summit was accompanied by a truckload of wishful thinking. Dutch Prime Minister Mark Rutte said: "We have thus sent a clear signal to the markets by showing our determination to stem the crisis and turn the tide in Greece, thereby securing the future of the savings, pensions and jobs of our citizens all over Europe."

What has actually happened is that the “peripheral” economies like Greece, Ireland and Portugal are being cut adrift or reduced to vassal states to buy up goods produced in northern Europe. The European Union is beginning to resemble a corporate empire with cheap labour subsidiaries disguised as countries.

France pushed through a plan to create the European eqivalent of the International Monetary Fund and there was agreement for most countries to rein in their spending to protect the euro. It won’t be enough to hold back a crisis generated by mountains of debt built up in every sector over decades.

As Reuters correspondent Felix Salmon noted: “Overall, this looks like a deal which can quite easily be scaled up and used as a framework for future default/restructurings … But there’s nothing here to reassure holders of Portuguese and Irish bonds — or even Spanish and Italian bonds, for that matter — that they’re home safe. Greece will be the first EU country to default on its debt. But I doubt it’ll be the last.”

The second wave of the global financial crisis that has shaken global capitalism is under way and is certain to be much more devastating than the first shock of 2008.

Paul Feldman

Communications editor

Crisis is alll pain and no gain for workers

The crisis in Greece, which comes to a head today with the vote in parliament to impose further massive cuts, also marks four years since the mother of all financial bubbles burst.

The post-war expansion of credit that funded globalisation showed itself to be unsustainable when the effects of the credit crunch emerged into the open in 2007. Attempts to limit the effects of a global collapse of production with colossal amounts of credit invented by governments and central banks simply spread responsibility for the problem.

Toxic debt was in effect transferred from a failing system of global financial and manufacturing corporations to sovereign states which are, in turn, forcing it on to their increasingly resistant populations. In Greece, an estimated 80% are against “austerity” measures being forced through.

On a global scale, contradictory pressures are at work. Growth is giving way to contraction. The hard line views of the Bank for International Settlements (BIS) are in the ascendant, causing consternation amongst softer, liberal Keynesians, like Martin Wolf of the Financial Times, and Adam Posen, a member of the Bank of England’s influential Monetary Policy Committee

The real message from the BIS in its annual report published this week is precisely the opposite of a confident recovery. Challenges left in the aftermath of the 2007/8 crisis require further actions that will most certainly produce a severe contraction. That is what they are intended to achieve.

Challenges are grouped under several headings. At the top of the list is public sector debt. The BIS believes that governments have hardly begun bringing debt down to “sustainable levels”. In addition to short-term measures, pension schemes and social benefits will have to go. “Governments that put off addressing their fiscal problems run a risk of being punished both suddenly and harshly,” the report warns.

Next comes private sector debt. In the United States and Europe, households, financial and non-financial firms are still drowning in debt, despite millions of repossessions, massive write-offs, the disappearance of many financial and retail institutions, and mass unemployment across the world. Once again they’ve only made a start.

“Growth during the pre-crisis years was heavily weighted towards finance and construction. In a number of countries, these sectors grew disproportionately to the rest of the economy and now have to shrink. [emphasis added]. Like most adjustments, it will be painful in the short run. Not only will this reallocation impose suffering on the people who worked and invested in those sectors, it will weigh on aggregate growth and public revenues as well.”

The BIS sees the need for globally co-ordinated action to deal with “global imbalances in financial flows”. As the report states: “The financial crisis showed us that the build-up of gross investment positions can lead to substantial currency, liquidity and other mismatches that can propagate and magnify shocks, creating damaging volatility in the international financial system.”

But they are whistling in the wind if they think that governments have any more hope of controlling the movement of capital corporate interests after the crisis than before.

And then there’s the problem of monetary policy. “Unconventional actions” including negative real interest rates and quantitative easing – central banks inventing credit to lend money to governments - have led directly to soaring inflation, especially in food and fuel. The BIS “solution”? Monetary easing must be reined in and interest rates must rise – especially in the UK. As soon as they do house-buyers in Britain will be facing a tsunami of house repossessions.

Fixing the aftermath of the global capitalist crisis is too painful for countless millions to bear. The workers of Greece are saying they’ve had enough and are not prepared to sacrifice living standards further on the altar of creditors and their profits. Up to 750,000 workers in Britain go on strike tomorrow, defying both the ConDems and Labour, in defence of hard-won pensions which are being cut to reduce the budget deficit. The message is clear: We can’t be doing with this unsustainable, ruthless system any more.

Gerry Gold
Economics editor

For the TUC and Miliband, resistance is futile

As the coalition puts the finishing touches to next week’s budget cuts, which are certain to devastate services and jobs, you might wonder what the trade union leadership and the Labour Party are up to. Keeping their heads down, is the answer.

While French unions battle the Sarkozy government over pension cuts, our very own Trades Union Congress has called a lobby of Parliament for the day before the cuts are made public. Why then, you might ask? It’s because they don’t want loads of angry workers turning up outside of the Commons once they’ve heard the bad news.

As for a lobby, that is really going to frighten the Lib-Con government! Nothing like seeing your MP and asking him or her to oppose the cuts, to put the fear of God into elected representatives.

And that’s it as far as the TUC is concerned. Perhaps they’ll be a demonstration in March next year, probably on a Saturday to avoid workers having to strike to be there. For the main part, the most dramatic changes to public services and the role of the state will be implemented without official opposition.

When it comes to Labour under Ed Miliband – or should that be Millipede? – they might as well be part of the coalition. Miliband has already spoken out against holding strikes against the cuts and agrees that the budget deficit has to be reduced.

By blocking Ed Balls from becoming shadow chancellor, the job he coveted most, Miliband revealed his hand. Balls’ view is that the government is cutting too much of the deficit too quickly. His argument, essentially, is that the cuts are not really necessary. By giving the job to Alan Johnson, a man who on his own admission knows little about economics, Miliband moved closer to the coalition’s policy.

The reason for this is not hard to fathom. Miliband, Balls, Yvette Cooper and other senior members of the shadow cabinet, fully signed up to the New Labour project. At its heart, was the acceptance that market-driven, globalised capitalism is the only game in town. Whatever you do, don’t upset the bankers.

And, despite the collapse of the banks and the subsequent recession, this is what they still believe. That is their ideology, their world outlook. So when the Tories step up the creation of more Academy schools, raise tuition fees and introduce a market framework in the NHS, they are building on what Miliband and others did in government.

This is the political reality as Britain staggers on towards a further banking crisis and with a national debt that is eating up £70 billion a year in interest rates alone. The International Monetary Fund has revealed the startling prospect that US and European banks need to refinance around about £2.75 trillion in debt over 2011 and 2012. The IMF also repeated its claim that European banks were still hiding losses off their balance sheets, having written down only around a quarter of expected losses.

And guess which country is in the worst position? You’ve worked it out. Britain’s banks need to refinance to the tune of £800 billion over the next two years, nearly a third of the refinancing the IMF has identified. With state finances looking like a sea of red, the idea of another bailout – should the banks, as is almost certain, be unable to refinance on their own – looks highly improbable.

All sorts of political scenarios are possible in such an emergency, including a national government. One that can be safely ruled out is the idea of Miliband’s party doing anything other than rushing to the aid of the capitalist system, as they did in 2008. For them, resistance is futile. For the majority, it’s the only option.


Paul Feldman
Communications editor

The crisis and spending cuts: cause and effect

The Lib Dem-Tory government stands accused of making cuts in public spending that are purely “ideologically driven”, that are “unnecessary” and being carried through just to please their rich City friends.

In launching the Coalition of Resistance in The Guardian this week, former Labour cabinet minister Tony Benn wrote: “We reject these cuts as simply malicious ideological vandalism, hitting the most vulnerable the hardest.”

In the same spirit, writer and blogger Richard Seymour claims that “there is no urgent need to pay off Britain’s debts”, and that the cuts agenda was driven by big business interests. This view is shared by many trade union leaders.

If, as is suggested, the Coalition’s intentions are essentially “ideological” and not necessary, it follows that they can be stopped in their tracks and even reversed by a great deal of protest and systematic opposition.

After all, the cuts are but a policy decision taken by a right-wing government when there are other options available. Or so it is implied. So if sufficient pressure is applied, the Coalition might be persuaded to change course.

This is the first of several difficulties with this approach. It helps to foster the illusion that the Coalition could be for turning and that there are more rational, progressive options available.

Nor is it true that all sections of business support the cuts programme. There are at least 1 million private sector jobs that are dependent on public sector contracts who are already losing out, while the risk of plunging the economy deeper into recession are very real.

What is sidestepped and even ignored is the profound and deepening crisis of the capitalist system as a whole as the source of the cuts. In fact, the term “capitalism” isn’t used by Benn once in his otherwise forthright appeal to come together to fight the cuts.

The truth is that the budget crisis facing Britain is but one aspect of the great unravelling of decades of debt that sustained the global economy and the financial system.

Debt increased at every level, from consumers to companies to banks to whole countries. A survey by the McKinsey Global Institute found that average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008. In Iceland and Ireland, debt-to-GDP ratios reached 1,200% and 700% respectively.

In 2007, the bubble began to burst when poor Americans were unable to pay for their subprime mortgages. The following year, the global financial system went to the edge of collapse, plunging capitalist economies into a deep recession which is worsening.

Even The Economist had to acknowledge the connection. In a special edition on debt, the magazine acknowledged: “Hyman Minsky… argued that these debt crises were both inherent in the capitalist system and cyclical. Prosperous times encourage individuals and companies to take on more risk, meaning more debt. Initially such speculation is successful and encourages others to follow suit; eventually credit is extended to those who will be able to repay the debt only if asset prices keep rising (a succinct description of the subprime-lending boom). In the end the pyramid collapses.”

There is, therefore, a material cause-effect relationship between the crisis of the system as a whole and the mountains of debt that leave the British state having to find £40 billion a year in interest payments on government bonds. Attempts to buck financial markets failed in Greece, Ireland and Spain, which led all the major British parties to pledge substantial cuts during the election campaign

Capitalism has to drive down living standards to sustain the profit system and the cuts are part of this onslaught. We don’t need to try and find a substitute budget to help capitalism out of its problems. The challenge is to develop an alternative to capitalism itself and build a coalition of forces to challenge for state power through a network of People’s Assemblies.

Paul Feldman
Communications editor

On a knife edge

Share markets around the world suffered another roller-coaster day yesterday as nervous traders decided it was a good time to sell. Everything points to the most dangerous moment for global capitalism since the autumn 2008 meltdown.

Many and varied reasons are being cited by the traders who sold (and later bought) shares during the day, moving huge sums to (relatively) safer places, including US Treasuries and German government bonds.

The Financial Times’ Chris Giles blamed Europe’s sovereign debt crisis, which, he said, “sent shock waves across the world as it proved that the recovery from the great recession was neither steady nor guaranteed.” It sounds authoritative and convincing.

"The main reason for the fall in South Korea, is the risk of war with North Korea," said Kim Joong-hyun, a strategist at Shinhan Investment in Seoul. The warship was sunk two months ago, on March 26, and North Korea’s leader Kim Jong Il has now severed all communications with the South.

The US Dow Jones sank below 10,000 due it was said, to disappointing news of falling house prices. New regulations on US financial institutions are adding to the problems, threatening banking profits. Credit in the US has been shrinking for two years - overall bank lending is down more than 20% percent from where it began 2009 - and Obama’s legislation has been under way for months.

In London, the FTSE 100 index of Britain's biggest companies dropped 2.5%, falling below the 5,000 mark to 4938. It was shadowed downward by markets in Germany, France and Spain. Here the reason given for the collapse was an instruction from the International Monetary Fund to Spain’s government to sort out its bankrupt banking sector. At the weekend, the Bank of Spain seized Cajasur, a small but troubled savings bank and trade unions have started preparations for a general strike.

Each of these and many other different localised “explanations” for market movements reveal aspects of the crisis in each region of the global economy. Others are searching for a connecting thread. Washington Post staff writers Howard Schneider and Neil Irwin believe they have found one in the realm of politics:

“The knife-edge psychology currently governing global markets has put the future of the US economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.”

They suggest that one false move could lead to a sovereign default in Europe, adding: “Bank holdings of European debt are now being studied with the same focus given to holdings of US mortgage-backed securities as the global financial crisis unfolded in 2008 - and with the same suspicion that problems in one part of the world could wreck others.”

What they are describing is a universal crisis of the capitalist system, brought about by decades of attempts to offset falling rates of profit with pumped up balloons of credit- and debt-led growth. Politicians and states are struggling in vain to keep up with the unravelling that began two years ago.

The crisis makes its appearance in the realms of the economy, in international relations, in the crisis of the democracy and the state, in the tipping of the planet’s ecosystems into irreversible changes, and in the degrading commodification of culture.

Many new people joined A World to Win on the revolutionary road at our conference last weekend because not one of these parts of the crisis can be resolved on its own or within the economic and political framework of capitalism. You should make the same choice.

Gerry Gold

Economics editor

Something's got to give

Economic storms continue to batter countries throughout Europe as their governments struggle vainly to keep their heads above the tsunami of debt.

After weeks of wrangling among the eurozone countries an agreement was reached on a support package staving off state bankruptcy for Greece and the collapse of the euro. Backing from the International Monetary Fund and the European Central Bank was judged sufficient for the country’s government to return to selling its debt on the international bond markets to raise the cash needed to fund its monumental deficit.

But international investors are yet to be convinced by the Greek government’s ability to impose its programme of further austerity measures on its unwilling population. The 5.9 per cent interest payments needed to attract buyers for its latest €5 billion issue turned out to be much higher than was hoped for.

Now the additional costs will have to be passed on in the form of deeper “structural reforms” which are certain to further destabilise the already volatile political crisis and intensify the conflict with the Greek trade unions.

Meanwhile, on Europe’s western extremity, Ireland’s National Asset Management Agency began operations yesterday as the country’s “bad bank”, buying up the “impaired assets” that litter the country in the wake of the global financial meltdown and continuing recession.

NAMA is just one part of the Irish government’s attempt to steady its economy, which has suffered the most severe contraction of any industrialised country: the value of annual national output shrank by a cumulative 12 per cent in the three years to 2009.

The basic idea is that NAMA will buy up the banks’ bad debts and valueless property, in the process cleaning up the economy so that those left standing can return to the old game of turning a profit.

But there were shocks in store when NAMA announced the scale of the operation. It has counted up the face value of the toxic debts in the economy and arrived at a figure of €81 billion, which is equivalent to almost half the total value of all goods and services produced in the country in 2009.

The new agency is highly experimental. Nobody knows if what it is supposed to do will work. The terms of its first round of purchases stunned the markets. It is buying property-based loans with a book value of €16 billion. But NAMA has the power to set its own price, and it has awarded itself a discount of 47% based on the current market value. The agency is set to become the owner of hundreds of pubs, empty office blocks, abandoned shopping centres and acres of unused farmland, as well half-finished housing projects abandoned by bankrupt speculative builders.

As part of the deal, the newly state-owned Irish banks are required to restock their capital balances after years of floating on thin air. They are €32 billion short, so they’ll have to sell off their valuable assets in the US, the UK and Poland. This action will reverberate throughout the world.

In the meantime just like Greece, Portugal, Spain, the UK the US, and a growing list of countries facing up to state bankruptcy, Ireland has to set about reducing its budget deficit which is the second largest in the eurozone after Greece’s. Something’s got to give - and it is already. The British state is apparently preparing for emergency political measures in the event of a hung Parliament after the upcoming general election to prevent a run on the pound. We'd be well advised to prepare for all eventualities ourselves.

Gerry Gold
Economics editor

In thrall to the markets

Governments across the world are engaged in a beauty contest judged by the ratings agencies which pronounce on their credit-worthiness, and the hedge funds which decide whether a country’s debt – its bond issues - are worth buying.

The closer a country like Greece, or Portugal, or Spain or the UK gets to defaulting on its debts, the more it applies the make-up to hide its decay. Greek prime minister George Papandreou is engaged in a two-pronged shadow play. It is designed to stop the bankrupt country’s ancient monuments – essential to the tourist industry from which the country derives much of it income – from falling into the hands of its creditors.

In act one of the country’s financial tragedy, Papandreou is implementing the first tranche of a broad austerity programme of savage cuts and tax increases. Act two is a world tour to gather support for a campaign to regulate the use of credit default swaps and other derivatives by speculators gambling on the likelihood of a default.

But Papandreou is himself gambling. His campaign is a populist move intended to deflect the anger of the still-powerful Greek trade unions that once supported his party PASOK. But the Greek workers are having none of it.

In protest against the planned austerity measures, Greek tax and rubbish collectors walked off their jobs for a second day on Monday. The country's two main unions have urged more than a million civil servants and private sector workers to strike today. This second general strike in as many weeks is set to paralyse much of the country.

Meanwhile, in Portugal, similar plans sparked a strike by civil servants which shut schools, courts and hospitals on March 4 in actions supported by 80% of the membership. In its historic referendum, the population of Iceland has resoundingly rejected the terms for repaying the debt guarantees for Icesave depositors held by the British and Dutch governments.

Public and private sector employers across the world are responding to the recession by driving up productivity and cutting labour costs. As a two-day strike by 270,000 UK public sector workers over cuts in redundancy pay came to an end on Tuesday, the threat was growing of action over the Easter holiday by British Airways cabin crews over pay cuts, and rail maintenance workers and signallers over job reductions and changes to working conditions.

In the United States, the economic shakeout is driving the rate of exploitation to record levels. Official figures show that in 2009, productivity rose 3.8% from 2008, while unit labour costs fell 1.7%, a record pace of contraction. There are surely limits to what American workers can stand. Trouble is brewing already at American Airlines.

Everyday brings new shocks that surprise and disappoint those who search for signs of recovery. The UK’s declining exports and widening trade deficit despite a 25% decline in the relative value of the pound, are just the latest in a long line of figures that lead it inexorably to join the sovereign debt crisis on the way to full-blown state bankruptcy. No wonder Gordon Brown today admitted that there were “substantial risks ahead” for the economy.

The financial markets are relying on New Labour and/or the Tories to deal with the public spending deficit at the expense of ordinary people. Brown’s denials on this subject should be taken with a pinch of salt. Capitalism is cornered in country after country and is fighting back the only way it knows how. The increasing resistance by workers around the world has to point towards the strengthening of international alliances on the road to putting capital out of business once and for all.

Gerry Gold
Economics editor

The mirage in Dubai

Dubai was a property dream literally built on sand and borrowed money, where the rich could enjoy the sun and watch their assets soar in value. But like so much of recent capitalism, it has proved more mirage than substance.

Dubai World, the emirate’s main holding company, has asked for a six-month debt holiday from international bond holders because this oil-free state simply doesn’t have the cash. Result? Turmoil on world stock markets has returned with a vengeance as investors consider whether Dubai’s virtual default is the beginning of another round of the global financial crisis.

This is a story about a “boom” based on debt. Sounds familiar? It ought to because it’s a microcosm of how the consumer boom in the advanced capitalist countries was financed.

In a bid to emulate its oil-rich neighbours, Dubai borrowed heavily to build up a non-oil economy based on property, trade and tourism. The estimated total debt is estimated at $80 billion, although no one knows for sure.

Hotels soared into the sky, luxury homes were built on man-made lagoon islands and no expense was spared to build a ski slope. The environmental cost of making snow in Dubai is mind boggling.

Dubai doubled in size and house prices almost quadrupled in 2002-07, since when property prices have halved. Trade and tourism has suffered because of the recession and plans for turning Dubai into a regional financial centre have come to grief in the midst of the global credit crunch.

Today the cranes stand idle as construction projects have ground to halt. Skyscrapers are empty and apparently the airport parking lot is full of cars abandoned by expatriates who have lost their shirts in the property crash.

Graham Turner, of consultancy GFC Economics, said: "It gives you a picture of the fact that credit problem persists, despite everything that's been done. Despite having oil, it's still the case that many of these countries had explosive credit growth. It's very clear that in 2010, we've got plenty more problems in store."

That’s putting it mildly Graham! The near-collapse of the financial system in 2008 was only avoided by reducing interest rates to almost zero, printing vast quantities of electronic money and building up record levels of government deficits. Far from “restoring growth”, these measures have failed to prevent unemployment from soaring, especially in the United States. Many banks, notably in Germany, are still in some difficulties and the non-performing debt still overhanging the financial system is incalculable.

The amount of new money sloshing around the system has also fuelled a stock market boom, where share prices have soared by 50%. Andrew Clare, professor of asset management at Cass Business School, said: "I just don't understand the basis for the market rally: equity prices had gone too far. Investors are underpricing all the risks that are out there, and this is just one of them. Some of those risks are going to come home to roost, and this is just the first.

"And next year they're going to have the shock of realising that interest rates can go up as well as down; and you've also got places like the UK, where taxes are going to have to go up and public spending will have to be cut – and the US, too, has some difficult decisions to make."

Behind Dubai come countries like Ireland, Ukraine and Greece with sovereign debt they may not be able to repay. The United Kingdom won’t be far behind either. Dubai’s is not the only economy built on sand, speculation and other people’s money.

Paul Feldman
Communications editor