From Socialist Review, May 2009.
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Copied with thanks from the Socialist Review Website.
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The media greeted the London G20 Summit as a great success and declared it to be “the day the world came together to fight recession with a plan for economic recovery and reform”. Chris Harman looks at what lies behind the hype and the so called solutions put forward
According to Barack Obama the London G20 Summit was “historic” and “a turning point”. Did it in fact represent an answer to the deepening crisis?
The meeting did not at all measure up to the claims made for it. So, for instance, Gordon Brown, out to claim glory for himself, spoke of it deciding on a “fiscal stimulus” that was the largest “the world has ever seen”, amounting to $5,000 billion, with a new $1,100 billion “programme of support to restore credit, growth and jobs in the world economy”. In fact, as the Financial Times (FT) pointed out the next day, “the $1,100 billion pledged included re-announcements and half-done deals,” and, “of the $500 billion of money pledged to the IMF to bolster struggling economies, some had already been announced and $250 billion was a pledge of future funds”.
Commentators strongly committed to the bolstering up of capitalism were deeply pessimistic. According to FT columnist Wolfgang Munchau, “For the first time since the crisis erupted two years ago, global leaders went a few millimetres beyond what was expected of them. But the London summit comprehensively failed to do what it set out to do. Not one of its resolutions will move the world a small step closer to resolving the global economic crisis.”
Martin Wolf, another FT columnist, had the same response: “Did the meeting of the Group of 20 in London last week put the world economy on the path of sustainable recovery? The answer is no.”
But stock exchanges did rise after the meeting. Obama says there are now “glimmers of hope” and Ben Bernanke of the US Federal Reserve claims there are “tentative signs” of the sharp decline in economic activity slowing.
On the very day that Obama made his statement the Organisation for Economic Cooperation and Development (OECD), the intergovernmental research body, issued a report saying that “leading indicators for the top economies continue to point to a strong slowdown in every one of the 11 major economies monitored”.
It expects “economic activity in the OECD area” to plummet by an average of 4.3 percent in 2009 and unemployment rates in many countries to reach double figures by the end of next year “for the first time since the early 1990s”.
Another 610,000 Americans went on the dole in April. US industrial production is down by 12.8 percent on a year ago. In Europe it is down 18.4 percent and in Japan a massive 38 percent.
But the huge amounts of government money must have had some effect?
It is necessary to distinguish between the vast sums given to the banks to stop them going bust and the sums used in “stimulus packages” – that is, to provide a market for the goods and services which firms provide.
According to the OECD these “discretionary” stimulus measures will on average boost gross domestic product by just 0.5 percent in 2009 and 2010. On top of this there are, it is true, “non-discretionary” increases in government spending – for instance, spending that rises automatically with rising unemployment, like dole and social security payments.
The spending is bound to have some effect. But it is not going to stop the ricochet effect of the crisis across the economy. When someone loses their job the dole payments do not nearly make up the loss in buying power from not getting a wage – and that means that the market for things produced by other people contracts and they risk losing their jobs as well.
Added to this is the way in which firms try to protect their profits from the crisis by wage freezes and wage cuts. One person’s wage cut is a reduced market for the goods produced by someone else and a threat to their job.
What is quantitative easing and what role does it play?
It amounts in effect to governments printing money by making credit available to banks and corporations at zero interest rates. This is meant to encourage them either to spend on investment themselves or to lend to others to do so. It is also intended to hold down interest rates generally to such a low level that people see no point in saving. But it cannot work if firms and individuals think they have to hang on to every penny they can get their hands on if they are not to end up broke.
Economists distinguish between “liquidity” and “solvency” problems. Liquidity problems occur when you cannot pay a bill because you have not yet got the money which someone else is definitely going to pay you at some point in the relatively near future. In that case, the money a firm or bank can get through “quantitative easing” helps. Solvency problems arise when you owe more than is owed to you. In that case quantitative easing is no help at all.
The banks that went bust last year suffered from solvency problems. They had borrowed in order to lend for the buying of property in the belief that the prices would rise indefinitely. When house and property prices started to fall they suddenly could not pay their own debts. And when one bank went bust, the others that had lent to it were hit in turn. Governments have given money to the banks in the hope that they would then have enough reserves (their “capital”) to fill up any holes in their balance sheets. Now quantitative easing is meant to get the banks lending again.
Is it working?
One sign of the insanity of the system is that no one has any way of knowing. Even those at the top of each bank do not know how many of the loans they have made in the past are recoverable and, therefore, whether they can pay back what they themselves owe. And when they suspect things might go wrong, they have every incentive to keep that secret in the hope that they can borrow more to get themselves out of trouble.
So there are very different estimates of what the losses of the US banks are – $400 billion, $800 billion, and $1,600 billion. If it is the first figure, then the money poured into the banking system will be enough to get it working again. If it is the last figure, then there will be more big bank collapses and a further qualitative worsening of the crisis.
Some important establishment voices fear the worst and conclude that nationalisation of whole banking systems may be the only way to save capitalism from itself.
James Baker was in Ronald Reagan’s and George Bush senior’s governments. “Most proposals advanced thus far”, he writes, “assume that, once confidence in financial markets is restored, banks will recover. But if their assumption is wrong, we risk perpetuating US zombie banks and suffering a lost American decade.” His conclusion is that the state may have to take actions, including wiping out bank shareholders, that go against his whole political philosophy: “I abhor the idea of government ownership – either partial or full – even if only temporary. Unfortunately, we may have no choice.”
But the bank shareholders are very powerful and will do their utmost to resist any such move. And they expect to get the support of all those who are worried by any threat to the divine rights of private property. Fear of such reactions has prevented the “liberals” in Obama’s administration and Congress even hinting at proposals that Republicans like Baker think may be inevitable.
Instead of making clear decisions the US government has been carrying out “stress tests” on the largest banks – a policy which, according to FT Washington correspondent Edward Luce, amounts to pushing “back the day of reckoning in order to buy some breathing space”.
Munchau argues that “governments are now in a wait and see mode – wait until those existing stimulus packages kick in, and see how the economy responds.” While they wait and see, the toll of job losses can only grow greater.
So is no recovery possible?
Supporters of the system always try to console themselves with the thought that every previous crisis of the system has eventually come to an end. But it can take an awfully long time. It took a decade of economic devastation and the worst war humanity had known for the system to resume its old growth in the 1930s.
The sheer size of the stimulus packages means they can hardly avoid having some impact. But there are intractable problems.
The first is that any recovery depends on a lot of big capitalists deciding the profits to be made by investing and taking on workers are going to be large enough to offset the risks involved. But even the bubble years were not sufficient to raise the level of productive investment to any great degree.
Figures from radical economists Robert Brenner, David Kotz, Anwar Shaikh and others suggest profitability has only ever partially recovered after falling to a very low level a quarter of a century ago. And the recovery has been based on reducing the share of wages and salary in national income, so reducing the ability of people to buy all the goods the economy is capable of producing. Booms came to depend on short-lived speculative bubbles as a result.
Recent calculations by the mainstream financial adviser Andrew Smithers suggest US industrial profits were artificially boosted over the last decade by 22 percent by including in them speculative rises in real estate values. The bosses of every corporation had an incentive to puff up its profits artificially to justify their enormous salaries and bonuses through share options and so on. Now the bubble has burst the truth about real profitability is coming home with a vengeance – witness the enormous problems of General Motors. The automatic recovery mechanisms in the economy are very weak indeed.
But can’t they find a way of returning to profitability?
Historically the fact that some very big companies went bust could solve the problem of profitability for others. These could buy their plant and equipment on the cheap. But if big companies go bust today, it can cause such damage that their competitors suffer as well. Even right wing governments regard them as “too big to fail” and bail them out. That stops a devastating collapse of whole economies, but by the same token prevents quick recovery from the crisis and forces governments to try to bring this about with stimulus packages.
What other problems are there with them?
The effects of the packages are limited because the crisis is global, but they are national.
One important factor in the crisis was the increasing imbalance over the last two decades within the world economy. The US, Britain and smaller countries like Ireland, and the eastern European states became increasingly dependent on debt to pay for all the things their governments and people bought. A lot of the lending came via the banks from the profits made in economies of other countries like China, Japan and Germany – and these profits in turn come from exports to the US, Britain, etc that were paid for out of the debt. It was this merry-go-round of lending and borrowing that allowed the greed of the bankers to lose touch with reality during the bubble.
Now the different ways governments are responding to the crisis are re-creating the imbalances and can at best lead to a short-lived bubble. The British and US governments are borrowing to pay for stimulus packages, while the continental European economies are doing much less and hoping that their capitalists can rely on exports to the US. The Chinese and the Japanese do have big stimulus packages, but still rely on exports, while other countries like Britain are relying on the fall in the international value of their currencies to help them export.
The point is that each government is reacting to pressures from the big domestically based companies and even the biggest multinationals rely to a very large extent upon one national economy and its government for their production, sales and profits. But this means the thing the governments cannot do is cooperate to arrive at a scheme for rebalancing the global economy. That explains the bitter wrangles behind the scenes at the G20.
The French and German governments were in effect saying that all the US and Britain were interested in was restoring the power of their banking systems to dominate other countries. The US and Britain were saying all the Germans and the French were interested in was exporting at their expense. The Chinese were blaming the US for the crisis. The US was blaming the Chinese for keeping down the value of their currency, the yuan, so as to undercut others in world markets.
As a result even hardline supporters of the system like Wolf think that any recovery in the medium term will not be able to last long. He complains that “the world is on a path towards an unsustainable recovery. An unsustainable recovery might be better than none, but it is not good enough.” Others are even more pessimistic.
Is this why there was fear of the summit falling apart?
The ability of any government to protect its nationally based multinationals depends on its ability to throw its weight about internationally. The US government especially faces a major problem in this respect. The attempt to guarantee the 21st century as “a new American century” has backfired through its military setbacks in Iraq and Afghanistan. So even seasoned US warmongers see the need for Obama to have a softer attitude towards Iran, Russia, and even Venezuela and Cuba. But at the same time, the crisis means US capitalists need a powerful US state to be able to push their interests even more than in the past. That explains the increase in the number of US troops sent into Afghanistan, the spread of the Afghan war in Pakistan and the maintenance of 50,000 troops in Iraq supposedly for “training” purposes.
At the same time, other powers are trying to take advantage of the weakening of the US to assert themselves, with Chinese moves into Africa and the Russian government’s assertion of its influence over former republics of the USSR that were close to the US. The way national economies are being wrecked by the crisis adds to the tensions in all these regions. So new flare-ups are possible at any time in South Asia, central Asia, eastern Europe, the Middle East or north east Africa.
Hilary Clinton has always been a warmonger. She showed this by voting for the Iraq war and supporting the occupation. Now all the pressure will be on Obama to become one as well. In fact, in bombing villages in Pakistan, he already is one even if his language is still much less ferocious than that of Bush.
What are the prospects here in Britain?
The recession is going to get worse. Even the CBI, which made a much publicised claim that “the worst of the recession” is “over”, actually expects the economy to contract by 3.9 percent this year – greater than its previous forecast of 3.3 percent. That translates into terrible devastation of the lives of a further million people and their families through unemployment. It also signifies for millions more wage freezes and pay cuts at a time when the increased food and energy prices of last year are still with us, whatever the official figures might say.
But as well as the recession, there is the cost of paying for the money poured into the banks. Calculations by the International Monetary Fund suggest the cost to the government of all British bank support is 13 percent of GDP, or £200 billion. Martin Wolf thinks this is “too optimistic”.
“Certainly, together with the costs of the economic slump, an increase of well over 50 percentage points in the ratio of public sector debt to GDP is highly likely,” continues Wolf. “Such are the wages of financial mania. They would be similar to the fiscal costs of a war.” In other words, the cost of covering the losses made by the banks works out as a minimum of over £3,000 for every man, woman and child in the country.
All the mainstream political parties reject any notion of this cost being paid for out of profits. Instead it is going to come from people losing pension entitlement in the public sector, from interest levels on mortgage repayments that are, on average, much higher than the interest banks pay to borrow from the government and, above all, from cuts in public expenditure. There was a trailer for some of these in the budget, but the effort will be to impose much harsher ones.
The FT last month examined in great detail the sorts of cuts which could be imposed. Suggestions included a clampdown on spending on the NHS and education, a complete public sector wage freeze, reducing public sector pension entitlements, making people pay to see a doctor, and means testing old people’s winter fuel allowances, bus passes and free prescriptions.
The softening up process for such attacks has already started with the incessant media campaign about the supposed privilege of working in the public sector.
But surely such cuts would reduce people’s ability to buy things and make the crisis worse?
Certainly. That is why some economists talk about a “W-shaped” recession, with partial recovery followed by a further downward plunge, and warn of the dangers this poses to capitalism. We have a classical case of the capitalist class not knowing which way to turn to deal with a crisis produced by its own system. This will translate into new political crises, with different sections of ruling classes rowing publicly with each other while tens of millions of embittered people at the base of society try to find some way to express their anger. We are in for a period of political and social as well as economic flux.
Last updated on 27 December 2009