Capital's busted flush
The bourgeoisie has no answers to the continuing economic crisis, writes Eddie Ford
Over the last month the headlines have been dominated by the UK riots and events in Libya. However, nothing can hide the fact that the global economy stands on the brink of a severe recession, if not a calamitous slump. Far from the situation improving over recent weeks, it has further deteriorated - as reality overtakes the hype. Nothing has actually been done to prevent the spread of toxic debt or avert economic crisis. Instead, all we have had so far is just smoke and mirrors.
Almost despairingly, Josef Ackermann, head of Deutsche Bank, said the current levels of volatility “reminds one of the autumn of 2008” - the dark days following the Lehman Brothers disaster, when for a moment it looked like the entire capitalist banking/financial system was about to collapse. He also warned that “numerous” smaller banks will go to the wall if they were forced to book their losses on stricken sovereign bonds. Similarly, the Institute of International Finance - essentially a lobby group representing the big global lenders - has stated that there is a “growing risk” that the financial markets and the real economy could become locked in an intractable, self-reinforcing spiral downwards resembling that of 2007-09. So it looks like Credit Crunch 2 is almost upon us.
This new round of abject despondency was triggered by the latest unemployment figures from the United States. Released on September 2, they made for very depressing reading indeed. Though many analysts were expecting at least 75,000 new jobs to have been created last month, not a single net post was added in August - an omen of recession if ever there was one. Just to keep up with the growth in the working-age population, the US economy needs to add around 150,000 to 200,000 new jobs each month to bring the unemployment rate down. But it remained at 9.1% last month and official statistics for the second quarter revealed a sharp slowdown in economic growth to just 1% - marking a retrenchment since the end of last year, when growth averaged above 3%. Now there is growing pressure on president Barack Obama to launch a re-stimulus package for the economy and also on the Federal Reserve to initiate a new round of quantitative easing.
Inevitably, global markets plunged in response to the stream of bad news emanating from the US - coming as it did on top of the increasing concerns about Europe’s continuing debt crisis and mounting evidence of a continent-wide drift towards recession. Hence we saw investor flight into assets perceived as risk-free. The FTSE 100 index went down by 3.5%, wiping out £49 billion and extending the losses since the publication of the US jobless figures to £82 billion. Markets elsewhere in Europe suffered even bigger falls, with Germany’s Dax index of leading shares shedding more than 5% - its lowest level in two years. France and Italy also saw share price falls of around 5% and Japan’s Nikkei index also fell 2.2% to a six-month low.
Significantly, banks were among the biggest losers, with the partially nationalised Royal Bank of Scotland’s shares down more than 12% - a contributory factor being that it is widely thought to be extremely vulnerable to liability claims made by the US federal housing finance agency over the subprime mortgage scandal. Meanwhile, shares in Lloyds and Barclays fell by 7.5% and 6.7% respectively. The Stoxx Europe 600 banking index fell to its lowest level for 29 months.
Correspondingly, gold prices reached new highs. German government bonds made strong gains too, as did - yet again - the safe Swiss franc; too safe, in fact. So on September 6 a worried Swiss National Bank announced that it was setting a minimum exchange rate with the euro, saying that it will no longer tolerate a rate below 1.20 francs per euro. Indeed, the SNB declared that it was prepared to buy foreign currency in “unlimited quantities” if necessary, as the franc’s overvaluation posed an “acute threat to the Swiss economy” and “carries the risk of a deflationary development”.
Just as alarmingly, though quite predictably, the bond yields on Italian and Spanish government debt this week started to creep up again to the ‘danger zone’. It was only a month ago that the European Central Bank launched a frantic rescue mission and bought up some €22 billion-worth of Italian and Spanish government bonds. Yet now, once again, the nightmare scenario is resurfacing - having to bail out Spain and Italy, to one degree or another, in order to salvage the ailing euro zone project. Or just let them go under. Both options are unacceptable, of course, but life itself will eventually force the European Union leaders - sooner being more advisable than later - to make some sort of decision either way.
There is chronic indecisiveness everywhere in the EU. The nervous and increasingly febrile markets can sense a storm coming, a feeling reinforced by the fact that there has been a steep slowdown in the euro zone economy during the second quarter due to a combination of government cuts and a drop in consumer spending.
Eurostat, the EU’s official statistics agency, stated on September 6 that the combined GDP growth of the euro zone’s 17 member-countries slowed to 0.2% in the April-June period - down from the 0.8% experienced in the first three months of the year. Furthermore, EU officials expect growth to slow down even more as a result of high oil prices in the first half of the year and the general financial market turmoil - some expecting the euro zone economy to only grow by 0.1% percent in the third quarter and come to an actual halt in the fourth.
But the reality may be even worse than that. A closer examination reveals that France’s growth rate, if that is the right term, ground to a complete halt in the spring - with government officials rushing around like madmen to soothe investor concerns that the country could be the next major economy to lose its coveted triple-A credit rating. In Germany, the supposed powerhouse of the EU, the economy ‘grew’ by just 0.1% between April and June - and the estimate for German economic growth in the first quarter of the year was revised down to 1.3% from a previous estimate of 1.5%. News that Germany’s ruling party lost another regional election on September 4 only helped to cast further doubt over Europe’s ability to agree on a viable solution to the debt problems.
No wonder alarm bells are ringing - something has to be done. In particular, more voices are being raised doubting the wisdom of pushing ahead with all the various austerity programmes, which look more and more like an act of collective economic suicide. Hence the president of the World Bank, Robert Zoellick, warned that the drive to cut national deficits across Europe could “sink” the region’s economic recovery - as the hope that perhaps we can somehow “muddle through” by a magical emergence of “financing and liquidity” rapidly fades away. More stridently still, Christine Lagarde, the IMF’s managing director, starkly declared that the global economy faced a “threatening downward spiral” if it did not abandon fiscal austerity and instead switch to “growth-intensive measures”. More concretely, Lagarde said it was essential to recapitalise banks so as to “avert contagion” and “withstand the risks linked to the debt crisis and weak growth”. In other words, do an about-turn before it is too late.
Not being miraculously immune from the economic retardation in the US and the euro zone, the UK is also sliding into recession - with chancellor George Osborne looking less like a wonder boy every day. The services sector, which accounts for about 70% of the economy, suffered its worse slowdown since the 2001 foot-and-mouth crisis, according to a survey. The seasonally adjusted index, which measures activity across the sector, fell to 51.1 in August from 55.4 in July - worse than even in the weeks following the Lehman Brothers collapse.
To add to the misery, more UK high street shops face closure after a dive in consumer spending left retail sales down in August, compared to the same month last year. Thus new data from the British Retail Consortium shows a fall of 0.6% in sales last month, which could prove fatal for many shops after a slow spring and summer. The BRC blamed a decline in “consumer confidence”, high inflation and a “squeeze” on personal finances. And we all know that forecasts for GDP growth have been steadily falling since data showing the economy grew by just 0.2% in the second quarter - with UK manufacturing experiencing in June a 0.4% decline in production, and the trade gap rising to £8.87 billion. Not looking good, captain George.
What does all this add up to? Quite simple really - an economy on course for a double-dip recession. Therefore, will Osborne will do a fiscal U-turn? After all, slower growth - if any - means lower tax receipts and higher bills for welfare, not exactly conducive to a muscular programme of deficit debt reduction. However, like the captain of the Titanic, Osborne insisted that the government would stick “unwaveringly” to its austerity plans - he would not be slowing down the pace of public spending cuts (or, it seems, introducing a drop in the 50p top rate of income tax). Though even Osborne was forced to admit that the long-term damage caused to the economy by the renewed credit crunch was forcing him to “revise down” estimates for growth that were already weak. But naturally he blamed the fourth downgrade since the coalition came to power 16 months ago on the legacy of Labour rule - maybe he will do that right to the very end, providing prime minister Miliband or Balls with some wry amusement as they wave the coalition government goodbye.
The recent economic crisis has laid bare the thoroughly irrational and self-destructive nature of capitalism - it stares at you in the face from every headline. In turn, this has generated a rash of existential articles in the mainstream press about Marxism and socialism in general - maybe it is not all quixotic madness peddled by starry-eyed utopians who have never adjusted to the real world.
Charles Moore, the ultra-conservative former editor of The Daily Telegraph, confessed that he was “starting to think that the left might actually be right” about the free market being a “set-up”. Yes, he writes, the “greater freedom to borrow which began in the 1980s was good for most people” - but “when loans become the means by which millions finance mere consumption, that is different”. Rather, “as the left always claims”, the global banking system is an “adventure playground for the participants, complete with spongy, health-and-safety-approved flooring so that they bounce when they fall off” - and, he ruefully notes, “the role of the rest of us is simply to pay”.
As for the plight of the euro, for Moore this “could have been designed by a leftwing propagandist as a satire of how money-power works” - a single currency is created and “no democratic institution with any authority watches over it”. Rubbing salt in the wound, when the euro zone’s borrowings run into trouble, “elected governments must submit to almost any indignity rather than let bankers get hurt”. Sounding almost outraged, Moore asks: “What about the workers? They must lose their jobs in Porto and Piraeus and Punchestown and Poggibonsi so that bankers in Frankfurt and bureaucrats in Brussels may sleep easily in their beds.”
Similar views were expounded by the misanthropically inclined philosopher, John Gray, on BBC radio 4. Karl Marx “may have been wrong about communism”, Gray ventures, but he was “prophetically right” in his “grasp of the revolution of capitalism” - and not merely about “capitalism’s endemic instability” and its “creative destruction”, though in this regard Marx was “far more perceptive than most economists in his day and ours”. But “more profoundly”, Gray argues, Marx “understood how capitalism destroys its own social base” - which is “the middle class way of life” - by plunging “the middle classes into something like the precarious existence of the hard-pressed workers of his time”. Meaning, Gray moans, that “more and more people live from day to day with little idea of what the future may bring” and “in the process of creative destruction the ladder has been kicked away and for increasing numbers of people a middle class existence is no longer even an aspiration”. As a consequence, Gray concludes, we - the middle class or otherwise - “have very little effective control over the course of our lives” and we end up living in a society that is “being continuously transformed by market forces”; where “traditional values are dysfunctional” and “anyone who tries to live by them risks ending up on the scrapheap”.
Needless to say, the likes of Moore and Gray have no intention quite yet of deserting to the ranks of the proletariat. Their new-found, but highly selective, ‘appreciation’ of Marx is more a warning to the establishment to get its act together - or risk being swept away by the swinish rabble. When they look at the current left they just laugh - and, as the CPGB is the first to admit, they are quite right to do so. Moore, for one, believes that “conservatism will be saved, as has so often been the case in the past, by the stupidity of the left”. Given our track record, his hopes are not entirely without foundation.
For all that though, such comments show the malaise that is afflicting official society - which is running out of answers. Nothing appears to be working and the bourgeoisie is scared of ‘turning Japanese’. Capitalism is in a big hole, but all it can do is keep digging; more austerity, more cuts, more retrenchment. No viable plans, no future - a busted flush.
- The Daily Telegraph July 22.