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New phase in the great recession
Capitalist strategists are filled with gloom at
the prospect of a new economic downturn. Fear of recession in the US,
its credit rating downgrade and political dysfunction, not to mention
the ongoing eurozone crisis, Japanese stagnation and slowdown in China,
have all led to convulsions on world stock markets. LYNN WALSH reports.
THE WORLD ECONOMY appears to be sliding into a
‘double-dip’ recession or, more accurately, a continuation of the ‘great
recession’ of 2008-09, following a feeble ‘recovery’ in 2010. The
advanced capitalist countries are most severely affected, but the
brightly burning furnaces of the semi-developed giants of China, India
and Brazil (so-called ‘emerging markets’) are beginning to flicker.
Until recently, signs of a slowdown which appeared in the second quarter
of 2011 were regarded by many capitalist commentators as merely a ‘soft
patch’. But the outlook changed dramatically with the convulsions in
global stock exchanges during the first three weeks of August.
Trillions of dollars were wiped off the value of
shares, with bank shares being especially hit. This is in spite of the
high profits garnered by big business in the last period, and their huge
cash reserves. The volatility and sharp decline – not at this stage a
crash – reflect fear of an economic downturn and a collapse of profits
in the future. Huge amounts of money have been taken out of company
shares and transferred to so-called ‘safe havens’. In the first three
weeks of August, $42 billion was taken out of equity funds. Financial
institutions and big investors have moved from shares to government
bonds (notably the US and Japan), to gold (pushed up to almost $1,900 an
ounce), and cash deposits in Switzerland (Swiss banks are now charging
fees for deposits, effectively a negative interest rate!).
The stock exchange volatility was triggered by a
series of events, all interconnected and symptomatic of an underlying
slowdown in the global economy. One financial analyst described the
situation as "an imperfect storm of downgrades, rumours, lacklustre
macroeconomic data and the ongoing eurozone debt crisis [which]
transformed a retreat by investors into something approaching a
stampede". (Financial Times, 13 August) Investors fled from risk and
sought ‘safe havens’.
The confidence of investors internationally was
shaken by the struggle between Barack Obama and the US Congress over
raising the country’s debt limit and the subsequent downgrading by
Standard & Poor’s (S&P) of the US government’s credit status. The battle
over the $14.5 trillion national debt highlighted the dysfunctional
character of the US political process. A minority of Tea Party
Republicans appeared ready to plunge the country into default rather
than accept even very limited tax increases on the wealthy to help
reduce the deficit. While many commentators regarded a US default as
‘inconceivable’, others were not so sure.
In downgrading the US debt status from AAA to AA+,
the rating agency S&P referred not only to the absolute level of debt
but the dysfunctional process. "The effectiveness, stability, and
predictability of American policy-making and political institutions have
weakened at a time of ongoing fiscal and economic challenges", S&P wrote
in its downgrade report. The rating agency Fitch later confirmed the
US’s AAA rating. In any case, when shares plunged funds poured into US
Treasury bonds, despite S&P’s downgrade. The US is still seen as a safe
haven, even when T-bond yields are reduced to record lows. However, the
episode has clearly left its mark: "Once unthinkable things have
happened, such as the US losing its AAA rating", commented an analyst at
Barclay’s Capital. "Investors are literally feeling the earth shifting
under their feet; you just don’t know what else you thought of as rock
solid might turn out to be untrue". (Reuters, 15 August)
Temporary fixes
BY EARLY AUGUST it was clear that the 21 July deal
agreed by eurozone leaders had far from resolved the eurozone crisis.
Renewed fears of defaults in eurozone government bonds were also leading
to doubts about banks believed to be holding large quantities of
sovereign debt. The situation was intensified by a statement from José
Manuel Barroso, head of the European Commission, who said there was "a
growing concern among investors about the systemic capacity of the [eurozone]
area to respond to the evolving crisis". This statement, in itself,
intensified the turmoil on bond markets.
It had been agreed that Greece should be given
another loan of €109 billion. However, this, as with other sections of
the deal, is subject to approval by the national governments or
parliaments of the 17 eurozone members. There are growing doubts as to
whether even the German parliament, the Bundestag, will ratify the
agreement. Moreover, Finland has subsequently demanded that Greece
provides collateral (security) in the form of certain assets (not so far
specified publicly) to guarantee their share of the new loan. This opens
up the possibility of other eurozone governments demanding similar
collateral, which could make the loan financially unviable or
politically unacceptable for cash-strapped Greece.
The summit also agreed to extend the powers of
intervention of the European Financial Stability Facility (EFSF), but
did not raise the very modest €440 billion funds available. Again, any
real extension of EFSF powers depends on the approval of national
parliaments.
This situation led to renewed, intensive speculation
against the bonds of some eurozone governments and also the shares of
banks holding euro bonds. This was not so much directed, at this stage,
against the bonds of Greece, Portugal and Ireland because the European
Central Bank (ECB) had – somewhat reluctantly – already been intervening
to buy their bonds, thus sustaining their prices.
Speculators, however, began to bet on a fall in the
prices of the sovereign bonds of Italy, Spain and later France. This
speculation began to drive up the borrowing costs of these countries. It
also brought a sharp fall in the share prices of major banks. Notably,
there was an especially sharp fall in shares of the French bank, Société
Générale, following rumours (in the Daily Mail) that it was in trouble.
A major crisis in eurozone sovereign debt/banking
was averted by a u-turn in ECB policy. Under pressure from Germany and
France, the ECB agreed to start buying the bonds of Spain, Italy and
France to sustain their price and ward off speculators. This has
temporarily stabilised the position. But it is far from clear how much
longer the ECB will continue this intervention. Some members of the ECB
board are openly opposed to this policy, as is the Bundesbank. Once
again, there is a temporary fix to the ongoing eurozone crisis, not a
resolution.
In recent weeks there have also been renewed fears
of a new round of banking crisis. Since 2008 some banks have reduced
their debts and increased their capital reserves. Others, however, are
still heavily weighed down by bad debts and may not have sufficient
reserves to withstand another major downturn. But the position of
different banks is far from transparent. This has resulted in a growing
reluctance of banks to lend to one another through interbank money
markets. News that one unnamed European bank had borrowed 500 million US
dollars from the ECB sparked rumours that a major bank was in trouble
and had been refused funding by US banks. As a result of this and other
incidents, banks have increasingly been depositing their spare cash with
central banks, even though this pays lower interest rates than the
commercial money-market funds. While not yet as severe as in 2008, this
trend carries the threat of a new credit squeeze like that of 2008, with
banks being reluctant to lend to any customers perceived as risky.
Above all, however, it was the accumulating reports
of a slowdown in the major capitalist economies that triggered the stock
exchange falls. In the US, GDP growth fell to 0.8% (annualised) compared
to 3% last year. Around 24 million workers are looking for full-time
jobs. Moreover, a recent survey of manufacturing in Pennsylvania and New
Jersey predicts a sharp decline in coming months.
In Japan, growth has declined for the third
consecutive quarter, falling 0.3% in the second quarter of 2011. The
rising value of the yen against the US dollar, propelled by the influx
of cash in search of a safe haven, will make Japan’s exports more
expensive, further cutting across growth. In Britain, the economy is
stagnant, depressed by the austerity measures of the Con-Dem government.
The economies of the two largest eurozone countries, Germany and France,
are also stagnant. Even German growth, previously the most dynamic, has
ground to a halt. This is partly the result of weak domestic demand
(with a severe squeeze on wage levels in recent years) and, most
significantly, a decline in exports to China (down 12%). Overall
eurozone industrial output for May and June, moreover, declined by 0.7%.
In Greece, as a result of savage austerity measures, the economy is
likely to decline by 5% this year. The outlook is bleak and the slide in
share prices reinforces the gloom. "Market crashes stoke a negative
spiral". (Financial Times editorial, 20 August)
A new credit squeeze?
THE NEW DOWNTURN is a prolongation of the 2008-09
recession, but a new phase of the crisis with different features. This
time, it is not the banks and shadow banking network that have
precipitated a broader economic crisis, but an economic slowdown which,
together with the sovereign debt crisis, has precipitated a new phase of
banking crisis. Although the position of most banks does not appear to
be as bad as in 2008, there is the distinct possibility of a new credit
squeeze as bank lending dries up. Some banks themselves would be hit by
such a squeeze, and further bank failures certainly cannot be ruled out.
From the end of 2009 until early 2011 there was a
feeble, uneven recovery. It depended on a number of factors. There was
short-term fiscal stimulus, with increased government spending in the
US, Britain, Japan, and core European countries. There was also an
extremely loose money policy carried out by the major central banks in
the US, Japan and Europe. This has meant near zero interest rates and,
in one form or another, quantitative easing – the pumping of additional
credit into the economy on the basis of ‘creating’ (ie printing, in old
fashioned terms) money. The world economy was also sustained by the
continued high growth rates in major developing economies, notably
China, India and Brazil (which benefitted from additional investment
derived from quantitative easing and also from the huge stimulus package
of the Chinese regime).
However, massive problems remain, particularly the
huge burden of state and private debt. State budget deficits and
accumulated national debt have soared, partly due to bank bailouts and
fiscal stimulus, but mainly due to low or negative growth, which slashed
tax revenues and increased spending on unemployment benefits, etc.
Household debt also remains a huge burden, depressing consumer spending,
the main component of GDP in most advanced capitalist countries. Some
companies, particularly in commercial property, have big debts (and some
may well default in the coming months). On the other hand, many big
corporations are sitting on huge piles of cash: they are not interested
in investing this capital in new plant and machinery because it would
not be profitable given existing levels of money-backed demand. Many
have taken advantage of the recent fall in share prices to buy back
their own shares, thus boosting their share prices while handing a bonus
to their shareholders.
Given generally weak domestic demand, export growth
has been seen as an important way out of the recession. However, there
is intense competition for limited markets. In the case of the eurozone
countries, they do not have the possibility of devaluing their currency
in order to cheapen their exports and gain market share. Germany did
manage previously to boost its exports (mainly on the basis of the
quality of its manufactured goods), but has recently suffered a fall in
exports as a result of the downturn in Japan and a slowing of
manufacturing in China and elsewhere.
Bitter policy debates
THE CAPITALIST CLASS internationally faces not only
an economic crisis but a political crisis of economic policy. A whole
range of policies has been tried – to no avail, giving way to renewed
recession. Bank bailouts in 2008-09 and stimulus packages prevented a
catastrophic collapse of the world economy on the lines of 1929-33. But
the solvency of some banks is now threatened by the sovereign debt
crisis. Stimulus packages in the US and Europe have run their course.
Priority is now being given to severe austerity measures in order to
reduce deficits and accumulated debt. This is clearly having the effect
of depressing growth, which is likely to lead to even higher deficits in
the future.
Deficit reduction, however, has been the dominant
ideology of big business (‘financial markets’) and the policy adopted by
most political leaders (including those of former social-democratic
parties). But even some bourgeois leaders and heads of financial
institutions have begun to change their tune. For instance, the new head
of the International Monetary Fund, Christine Lagarde, recently called
for some countries (unspecified, but no doubt meaning Germany, Japan,
the US and possibly Britain) to introduce short-term fiscal stimulus
while preserving their commitment to medium-term fiscal austerity (a
tricky balancing act!). (Don’t Let Fiscal Brakes Stall Global Recovery,
Financial Times, 15 August) There is no indication at the moment of any
major government adopting such a course, but in the face of an even
deeper downturn in the world economy capitalist leaders will undoubtedly
be forced to change direction in order to avoid economic collapse. The
recent public-sector strikes in Britain are, in their different ways, a
foretaste of the social upheavals to come. In this new phase of
recession, which is likely to be protracted, the working class will be
more prepared to struggle against austerity measures than in 2008-09,
when the sharp downturn came as a sudden shock.
Bitter debates are also taking place in relation to
monetary policy. While political leaders have been restrained by
pressure from big business from adopting stimulus measures, the central
banks have, to one degree or another, adopted measures to stimulate
growth. For instance, both the Federal Reserve in the US and the Bank of
England have reduced interest rates to near zero and adopted so-called
quantitative easing programmes. The pumping in of credit into the
economy has undoubtedly prevented the collapse of many banks and
corporations, though it has had a limited effect in stimulating growth.
At the same time, as critics point out, a large slice of the credit was
diverted to speculative investments in ‘emerging markets’.
Quantitative easing, however, has been bitterly
attacked by some sections of big business and ultra-free-market
politicians. In the US, for instance, some members of the Federal
Reserve board are strongly opposed to quantitative easing. Recently,
Rick Perry, a contender for the Republican presidential nomination,
denounced Ben Bernanke as a traitor for printing money. Similarly, in
the eurozone, there is strong opposition to the ECB’s policy of buying
government bonds in order to support their price levels. Three members
of the ECB board (including the representative of Germany) and also the
Bundesbank oppose this policy (even though the ECB has attracted
deposits from banks that cancel out the value of the bond purchases).
Critics of quantitative easing argue that it is
inevitably inflationary. However, much of the extra liquidity is
actually hoarded by banks and financial institutions and, given the
generally deflationary trends in the major economies, is not at this
stage inflationary, though it certainly has the potential to cause
inflation in the future. In reality, the ‘inflation hawks’ are like
generals fighting past wars. In this period, the main threat to
capitalism globally comes from deflation, the stagnation of the economy,
the fall in prices, and the increase in the burden of debt. More and
more, commentators are referring to the ‘Japanisation’ of the world
economy, a reference to the 17-year stagnation of Japanese capitalism.
Keynesian-type stimulus packages, particularly if
they involved infrastructure projects which create employment and boost
unemployment benefits, would mitigate the downturn. Sections of big
business that previously denounced Keynesianism as unredeemed evil are
now beginning to call for such measures. Even the Financial Times,
previously a pillar of neo-liberal doctrine, says that "for those with
room for fiscal manoeuvre, there is a case for a more relaxed approach
to economic belt-tightening". (Ghost of Keynes Haunts Eurozone, 16
August)
Keynesian measures, however, would only be a
short-term fix (as even John Maynard Keynes himself recognised). They
would inevitably increase the indebtedness of states, and such debt
could only be paid off on the basis of sustained growth. However, under
capitalism sustained growth depends on sustained investment, which will
only take place if the big corporations and capitalist investors believe
that they will make adequate profits from their investments. In this
period, capitalism cannot secure the combination of high investment
levels and sustained productivity growth that would be needed to combine
rapid growth, good wages, high social spending – and big profits.
Ultimately, that proved to be beyond capitalism even during the ‘golden
age’ (1945-73) of the post-war upswing. Today, as recent events show, we
are facing the ‘bleak age’ of the crisis-ridden system. |