this is a excellent article on the growing turmoil in the world of capitalism from this week's socialist. The newspaper from the Socialist party where you can find more excellent articles each week at
www.socialistparty.org.uk
As their system continues to slide further into its worst crisis since the 1930s, the frantic efforts of world capitalist leaders to reverse the process are farcical, contradictory and ineffective. "Financial markets at their wits' end", was the headline in the Financial Times.
In a matter of weeks, trillions of dollars have been wiped from equity market values worldwide. The rush out of equities (shares in companies, banks etc) to alleged 'safe havens' of gold is now greater than at the time of the collapse of Lehman Brothers in 2008. This indicates the depth of the present crisis which threatens to become a prolonged slump.
The credit-worthiness of the USA, the most powerful economy in the world, has been questioned. Eurozone leaders are stumbling from one summit to another without being able to solve the crisis.
On Friday 5 August, the credit rating agency Standard and Poor (S&P), downgraded US government bonds from AAA to AA+. This, they said, was due to the debacle between Democrats and Republicans over the debt ceiling for the US - now standing at $14 trillion, the highest in the world. These are the very same 'experts' who gave an AAA rating to the sub-prime lending spree in the first place which helped to lay the basis for the present crisis.
Big investors in US 'treasuries', including the Chinese government, are still not likely to move out significantly, but China's official People's Daily newspaper took the opportunity of the S&P assessment to chide the US government with its own interests in mind. It should not "become blind to the great risks that a weak greenback could pose to the world's fragile economic recovery by lifting dollar-denominated commodities prices", it wrote.
Double-dip recession
The S&P found the sums on which it based its assessment were wrong - by $2 trillion - but, pessimistic as they are about growth prospects, they still believed that lenders would have doubts about buying US government bonds. The latest figures for January to July show the US economy already crawling along at a rate of just 0.8%.
The US economy is now almost certainly facing a 'double dip' recession. There are legitimate fears, now widespread, that the austerity measures being imposed in the US and many other countries to tackle high levels of debt, will actually stifle their already weak economic recoveries and plunge them further into crisis.
This is behind the renewed expectations that the US Federal Reserve will announce a new round of 'quantitative easing' (QE - printing money) in response to forecasts of the US having a 50-50 chance of entering recession before the end of the year. But QE1 and QE2 have not solved the problems and it remains to be seen whether a new 'stimulus package' will be sufficient to stem the crisis.
Fears about the future of the world economy have been reflected in the price of gold and oil. Gold - not 'paper value' but a store of real value - is always a favourite 'investment' in uncertain times. Its price has jumped to new nominal records well over $1,720 an ounce and could, in some estimates, go as high as $2,500 by the end of the year.
Another 'safe haven' for investors - the Swiss Franc - has reached in the last month record highs against the euro and the dollar. The 'Swissie' has now moved into negative interest rate territory, which means investors paying the banks to hold their assets safe!
On the other hand, the price of oil has considerably declined. This is because of the grave concerns about downturns in growth leading to a fall in demand.
As the CWI has explained on many occasions, the very feeble recovery in most countries has not been accompanied by any sizeable growth in total output. Apart from some notable exceptions, it did not bring jobs for the tens of millions of unemployed, nor stem what seems like a war on the poor - massive cuts in public spending.
Further cutbacks and downturns in the prospects for young people lie behind the outbursts of anger recently seen on the streets of England. Seriously prepared strikes and general strikes are urgently needed in a series of countries now to stem the attacks on pension rights.
Without the trade union leaders giving a clear lead in the struggle against cuts across Europe and in other countries, clashes with police and attacks on property could erupt in the most deprived urban areas.
A programme of jobs and homes for all has to be accompanied by a struggle for the nationalisation, under democratic workers' control and management, of the banks and big monopolies. This can channel all the anger and frustration of youth and workers against the system.
Crisis measures
On 21 July a special meeting of Eurozone finance ministers agreed another bailout for the Greek government. But within days it was clear this would not solve Greece's underlying problems or prevent a default of its national debt. Before the 21 July agreement can even come into force, it has to be ratified by all of the Eurozone governments, mostly through their parliaments which are not in session during August.
Only two weeks after this, under pressure from the Eurozone leaders, especially Merkel and Sarkozy, the European Central Bank (ECB) was forced to announce new measures to try and prevent the stock markets going into a tail-spin after Friday's news from America! Its previous policy of not buying Italian and Spanish bonds on the open market was reversed.
This reduced, at least temporarily, the rates on these countries' borrowings. However, stock markets remain volatile, reflecting investors' doubts over effective EU measures to solve the eurozone sovereign debt crisis.
Other discussions have taken place about expanding the powers to intervene by using the €440 billion in the European Financial Stability Fund but they are hampered by the need for unanimity across the zone.
Italy and Spain's governments alone need to find an extra €840 billion over the coming 18 months - more than the total of bailouts already found for Greece, Ireland and Portugal.
The ECB measure will ease the situation in relation to the debts of Italy and Spain but the strings attached will bring them into head-on confrontation with their populations.
Italy's prime minister, Silvio Berlusconi, has tried to give the impression there is no major problem in Italy. But his country has one of the biggest debts as a percentage of GDP (nearly 120%) and an economy which has failed to grow more than a fraction of 1% for the past two decades.
He has now agreed, with his government, to bring forward the deadline by which budget cuts will balance the state books - from the original 2014 (well after the next general election) to 2013 (still after the next election is due!).
Extra austerity measures, nearly double those already announced, have been put through the cabinet by decree. Already, even in a summer period, opposition is mounting. Berlusconi has said he will not stand next time round, but he desperately needs a government in power that will not allow three major court cases against him to proceed.
Spain's prime minister, José Luis RodrÃguez Zapatero, has also declared he will not stand in November's election, sensing the widespread dissatisfaction with his inability to get Spain's economy back into healthy growth.
He has nevertheless agreed to increase austerity measures as a condition of the new loans. The massive level of youth unemployment in Spain and a feeling of utter neglect by politicians have been behind the mass movement of the 'indignados' - young people disillusioned with political parties and looking for radical, even revolutionary solutions.
Richard Hunter, a broker from Hargreaves Lansdown, said: "The markets are looking for a concrete plan out of Europe and the US in terms of how they are going to deal with their deficits." But because of private ownership and the states' role in defending the national interests of their own capitalists, a clear plan is something that capitalism, by its very nature, can never provide.
Capitalist anarchy
Trying to control an anarchic and blind system, none of the measures they take seems to stem the downward spiral into the worst crisis since the 1930s.
The measures they take to try and rescue their system will mean yet more cuts and austerity, yet more suffering and anguish for the vast majority of the world's population. The accumulating crises - economic and political - of the last few weeks, have only served to underline the chaotic and wasteful way in which capitalism works or fails to work.
Only 58.1% of Americans of working age now have a real job. Tens of millions of people worldwide are on the scrapheap when they could be producing goods and providing services.
On the basis of public ownership and democratic planning, all the human and physical resources of society could be harnessed for the benefit of the vast majority instead of the increasingly rich minority.
The stranglehold of the banks and capitalist politicians over the lives of millions, in fact, billions, has to be broken. Mass movements, including general strikes, will show the power that the working class can wield in society.
Linked with the energy and anger of the youth, new mass workers' parties can be rapidly built. Confidence in the idea of a socialist alternative to capitalism can and must be renewed without delay.
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Showing posts with label austerity measures. Show all posts
Showing posts with label austerity measures. Show all posts
Wednesday, 17 August 2011
Sunday, 7 August 2011
Who is to blame ?
this excellent article from the June 2009 issue of socialism today really gives a in depth look at the deep systematic issues that were going on behind the scenes and lead to the 2008 global economic collapse to which we find ourselves dealing with today.
The current economic crisis has fuelled waves of anger around the world. Prime targets are the top bankers and stock market dealers who epitomise the rampant, ultra-free market policies of the last 20 years. Backed by their political accomplices, they gorged themselves while workers’ conditions worsened, and finance capital drove down living standards in the neo-colonial countries. LYNN WALSH argues that behind the obscene greed lie more fundamental reasons for today’s global turmoil.
THE FINGER OF blame points to greedy bankers and financiers. They are seen as responsible for the financial meltdown that has triggered a world-wide slump. A wave of fury swept the US when 80 directors of the American International Group paid themselves $165 million in bonuses after being bailed out by taxpayers to the tune of £173 billion. "Do the leaders of Wall Street want to set off an anti-capitalist political tidal wave across the United States that will sweep them away forever? It's certainly starting to look that way". (Martin Sieff, UPI.com, 16 March)
In Britain, there was popular outrage when Sir Fred Goodwin, ‘Fred the Shred’, the boss of Royal Bank of Scotland who presided over its ruination, walked away with a pension fund of £17 million - giving him a pension of £700,000 a year - effectively financed by taxpayers.
There is growing recognition, however, that the bankers and speculators are the figureheads of a rotten system. The Financial Times referred to the US people’s "widespread and deeply felt anger at financial capitalism and capitalism… the new and dominant fact in the country’s political life". (Chrystia Freeland, 27 March) But it is politically convenient for political leaders and even big-business bosses to blame the ‘greedy’ and ‘irresponsible’ financiers. Even in the serious financial press, debate about the causes of the present crisis, which is rooted in a profound, long-term crisis of the system, is mostly very superficial.
Writing in the New York Times, for instance, columnist David Brooks claims there are "two general narratives… gaining prominence… the greed narrative and the stupidity narrative". (Greed and Stupidity, 3 April) How can there be any doubt that the predatory profit-drive of investment bankers, hedge funds, and ultra-rich investors accelerated the process of financial boom and bust? True, they were the agents of deeper processes. But they became fabulously wealthy while inequality deepened.
Yet Brooks dismisses the greed narrative in favour of the stupidly narrative: "Overconfident bankers didn’t know what they were doing". They did not understand the complex financial instruments they were using. They relied too much on mathematical models. "We got into [the crisis]", Brooks concludes, "because arrogant traders around the world were playing a high-stakes game they didn’t understand".
There is an element of truth in this, of course. The complex financial instruments, derivatives, asset-backed securities, etc, that were supposed to spread risk – and even abolish risk – actually disastrously generalised risk. But again, this was a symptom of a diseased economy, not a primary cause. Brooks’ narrative is almost laughable in its simplicity. However, the columnist refers to a more serious analysis, one that has provoked debate in serious capitalist journals.
Submerging market economies
‘THE QUIET COUP’ by Simon Johnson, chief economist to the IMF in 2007-08, lays bare (as the magazine’s introductory caption puts it) the alarming and "unpleasant truth" that "the finance industry has effectively captured [the US] government". (The Atlantic Monthly, May 2009, www.theatlantic.com) As an IMF official, Johnson was involved in many crises in ‘emerging markets’, semi-developed economies like the South-East Asian countries in 1997, Russia in 1998, and so on. Every crisis is different, but he sees a common thread:
"Typically, these countries are in a desperate economic situation for one simple reason – the powerful elites within them overreached in good times and took too many risks". (This is somewhat one-sided, given the uneven, contradictory development of the neo-colonial developing countries.) "Emerging-market governments and their private-sector allies commonly form a tight-knit… oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon – correctly, in most cases – that their political connections will allow them to push onto the government any substantial problems that arise".
But the oligarchs "get carried away: they waste money and build massive business empires on a mountain of debt". With the onset of crisis, there is a downward spiral of corporate bankruptcies and collapsing banks. "Yesterday’s ‘public-private partnerships’ are relabelled ‘crony capitalism’." Governments find various ways of bailing out their big business friends. "Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk – at least until the riots grow too large".
Johnson finds a strong resemblance to the US crisis: "In its depth and suddenness, the US economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the US financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people".
Without using the precise, appropriate term, Johnson points to the role of US finance capital, which has become the dominant faction of the US capitalist class. "But there’s a deeper and more disturbing similarity [with development in neo-colonial countries]: elite business interests – financiers, in the case of the US – played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them".
Mesmerised by Wall Street
BLAME HAS BEEN targeted at an array of people and policies. Greedy bankers and irresponsible government officials (who lowered interest rates and loosened the money supply). Financiers proposed financial instruments they did not understand. Regulators turned a blind eye to shady practices. The twin deficits – the Federal government and the US trade deficit – allowed consumer spending and the housing bubble to grow on the basis of ever mounting debt. China supplied cheap goods and provided market-supporting credit. All these developments benefited the finance sector, and all attempts to limit potentially risky activities were brushed aside.
From the early 1980s, the finance sector boomed, becoming increasingly powerful. The monetary policy of Paul Volcker, chair of the Federal Reserve, which supported high interest rates and reduced inflation, favoured money lenders and those trading financial assets. Republican president, Ronald Reagan, opened up a period of deregulation, which was continued under Bill Clinton (Democrat) and George W Bush (Republican). There was an unprecedented boom of money trading outside the previous framework of the commercial banks through securitisation, with the proliferation of a host of exotic derivatives.
The growth of pension funds and individual saving plans also expanded the profit-making opportunities of investment banks, hedge funds, and so on. The accelerated globalisation of financial markets enormously extended the scope of speculative activity, channelling fabulous profits into the coffers of money traders (including the special trading units of commercial banks).
"Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16% of domestic corporate profits. In 1986, that figure reached 19%. In the 1990s, it oscillated between 21% and 30%, higher than it had ever been in the post-war period. This decade, it reached 41%. Pay rose just as dramatically. From 1948 to 1982, average compensation pay in the financial sector ranged between 99% and 108% of the average for all domestic private industries. From 1983, it shot upward, reaching 181% in 2007".
Finance capitalists concentrated massive wealth into their hands in recent years and, as a result, have exerted enormous political power. Johnson points to the ‘cultural capital’ acquired by the finance sector, ‘a belief system’: "Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country". In other words, ultra-free market ideology was a powerful force in shaping conditions favourable to finance capital: "Faith in free financial markets grew into conventional wisdom – trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress".
Wall Street firms were among the top contributors to political campaigns, Republican and Democrat. Leaders rotated between Wall Street and Washington, people like James Rubin (Clinton’s Treasury Secretary), Alan Greenspan (from Wall Street to the Fed and back again), and now Tim Geithner, Barack Obama’s Treasury Secretary. Politicians, journalists and academics (says Johnson) were "mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true".
Systemic flaw
BUT IT HAS all come to an end. The beginning of the unwinding of the subprime housing bubble in 2007 triggered a world-wide seizure of the banking system. The ensuing credit squeeze produced an economic downturn. This in turn has aggravated the financial crisis. The illusion of limitless, risk-free profits has been totally shattered. The recovery, when it comes, is likely to be long-drawn-out and painful, particularly for workers who, as always, will bear the main burden of the crisis.
According to Brooks, Johnson’s analysis is just another ‘greed narrative’. Investment bankers, pursuing bigger and bigger profits, became increasingly powerful, "the US economy got finance heavy and finance mad, and finally collapsed". This just shows how shallow this columnist is. Johnson’s The Quiet Coup accurately describes a structural change in US capitalism – which also developed in Britain and other economies following the ‘Anglo-Saxon model’ – with the emergence of finance capital as the dominant section of the capitalist class.
Yet Johnson’s analysis also has its limitations. Nowhere does he explain the underlying reasons for the rise of the financial oligarchy. This means that, ultimately, he fails to analyse the causes of the current financial-economic crisis, which he simply blames on the rise of the oligarchy. Like any other structural change in capitalism, it is ultimately rooted in the underlying relations of production, in the inner processes of the capitalist economy.
The swing to financial investment and speculation over the last three-and-a-half decades arises from a crisis of over-accumulation of capital. During the post-war upswing (1950-73), capitalism enjoyed very favourable conditions, especially in the advanced capitalist countries. Historically high levels of investment and productivity growth supported both relatively high wage levels (sustaining consumer demand) and a rise in profitability (encouraging new investment). The growth of state expenditure also supported investment and demand for goods and services. This period is now referred to as the ‘golden age’ of capitalism.
The favourable relationships of that period, however, were undermined by the inner contradictions of capitalism. In particular, new investment in the means of production (plant, machinery, etc) no longer produced the level of profits required by the capitalists. "Between 1968 and 1973 the profit rate for the ACCs [advanced capitalist countries] as a whole fell in the business and manufacturing sectors by one fifth". (Andrew Glyn: Capitalism since 1945 [1991], p182) In the US, for instance, the profit rate for manufacturing fell from the previous peak of 36.4% to 22% in 1973. Significantly, the end of the upswing, marked by the 1973 oil price shock, was marked by an explosion of speculation, especially in commodities and commercial property. In their search for higher profits, the capitalists turned more and more towards financial investment, which became increasingly speculative. The Thatcher-Reagan ‘revolution’ – deregulation, privatisation, tax changes for the super-rich, and an offensive on workers’ rights – was carried through under pressure of the underlying economic change and, of course, enormously widened the scope for speculative capital.
The growth of investible funds (from corporate profits, pension funds, investment banks, etc) continuously grew, but far outstripped the opportunities for profitable investment in new productive capacity. In capitalist terms, there was an ‘over-supply’ of capital. Not that millions of people did not need essential goods and services, but there was insufficient money-backed demand because of the limited income of the working class. Overcapacity developed in most major industries, so why should capitalists invest in new means of production?
For the major capitalist economies, the growth rate of fixed capital stock (a measure of capital accumulation) in the 1990s and 2000s has been only half that of the 1960s. In the US, the growth fell from 4% per annum in the 1920s to 3% in the 1990s and 2% in the 2000s: "capital stock growth started from an exceptionally low point in the early 1990s. The most positive conclusion from [the data] would be that the investment boom of the later 1990s halted the seemingly inexorable downward trend in the growth rate of the capital stock which had begun in the late 1960s. Moreover, when the boom came to an end in 2000, capital stock growth plummeted more steeply than ever before". (Andrew Glyn: Capitalism Unleashed [2006], pp86, 134)
Surprisingly, perhaps, this analysis was confirmed in 2007 by a Morgan Stanley economist, whose role is to advise investors in the financial sector. Rejecting the ‘conventional wisdom’ that the flood of cheap credit was merely the result of "the central banks’ irresponsibly easy monetary policy", Stephen Jen wrote: "I believe that the more important source of global liquidity is the (curiously) low capex/capital stock in the world". (Capex is short for capital expenditure.) In spite of low interest rates and an abundance of credit, "there has been a curious reluctance on the part of the corporate sector in the world to invest in physical assets, ie capex has been surprisingly low…" Jen’s explanation emphasises the "intense uncertainty regarding the outlook of the global economy [which] may have forced companies to restrain their capex plans… multinational corporations may have attached a certain risk to expanding capacity in emerging markets, due to uncertainties regarding both political and economic policies". (Low Investment is the Main Source of Global Liquidity, Morgan Stanley Global Economic Forum, 23 February 2007)
Credit plays an essential part in the process of capitalist production, as Karl Marx showed. But, in the last 30 years, finance capital became increasingly parasitic. As Johnson’s figures show, finance swallowed an ever increasing share of total profits. The pressure of the finance sector for short-term profit also raised the profitability of many manufacturing and service industries, mostly through downsizing and intensifying the exploitation of workers. But the biggest profits for finance came from churning the huge volumes of cash flowing around the global economy.
Some originated, as we have seen, in the ‘surplus’ profits of big corporations which had no incentive to reinvest in new productive capacity. But the biggest profits have come from trading financial assets using ultra-cheap credit borrowed from economies with big surpluses, like Japan, China and the oil-producers. Much of the super-profits have come, not from the production of new wealth, but from the redistribution of savings and profits from small and medium savers, and investors to the super-rich, elite financiers who run the big hedge funds, investment banks and private equity firms.
An ongoing crisis
THESE, IN JOHNSON’S language, constitute the financial oligarchy. Its leaders were seen, until the collapse, as ‘masters of the universe’. But, in reality, they are the alchemists of capitalist impasse, conjuring up capital gains from speculative trading. The domination of finance capital arises from the inability of capitalism in this period to develop the productive forces in a broad-based way. There has been a surge of investment in some sectors, where there is new technology, and in some countries like China (where growth is still very uneven). But, on a world scale, the accumulation of capital, which should be the dynamic motor of capitalist growth, has collided with the barrier of private ownership, which demands profitable returns as the condition of new investment.
Johnson argues that all toxic assets should be written off at their true market value (a lot lower than their current valuation). Banks with insufficient capital should be nationalised, broken up, and eventually sold back to private owners. But he clearly does not believe that this is what will happen. The US government has effectively partially nationalised several big banks and financial institutions, but it has not taken control. Like the Bush administration, the Obama government is attempting to muddle through with a series of bank-by-bank deals, handing out state subsidies that are too complex for the public to understand. "Throughout the crisis", writes Johnson, "the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here".
There are now two scenarios, says Johnson. With government bailouts, the US and other major capitalist economies may muddle through. Alternatively, there could be a deepening world financial and economic crisis. It would be wrong (he says) to rely on the consoling idea that ‘it can’t be as bad as the great depression’ of the 1930s: "What we face now could, in fact, be worse than the Great Depression – because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronised downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances". Whatever scenario plays out, the capitalist ruling class will do all it can to offload the effects of this deep economic crisis onto the backs of the world’s working class and poor.
The current economic crisis has fuelled waves of anger around the world. Prime targets are the top bankers and stock market dealers who epitomise the rampant, ultra-free market policies of the last 20 years. Backed by their political accomplices, they gorged themselves while workers’ conditions worsened, and finance capital drove down living standards in the neo-colonial countries. LYNN WALSH argues that behind the obscene greed lie more fundamental reasons for today’s global turmoil.
THE FINGER OF blame points to greedy bankers and financiers. They are seen as responsible for the financial meltdown that has triggered a world-wide slump. A wave of fury swept the US when 80 directors of the American International Group paid themselves $165 million in bonuses after being bailed out by taxpayers to the tune of £173 billion. "Do the leaders of Wall Street want to set off an anti-capitalist political tidal wave across the United States that will sweep them away forever? It's certainly starting to look that way". (Martin Sieff, UPI.com, 16 March)
In Britain, there was popular outrage when Sir Fred Goodwin, ‘Fred the Shred’, the boss of Royal Bank of Scotland who presided over its ruination, walked away with a pension fund of £17 million - giving him a pension of £700,000 a year - effectively financed by taxpayers.
There is growing recognition, however, that the bankers and speculators are the figureheads of a rotten system. The Financial Times referred to the US people’s "widespread and deeply felt anger at financial capitalism and capitalism… the new and dominant fact in the country’s political life". (Chrystia Freeland, 27 March) But it is politically convenient for political leaders and even big-business bosses to blame the ‘greedy’ and ‘irresponsible’ financiers. Even in the serious financial press, debate about the causes of the present crisis, which is rooted in a profound, long-term crisis of the system, is mostly very superficial.
Writing in the New York Times, for instance, columnist David Brooks claims there are "two general narratives… gaining prominence… the greed narrative and the stupidity narrative". (Greed and Stupidity, 3 April) How can there be any doubt that the predatory profit-drive of investment bankers, hedge funds, and ultra-rich investors accelerated the process of financial boom and bust? True, they were the agents of deeper processes. But they became fabulously wealthy while inequality deepened.
Yet Brooks dismisses the greed narrative in favour of the stupidly narrative: "Overconfident bankers didn’t know what they were doing". They did not understand the complex financial instruments they were using. They relied too much on mathematical models. "We got into [the crisis]", Brooks concludes, "because arrogant traders around the world were playing a high-stakes game they didn’t understand".
There is an element of truth in this, of course. The complex financial instruments, derivatives, asset-backed securities, etc, that were supposed to spread risk – and even abolish risk – actually disastrously generalised risk. But again, this was a symptom of a diseased economy, not a primary cause. Brooks’ narrative is almost laughable in its simplicity. However, the columnist refers to a more serious analysis, one that has provoked debate in serious capitalist journals.
Submerging market economies
‘THE QUIET COUP’ by Simon Johnson, chief economist to the IMF in 2007-08, lays bare (as the magazine’s introductory caption puts it) the alarming and "unpleasant truth" that "the finance industry has effectively captured [the US] government". (The Atlantic Monthly, May 2009, www.theatlantic.com) As an IMF official, Johnson was involved in many crises in ‘emerging markets’, semi-developed economies like the South-East Asian countries in 1997, Russia in 1998, and so on. Every crisis is different, but he sees a common thread:
"Typically, these countries are in a desperate economic situation for one simple reason – the powerful elites within them overreached in good times and took too many risks". (This is somewhat one-sided, given the uneven, contradictory development of the neo-colonial developing countries.) "Emerging-market governments and their private-sector allies commonly form a tight-knit… oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon – correctly, in most cases – that their political connections will allow them to push onto the government any substantial problems that arise".
But the oligarchs "get carried away: they waste money and build massive business empires on a mountain of debt". With the onset of crisis, there is a downward spiral of corporate bankruptcies and collapsing banks. "Yesterday’s ‘public-private partnerships’ are relabelled ‘crony capitalism’." Governments find various ways of bailing out their big business friends. "Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk – at least until the riots grow too large".
Johnson finds a strong resemblance to the US crisis: "In its depth and suddenness, the US economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the US financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people".
Without using the precise, appropriate term, Johnson points to the role of US finance capital, which has become the dominant faction of the US capitalist class. "But there’s a deeper and more disturbing similarity [with development in neo-colonial countries]: elite business interests – financiers, in the case of the US – played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them".
Mesmerised by Wall Street
BLAME HAS BEEN targeted at an array of people and policies. Greedy bankers and irresponsible government officials (who lowered interest rates and loosened the money supply). Financiers proposed financial instruments they did not understand. Regulators turned a blind eye to shady practices. The twin deficits – the Federal government and the US trade deficit – allowed consumer spending and the housing bubble to grow on the basis of ever mounting debt. China supplied cheap goods and provided market-supporting credit. All these developments benefited the finance sector, and all attempts to limit potentially risky activities were brushed aside.
From the early 1980s, the finance sector boomed, becoming increasingly powerful. The monetary policy of Paul Volcker, chair of the Federal Reserve, which supported high interest rates and reduced inflation, favoured money lenders and those trading financial assets. Republican president, Ronald Reagan, opened up a period of deregulation, which was continued under Bill Clinton (Democrat) and George W Bush (Republican). There was an unprecedented boom of money trading outside the previous framework of the commercial banks through securitisation, with the proliferation of a host of exotic derivatives.
The growth of pension funds and individual saving plans also expanded the profit-making opportunities of investment banks, hedge funds, and so on. The accelerated globalisation of financial markets enormously extended the scope of speculative activity, channelling fabulous profits into the coffers of money traders (including the special trading units of commercial banks).
"Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16% of domestic corporate profits. In 1986, that figure reached 19%. In the 1990s, it oscillated between 21% and 30%, higher than it had ever been in the post-war period. This decade, it reached 41%. Pay rose just as dramatically. From 1948 to 1982, average compensation pay in the financial sector ranged between 99% and 108% of the average for all domestic private industries. From 1983, it shot upward, reaching 181% in 2007".
Finance capitalists concentrated massive wealth into their hands in recent years and, as a result, have exerted enormous political power. Johnson points to the ‘cultural capital’ acquired by the finance sector, ‘a belief system’: "Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country". In other words, ultra-free market ideology was a powerful force in shaping conditions favourable to finance capital: "Faith in free financial markets grew into conventional wisdom – trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress".
Wall Street firms were among the top contributors to political campaigns, Republican and Democrat. Leaders rotated between Wall Street and Washington, people like James Rubin (Clinton’s Treasury Secretary), Alan Greenspan (from Wall Street to the Fed and back again), and now Tim Geithner, Barack Obama’s Treasury Secretary. Politicians, journalists and academics (says Johnson) were "mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true".
Systemic flaw
BUT IT HAS all come to an end. The beginning of the unwinding of the subprime housing bubble in 2007 triggered a world-wide seizure of the banking system. The ensuing credit squeeze produced an economic downturn. This in turn has aggravated the financial crisis. The illusion of limitless, risk-free profits has been totally shattered. The recovery, when it comes, is likely to be long-drawn-out and painful, particularly for workers who, as always, will bear the main burden of the crisis.
According to Brooks, Johnson’s analysis is just another ‘greed narrative’. Investment bankers, pursuing bigger and bigger profits, became increasingly powerful, "the US economy got finance heavy and finance mad, and finally collapsed". This just shows how shallow this columnist is. Johnson’s The Quiet Coup accurately describes a structural change in US capitalism – which also developed in Britain and other economies following the ‘Anglo-Saxon model’ – with the emergence of finance capital as the dominant section of the capitalist class.
Yet Johnson’s analysis also has its limitations. Nowhere does he explain the underlying reasons for the rise of the financial oligarchy. This means that, ultimately, he fails to analyse the causes of the current financial-economic crisis, which he simply blames on the rise of the oligarchy. Like any other structural change in capitalism, it is ultimately rooted in the underlying relations of production, in the inner processes of the capitalist economy.
The swing to financial investment and speculation over the last three-and-a-half decades arises from a crisis of over-accumulation of capital. During the post-war upswing (1950-73), capitalism enjoyed very favourable conditions, especially in the advanced capitalist countries. Historically high levels of investment and productivity growth supported both relatively high wage levels (sustaining consumer demand) and a rise in profitability (encouraging new investment). The growth of state expenditure also supported investment and demand for goods and services. This period is now referred to as the ‘golden age’ of capitalism.
The favourable relationships of that period, however, were undermined by the inner contradictions of capitalism. In particular, new investment in the means of production (plant, machinery, etc) no longer produced the level of profits required by the capitalists. "Between 1968 and 1973 the profit rate for the ACCs [advanced capitalist countries] as a whole fell in the business and manufacturing sectors by one fifth". (Andrew Glyn: Capitalism since 1945 [1991], p182) In the US, for instance, the profit rate for manufacturing fell from the previous peak of 36.4% to 22% in 1973. Significantly, the end of the upswing, marked by the 1973 oil price shock, was marked by an explosion of speculation, especially in commodities and commercial property. In their search for higher profits, the capitalists turned more and more towards financial investment, which became increasingly speculative. The Thatcher-Reagan ‘revolution’ – deregulation, privatisation, tax changes for the super-rich, and an offensive on workers’ rights – was carried through under pressure of the underlying economic change and, of course, enormously widened the scope for speculative capital.
The growth of investible funds (from corporate profits, pension funds, investment banks, etc) continuously grew, but far outstripped the opportunities for profitable investment in new productive capacity. In capitalist terms, there was an ‘over-supply’ of capital. Not that millions of people did not need essential goods and services, but there was insufficient money-backed demand because of the limited income of the working class. Overcapacity developed in most major industries, so why should capitalists invest in new means of production?
For the major capitalist economies, the growth rate of fixed capital stock (a measure of capital accumulation) in the 1990s and 2000s has been only half that of the 1960s. In the US, the growth fell from 4% per annum in the 1920s to 3% in the 1990s and 2% in the 2000s: "capital stock growth started from an exceptionally low point in the early 1990s. The most positive conclusion from [the data] would be that the investment boom of the later 1990s halted the seemingly inexorable downward trend in the growth rate of the capital stock which had begun in the late 1960s. Moreover, when the boom came to an end in 2000, capital stock growth plummeted more steeply than ever before". (Andrew Glyn: Capitalism Unleashed [2006], pp86, 134)
Surprisingly, perhaps, this analysis was confirmed in 2007 by a Morgan Stanley economist, whose role is to advise investors in the financial sector. Rejecting the ‘conventional wisdom’ that the flood of cheap credit was merely the result of "the central banks’ irresponsibly easy monetary policy", Stephen Jen wrote: "I believe that the more important source of global liquidity is the (curiously) low capex/capital stock in the world". (Capex is short for capital expenditure.) In spite of low interest rates and an abundance of credit, "there has been a curious reluctance on the part of the corporate sector in the world to invest in physical assets, ie capex has been surprisingly low…" Jen’s explanation emphasises the "intense uncertainty regarding the outlook of the global economy [which] may have forced companies to restrain their capex plans… multinational corporations may have attached a certain risk to expanding capacity in emerging markets, due to uncertainties regarding both political and economic policies". (Low Investment is the Main Source of Global Liquidity, Morgan Stanley Global Economic Forum, 23 February 2007)
Credit plays an essential part in the process of capitalist production, as Karl Marx showed. But, in the last 30 years, finance capital became increasingly parasitic. As Johnson’s figures show, finance swallowed an ever increasing share of total profits. The pressure of the finance sector for short-term profit also raised the profitability of many manufacturing and service industries, mostly through downsizing and intensifying the exploitation of workers. But the biggest profits for finance came from churning the huge volumes of cash flowing around the global economy.
Some originated, as we have seen, in the ‘surplus’ profits of big corporations which had no incentive to reinvest in new productive capacity. But the biggest profits have come from trading financial assets using ultra-cheap credit borrowed from economies with big surpluses, like Japan, China and the oil-producers. Much of the super-profits have come, not from the production of new wealth, but from the redistribution of savings and profits from small and medium savers, and investors to the super-rich, elite financiers who run the big hedge funds, investment banks and private equity firms.
An ongoing crisis
THESE, IN JOHNSON’S language, constitute the financial oligarchy. Its leaders were seen, until the collapse, as ‘masters of the universe’. But, in reality, they are the alchemists of capitalist impasse, conjuring up capital gains from speculative trading. The domination of finance capital arises from the inability of capitalism in this period to develop the productive forces in a broad-based way. There has been a surge of investment in some sectors, where there is new technology, and in some countries like China (where growth is still very uneven). But, on a world scale, the accumulation of capital, which should be the dynamic motor of capitalist growth, has collided with the barrier of private ownership, which demands profitable returns as the condition of new investment.
Johnson argues that all toxic assets should be written off at their true market value (a lot lower than their current valuation). Banks with insufficient capital should be nationalised, broken up, and eventually sold back to private owners. But he clearly does not believe that this is what will happen. The US government has effectively partially nationalised several big banks and financial institutions, but it has not taken control. Like the Bush administration, the Obama government is attempting to muddle through with a series of bank-by-bank deals, handing out state subsidies that are too complex for the public to understand. "Throughout the crisis", writes Johnson, "the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here".
There are now two scenarios, says Johnson. With government bailouts, the US and other major capitalist economies may muddle through. Alternatively, there could be a deepening world financial and economic crisis. It would be wrong (he says) to rely on the consoling idea that ‘it can’t be as bad as the great depression’ of the 1930s: "What we face now could, in fact, be worse than the Great Depression – because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronised downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances". Whatever scenario plays out, the capitalist ruling class will do all it can to offload the effects of this deep economic crisis onto the backs of the world’s working class and poor.
Monday, 1 August 2011
America to join the austerity project of the ruling class around the globe
We hear today of the president of America giving in to the hard right the Tea party who demand hard deep cuts to cut the US's deficit and deal with their huge trillion dollors of debt.
President O'barma who was before using his stimulus package of tax cuts and investment in roads and transport projects has seemingly ground to a halt. The debt celling has been reached and the USA look like they will narrowly avoid a default on their debts as they will agree to raise the debt level for now.
But how ong will this last will they have to revisit this at a later date?
But what is clear now that President O'barma has put his neck on the line and looks to be agreeing for the need for deep savage cuts in public spending in america.
We all know this means austerity and if America is cutting spending too the rest of the world will suffer no doubt. This could however trigger a trade war with China who look to capitalise on this move by America. It is unclear what affect this will have on China it will be interesting to watch.
But what is clear to millions of working class people in America is that cuts to things like Medicare and help for the poor will be cut. All this just like in Europe and the UK to pay for the mess the rich ruling class has got itself into.
Capitalism will always find a way of surviving and more often than not makes the working class pay for something it did not create.
So ordinary working Americans must be prepared for large scale cuts in living standards and a drop in pay and jobs significantly. They must show the feeling of Westconsin where recently there has been mass struggles with unions and the police caving in and joining with the strikers. The struggles in Westconsin must be broadened out across the great nation and spread to every town and city. Only a mass collective action of the working class can push back these cuts and austerity.
Aswell as this ordinary Americans will need a political voice which they do not have at present. With Republicans and Democrats seemingly offering no alternative to cuts. Just like in Britain there is no mass workers party speaking for the interests of ordinary working people. A formation of such a party is needed in America to linking up with the international movement for the need for socialism across the globe replacing this horrible rotten capitalist system which has clearly failed.
Tough times lay ahead for all of us as i have previously blogged about but now is the time to resist and stand up to be counted. Its time to take sides and decide what kind of future world we want to live in. I know where i stand. On the side of the workers. do you ?
President O'barma who was before using his stimulus package of tax cuts and investment in roads and transport projects has seemingly ground to a halt. The debt celling has been reached and the USA look like they will narrowly avoid a default on their debts as they will agree to raise the debt level for now.
But how ong will this last will they have to revisit this at a later date?
But what is clear now that President O'barma has put his neck on the line and looks to be agreeing for the need for deep savage cuts in public spending in america.
We all know this means austerity and if America is cutting spending too the rest of the world will suffer no doubt. This could however trigger a trade war with China who look to capitalise on this move by America. It is unclear what affect this will have on China it will be interesting to watch.
But what is clear to millions of working class people in America is that cuts to things like Medicare and help for the poor will be cut. All this just like in Europe and the UK to pay for the mess the rich ruling class has got itself into.
Capitalism will always find a way of surviving and more often than not makes the working class pay for something it did not create.
So ordinary working Americans must be prepared for large scale cuts in living standards and a drop in pay and jobs significantly. They must show the feeling of Westconsin where recently there has been mass struggles with unions and the police caving in and joining with the strikers. The struggles in Westconsin must be broadened out across the great nation and spread to every town and city. Only a mass collective action of the working class can push back these cuts and austerity.
Aswell as this ordinary Americans will need a political voice which they do not have at present. With Republicans and Democrats seemingly offering no alternative to cuts. Just like in Britain there is no mass workers party speaking for the interests of ordinary working people. A formation of such a party is needed in America to linking up with the international movement for the need for socialism across the globe replacing this horrible rotten capitalist system which has clearly failed.
Tough times lay ahead for all of us as i have previously blogged about but now is the time to resist and stand up to be counted. Its time to take sides and decide what kind of future world we want to live in. I know where i stand. On the side of the workers. do you ?
Friday, 24 June 2011
EU tells Greeks to take more austerity or no bailout
So the EU and its moneyman have threatened Greeks need to take further actions of austerity before they will be given their new bailout package which will in the long run result in more cuts as they will need to pay this back one day.
This imagine reminds me of some awful medicine when you were younger being forced to take this awful tasting medicine as we are told it will make us better. We are not sure of this and often feel worse because of it.
This is a very similar feeling the Greek workers must be feeling today. When they are being told they require further privatisation and further cuts to their pay and jobs.
We can identify with this in the Uk where we are constantly being told there is no alternative we need to cut. Even Britains opposition the Labour party who claim to stand up for workers, which i completely refute admit there need to be cuts too all be a little slower and nicer.
i dont know about you but i dont know of any cuts that dont hurt or are nice.
EU leaders have urged all Greek politicians to support new spending cuts and tax hikes, saying there is no alternative if debt-laden Athens is to qualify for a second massive bail-out.
The second rescue is being negotiated in Brussels. It is expected to be about 120bn euros (£107bn; $171bn).
"There will be a new programme for Greece, on which the Greek parliament will have to vote next week," said Germany's Chancellor Angela Merkel.
The UK says it will not contribute.
EU leaders held a second day of summit talks in Brussels on Friday dominated by the Greek debt crisis, which threatens the stability of the 17-nation eurozone.
"In the case of Britain I sought assurances that Britain wouldn't be pulled into a eurozone package for Greece, and I've received those assurances," UK Prime Minister David Cameron said.
Ms Merkel reiterated: "We will do everything to stabilise the euro."
She spoke of the Greek opposition needing to "fulfil its historic responsibilities".
Separately, the leaders agreed that Croatia should join the EU. The target for Croatia's accession is July 2013. "There are no reservations, as we had with Bulgaria and Romania," Ms Merkel said.
EU pressure on Greece
The BBC's Matthew Price in Brussels says Europe's exasperation with Greece's economic woes is all too clear.
In their summit conclusions the EU leaders called on "all political parties in Greece to support the programme's main objectives", saying "national unity is a prerequisite for success".
Our correspondent says it was a direct challenge to the Greek opposition, which has threatened to reject the budget cuts when they are put to parliament next week.
Of course there has been mass protests on the streets of Greece this week and they have now experienced 9 general strikes. Effort now needs to be to provide a working class alternative to the cuts package and offer a way out of this vicious circle of debt, cuts and austerity leading to more pain for the good working Greeks.
A new working class alternative that can lead the people out of the grips of capitalism and show things do not have to be this way. There is a alternative and that is making the rich pay. By the workers taking over the commanding heights of the economy and running the economy in the interest of the many not just the few in a planned economy benifiting all not just the moneymen will be the first step to helping Greece out of this mess.
This imagine reminds me of some awful medicine when you were younger being forced to take this awful tasting medicine as we are told it will make us better. We are not sure of this and often feel worse because of it.
This is a very similar feeling the Greek workers must be feeling today. When they are being told they require further privatisation and further cuts to their pay and jobs.
We can identify with this in the Uk where we are constantly being told there is no alternative we need to cut. Even Britains opposition the Labour party who claim to stand up for workers, which i completely refute admit there need to be cuts too all be a little slower and nicer.
i dont know about you but i dont know of any cuts that dont hurt or are nice.
EU leaders have urged all Greek politicians to support new spending cuts and tax hikes, saying there is no alternative if debt-laden Athens is to qualify for a second massive bail-out.
The second rescue is being negotiated in Brussels. It is expected to be about 120bn euros (£107bn; $171bn).
"There will be a new programme for Greece, on which the Greek parliament will have to vote next week," said Germany's Chancellor Angela Merkel.
The UK says it will not contribute.
EU leaders held a second day of summit talks in Brussels on Friday dominated by the Greek debt crisis, which threatens the stability of the 17-nation eurozone.
"In the case of Britain I sought assurances that Britain wouldn't be pulled into a eurozone package for Greece, and I've received those assurances," UK Prime Minister David Cameron said.
Ms Merkel reiterated: "We will do everything to stabilise the euro."
She spoke of the Greek opposition needing to "fulfil its historic responsibilities".
Separately, the leaders agreed that Croatia should join the EU. The target for Croatia's accession is July 2013. "There are no reservations, as we had with Bulgaria and Romania," Ms Merkel said.
EU pressure on Greece
The BBC's Matthew Price in Brussels says Europe's exasperation with Greece's economic woes is all too clear.
In their summit conclusions the EU leaders called on "all political parties in Greece to support the programme's main objectives", saying "national unity is a prerequisite for success".
Our correspondent says it was a direct challenge to the Greek opposition, which has threatened to reject the budget cuts when they are put to parliament next week.
Of course there has been mass protests on the streets of Greece this week and they have now experienced 9 general strikes. Effort now needs to be to provide a working class alternative to the cuts package and offer a way out of this vicious circle of debt, cuts and austerity leading to more pain for the good working Greeks.
A new working class alternative that can lead the people out of the grips of capitalism and show things do not have to be this way. There is a alternative and that is making the rich pay. By the workers taking over the commanding heights of the economy and running the economy in the interest of the many not just the few in a planned economy benifiting all not just the moneymen will be the first step to helping Greece out of this mess.
Sunday, 22 May 2011
The worst is yet to come
I thought i'd share a excellent article which featured in socialism today a monthly publication of more in depth look at articles from our party. I foundt his a interesting read and shows we have not seen the start of this crisis barely and it is bound to get a lot worse before getting better.
The following article is by Lynn Walsh a good comrade in the labour and trade union movement for many years now.
Lynn Walsh, Editor of Socialism Today
The Con-Dem chancellor, George Osborne, claims his budget (24 March) is the "most pro-growth budget for a generation". But the British economy is barely crawling along, and the budget will do nothing to promote growth.
The government previously predicted 2.3% growth of gross domestic product (GDP - value of the total output of goods and services) for 2011. Now, the Office for Budget Responsibility (OBR) forecasts meagre growth of 1.7% of GDP for 2011. Even that may prove to be optimistic given the scale of spending cuts and tax increases.
Consumer spending, which has been the locomotive of the British economy over recent years, is falling. This is the chilling effect of job losses, escalating prices, and fear of what is to come. The former boss of Asda supermarket, Andy Bond, warns that worse is yet to come. "You’re kidding yourself if you think the worst is over and we’ve had a consumer recession - it’s ahead of us." The bosses of big supermarkets and high street stores, like Dixons and Mothercare, are warning of reduced sales and company profits.
"The economy," comments the Financial Times (6 April), "has been much weaker over the past six months than almost any economist expected." It was "practically stagnant over the past two quarters even before the impact of higher inflation and deeper spending cuts, according to a respected economics research group [National Institute of Economic and Social Research]."
As bad as they are, the Con-Dem cuts have so far merely been nibbling at public services: "The deeper cuts will bite with increased severity over the coming years." (Financial Times editorial, 25 March) Osborne’s fraudulent ’expansionary austerity’ is going to be austerity, austerity, austerity.
Squeezed incomes
Living standards have already been severely hit by inflation and squeezed wages. Prices are rising by 5.1% a year, according to the RPI (retail prices index, which includes housing costs).
At the same time, wages are only increasing by 2%, which means a 3% fall in real (inflation-adjusted) wages. Every 1% fall in real wages means a loss of £250 a year. This has resulted in the first fall in disposable income for over three decades, and there is likely to be a further fall in 2011.
The BBC Panorama programme recently carried out a survey of actual take-home pay (BBC News, 28 March). This showed that, on average, workers are taking home £1,088 less a year than two years ago. Their real pay has fallen by 5% since the beginning of 2009, which was half way through the recession.
The sharpest drop in real pay was in the construction industry, where it was £99 a month less. In the public sector, average pay was £45 a month less, while in the retail sector it was £41 a month less.
Privatising debt
One of the most alarming predictions for the next few years is for a huge rise in household debt. The Con-Dem government is aiming to cut public debt by £43 billion. At the same time, the OBR estimates that private-household debt (including mortgages and credit card debt) will rise by a staggering £245 billion. With increased unemployment, squeezed wages, higher prices and taxes, people will borrow more simply to survive.
In effect, this is the privatisation of the state debt, a huge share of which came from the nationalisation of bank losses. Now, spending cuts and tax increases will push millions deeper into debt, throwing a huge burden onto working class families.
By 2015, according to the OBR, debt as a percentage of household income will increase from the current 160% to 175%. In hard figures, this means a rise from an average of £58,000 debt to £66,291 by 2015.
Petrol tax
Faced with explosive public anger over the soaring price of petrol and diesel, Osborne cut fuel duty by 1p a litre and postponed a further 3p rise until January 2012. Undoubtedly, the government fears the possibility of another fuel price protest on the lines of September 2000, when lorry drivers and farmers blockaded oil refineries and jammed motorways. At that time, protests were encouraged by the Tory opposition, but new protests would now pose a threat to the Con-Dem government.
However, the 20% VAT on fuel will remain, and pump prices will no doubt continue to rise as a result of the rise in world oil prices, due to the crisis in the Middle East and North Africa.
To pay for the fuel duty cut, Osborne has raised taxes on oil production. The windfall profits tax on UK oil and gas production will increase from 20% to 32%, which is expected to bring in an additional £2 billion. Despite their increased profits from the 35% increase in oil prices over the last five months, the oil companies are screaming about this very limited tax increase, peanuts to these giant corporations. Malcolm Webb, chief executive of Oil and Gas UK, said: "This change in the tax regime will decrease investment, increase imports and drive UK jobs to other areas of the world."
This is a barely disguised threat of a ’strike of capital’ if the government increases its tax on oil production. They are unlikely to carry this out, at this time, however, because of the immensely profitable reserves that remain in the North Sea, especially given the fact that oil has now risen to around $120 a barrel.
Nevertheless, it is an indication of the likely reaction of big business, like the banks, to the threat of a ’Robin Hood tax’ proposed by the TUC. Without measures to take control of big business and mobilise mass support for such measures, big business will attempt to sabotage any such steps through withholding investment, etc.
Heading for disaster
The Con-Dem government’s leading economic policy guru, Oliver Letwin, has revealed the private discussions of Con-Dem ministers. "Leading up to the recent budget, we took the view collectively in cabinet that we faced an immediate national crisis in the form of less growth and jobs than we needed." (The Guardian, 31 March) Nothing in Osborne’s budget will overcome this crisis, which will deepen in the coming months.
In response to the budget’s supposedly pro-growth measures, the ’independent’ OBR concluded: "We do not believe there is sufficiently strong evidence to justify changing our trend growth assumption in light of policy measures announced in budget 2011."
It is predicting a mere 1.7% growth in GDP for 2011. At the same time, unemployment is projected to continue to an appalling 2.52 million or 8.2% of the workforce. This includes over a million unemployed young people.
The Con-Dem government’s aim is to reduce the government’s budget deficit to near zero by 2014-15. This is an unrealistic objective even from the point of view of big business and their system - and is likely to prove counter-productive. It is a doctrinaire policy dictated by the interests of the big banks and wealthy speculators, who manipulate bond markets in search of speculative profits.
Wiping out the budget deficit depends on faster economic growth, which is why Osborne continually claims he is promoting "expansionary austerity" through pro-growth measures.
His budget, however, did not impress the financial markets that much. The rating agency, Moodys, which assesses the credit status of borrowers, including governments, warned that "slower growth combined with weaker-than-expected fiscal consolidation could cause the UK’s debt metrics to deteriorate to a point that would be inconsistent with a AAA rating."
Near zero growth or even a new recession would mean even higher unemployment and reduced tax revenues. The Con-Dems’ savage austerity policy could then result in an increase in the deficit, the worst of all worlds.
The so-called ’expansionary austerity’ cannot provide a way out for sickly British capitalism. The crisis referred to by Letwin can only deepen. The Con-Dem government has already been shaken by mass opposition, especially the mighty 26 March TUC demonstration in London. It has been forced to partially reverse the abolition of education maintenance allowance, and to announce a ’natural break’ on the savaging of the NHS through accelerated privatisation.
The 26 March demonstration was only a beginning. It should be the prelude to further action, especially coordinated public sector strikes against cuts, a massive weekday demonstration, and a 24-hour general strike.
Black Wednesday budget
There are 44 changes in tax and benefits in Osborne’s budget. With such a complex tax/benefit system it is very hard to calculate their exact effect. But one thing is certain: most of the changes will cut the incomes of working-class families. The government’s claim that everyone - apart from the rich - will benefit is completely false.
One organisation, Credit Action, calculates that, on average, the changes will reduce household income by at least £200 a year. The Institute for Fiscal Studies (IFS) reckons that the average family income is expected to still be lower in 2013 than it was in 2008, making it the biggest five-year drop for more than 40 years. The IFS also calculates that the typical pensioner household has seen its real annual income fall by 2.4% (£456) since 2008.
However, these estimates come before further price rises, job losses, squeezed pay levels, and benefit cuts. The Centre for Economic and Business Research reckons the higher cost of living in 2011 will mean that the average family will be £910 worse off this year - the tightest squeeze on finances since 1921.
This year’s budget, moreover, is a supplement to last year’s horrendous Con-Dem spending review which spelt out £81 billion cuts and £33 billion tax raises by 2013.
The basic personal tax allowance (the threshold below which no income tax is paid) is to rise by £1,000 to £7,475, which means around 500,000 workers will not pay income tax.
This small gain, however, will be wiped out for many by the loss of services through cuts and reduced benefits. In particular, changes in tax credits and a freezing of child allowances will mean a sharp cut for working parents.
•Many middle class families will be squeezed by the lowering of the threshold for the higher (40%) tax rate from £37,401 to £35,000, which will mean around 750,000 workers paying significantly more tax (as well as higher national insurance contributions). Osborne tried to provide some populist window dressing through a number of taxes aimed at big business and the wealthy.
•The levy on windfall bank profits (heavily subsidised by state support during the crisis) is being marginally increased. North Sea oil companies will have to pay another £2 billion on their soaring profits.
•There will be a tax on passengers in private jets, and the stamp duty on the purchase of houses over £1 million will be raised to 5%. At the same time, however, there are concessions on stamp duty for developers and landlords buying multiple properties.
•The fee paid by wealthy overseas visitors to register as ’non-doms’ will be raised to £50,000, but they will continue to enjoy the privilege of paying no UK tax on their offshore profits.
•In the small print of the budget, there is a whole series of tax allowances for big business. Big companies will be able to offset against tax investments in enterprise zones, research and development, and many forms of new capital investment.
•Above all, corporation tax, currently 28%, has been cut by 2% with the promise of further cuts to 23% in three years’ time.
•Osborne has also promised that the 50% top rate of tax on those earning over £150,000 will be reduced in the future. This highlights an important aspect of the Con-Dems’ policy. Many of the current taxes levied on big business and the wealthy minority are regarded as temporary, to be reduced in the future. On the other hand, the cuts in public spending, with the massive loss of services and public sector jobs, are regarded as part of the permanent reduction of the public sector - in other words, a permanent blow to the living standards and well-being of many millions of workers.
The following article is by Lynn Walsh a good comrade in the labour and trade union movement for many years now.
Lynn Walsh, Editor of Socialism Today
The Con-Dem chancellor, George Osborne, claims his budget (24 March) is the "most pro-growth budget for a generation". But the British economy is barely crawling along, and the budget will do nothing to promote growth.
The government previously predicted 2.3% growth of gross domestic product (GDP - value of the total output of goods and services) for 2011. Now, the Office for Budget Responsibility (OBR) forecasts meagre growth of 1.7% of GDP for 2011. Even that may prove to be optimistic given the scale of spending cuts and tax increases.
Consumer spending, which has been the locomotive of the British economy over recent years, is falling. This is the chilling effect of job losses, escalating prices, and fear of what is to come. The former boss of Asda supermarket, Andy Bond, warns that worse is yet to come. "You’re kidding yourself if you think the worst is over and we’ve had a consumer recession - it’s ahead of us." The bosses of big supermarkets and high street stores, like Dixons and Mothercare, are warning of reduced sales and company profits.
"The economy," comments the Financial Times (6 April), "has been much weaker over the past six months than almost any economist expected." It was "practically stagnant over the past two quarters even before the impact of higher inflation and deeper spending cuts, according to a respected economics research group [National Institute of Economic and Social Research]."
As bad as they are, the Con-Dem cuts have so far merely been nibbling at public services: "The deeper cuts will bite with increased severity over the coming years." (Financial Times editorial, 25 March) Osborne’s fraudulent ’expansionary austerity’ is going to be austerity, austerity, austerity.
Squeezed incomes
Living standards have already been severely hit by inflation and squeezed wages. Prices are rising by 5.1% a year, according to the RPI (retail prices index, which includes housing costs).
At the same time, wages are only increasing by 2%, which means a 3% fall in real (inflation-adjusted) wages. Every 1% fall in real wages means a loss of £250 a year. This has resulted in the first fall in disposable income for over three decades, and there is likely to be a further fall in 2011.
The BBC Panorama programme recently carried out a survey of actual take-home pay (BBC News, 28 March). This showed that, on average, workers are taking home £1,088 less a year than two years ago. Their real pay has fallen by 5% since the beginning of 2009, which was half way through the recession.
The sharpest drop in real pay was in the construction industry, where it was £99 a month less. In the public sector, average pay was £45 a month less, while in the retail sector it was £41 a month less.
Privatising debt
One of the most alarming predictions for the next few years is for a huge rise in household debt. The Con-Dem government is aiming to cut public debt by £43 billion. At the same time, the OBR estimates that private-household debt (including mortgages and credit card debt) will rise by a staggering £245 billion. With increased unemployment, squeezed wages, higher prices and taxes, people will borrow more simply to survive.
In effect, this is the privatisation of the state debt, a huge share of which came from the nationalisation of bank losses. Now, spending cuts and tax increases will push millions deeper into debt, throwing a huge burden onto working class families.
By 2015, according to the OBR, debt as a percentage of household income will increase from the current 160% to 175%. In hard figures, this means a rise from an average of £58,000 debt to £66,291 by 2015.
Petrol tax
Faced with explosive public anger over the soaring price of petrol and diesel, Osborne cut fuel duty by 1p a litre and postponed a further 3p rise until January 2012. Undoubtedly, the government fears the possibility of another fuel price protest on the lines of September 2000, when lorry drivers and farmers blockaded oil refineries and jammed motorways. At that time, protests were encouraged by the Tory opposition, but new protests would now pose a threat to the Con-Dem government.
However, the 20% VAT on fuel will remain, and pump prices will no doubt continue to rise as a result of the rise in world oil prices, due to the crisis in the Middle East and North Africa.
To pay for the fuel duty cut, Osborne has raised taxes on oil production. The windfall profits tax on UK oil and gas production will increase from 20% to 32%, which is expected to bring in an additional £2 billion. Despite their increased profits from the 35% increase in oil prices over the last five months, the oil companies are screaming about this very limited tax increase, peanuts to these giant corporations. Malcolm Webb, chief executive of Oil and Gas UK, said: "This change in the tax regime will decrease investment, increase imports and drive UK jobs to other areas of the world."
This is a barely disguised threat of a ’strike of capital’ if the government increases its tax on oil production. They are unlikely to carry this out, at this time, however, because of the immensely profitable reserves that remain in the North Sea, especially given the fact that oil has now risen to around $120 a barrel.
Nevertheless, it is an indication of the likely reaction of big business, like the banks, to the threat of a ’Robin Hood tax’ proposed by the TUC. Without measures to take control of big business and mobilise mass support for such measures, big business will attempt to sabotage any such steps through withholding investment, etc.
Heading for disaster
The Con-Dem government’s leading economic policy guru, Oliver Letwin, has revealed the private discussions of Con-Dem ministers. "Leading up to the recent budget, we took the view collectively in cabinet that we faced an immediate national crisis in the form of less growth and jobs than we needed." (The Guardian, 31 March) Nothing in Osborne’s budget will overcome this crisis, which will deepen in the coming months.
In response to the budget’s supposedly pro-growth measures, the ’independent’ OBR concluded: "We do not believe there is sufficiently strong evidence to justify changing our trend growth assumption in light of policy measures announced in budget 2011."
It is predicting a mere 1.7% growth in GDP for 2011. At the same time, unemployment is projected to continue to an appalling 2.52 million or 8.2% of the workforce. This includes over a million unemployed young people.
The Con-Dem government’s aim is to reduce the government’s budget deficit to near zero by 2014-15. This is an unrealistic objective even from the point of view of big business and their system - and is likely to prove counter-productive. It is a doctrinaire policy dictated by the interests of the big banks and wealthy speculators, who manipulate bond markets in search of speculative profits.
Wiping out the budget deficit depends on faster economic growth, which is why Osborne continually claims he is promoting "expansionary austerity" through pro-growth measures.
His budget, however, did not impress the financial markets that much. The rating agency, Moodys, which assesses the credit status of borrowers, including governments, warned that "slower growth combined with weaker-than-expected fiscal consolidation could cause the UK’s debt metrics to deteriorate to a point that would be inconsistent with a AAA rating."
Near zero growth or even a new recession would mean even higher unemployment and reduced tax revenues. The Con-Dems’ savage austerity policy could then result in an increase in the deficit, the worst of all worlds.
The so-called ’expansionary austerity’ cannot provide a way out for sickly British capitalism. The crisis referred to by Letwin can only deepen. The Con-Dem government has already been shaken by mass opposition, especially the mighty 26 March TUC demonstration in London. It has been forced to partially reverse the abolition of education maintenance allowance, and to announce a ’natural break’ on the savaging of the NHS through accelerated privatisation.
The 26 March demonstration was only a beginning. It should be the prelude to further action, especially coordinated public sector strikes against cuts, a massive weekday demonstration, and a 24-hour general strike.
Black Wednesday budget
There are 44 changes in tax and benefits in Osborne’s budget. With such a complex tax/benefit system it is very hard to calculate their exact effect. But one thing is certain: most of the changes will cut the incomes of working-class families. The government’s claim that everyone - apart from the rich - will benefit is completely false.
One organisation, Credit Action, calculates that, on average, the changes will reduce household income by at least £200 a year. The Institute for Fiscal Studies (IFS) reckons that the average family income is expected to still be lower in 2013 than it was in 2008, making it the biggest five-year drop for more than 40 years. The IFS also calculates that the typical pensioner household has seen its real annual income fall by 2.4% (£456) since 2008.
However, these estimates come before further price rises, job losses, squeezed pay levels, and benefit cuts. The Centre for Economic and Business Research reckons the higher cost of living in 2011 will mean that the average family will be £910 worse off this year - the tightest squeeze on finances since 1921.
This year’s budget, moreover, is a supplement to last year’s horrendous Con-Dem spending review which spelt out £81 billion cuts and £33 billion tax raises by 2013.
The basic personal tax allowance (the threshold below which no income tax is paid) is to rise by £1,000 to £7,475, which means around 500,000 workers will not pay income tax.
This small gain, however, will be wiped out for many by the loss of services through cuts and reduced benefits. In particular, changes in tax credits and a freezing of child allowances will mean a sharp cut for working parents.
•Many middle class families will be squeezed by the lowering of the threshold for the higher (40%) tax rate from £37,401 to £35,000, which will mean around 750,000 workers paying significantly more tax (as well as higher national insurance contributions). Osborne tried to provide some populist window dressing through a number of taxes aimed at big business and the wealthy.
•The levy on windfall bank profits (heavily subsidised by state support during the crisis) is being marginally increased. North Sea oil companies will have to pay another £2 billion on their soaring profits.
•There will be a tax on passengers in private jets, and the stamp duty on the purchase of houses over £1 million will be raised to 5%. At the same time, however, there are concessions on stamp duty for developers and landlords buying multiple properties.
•The fee paid by wealthy overseas visitors to register as ’non-doms’ will be raised to £50,000, but they will continue to enjoy the privilege of paying no UK tax on their offshore profits.
•In the small print of the budget, there is a whole series of tax allowances for big business. Big companies will be able to offset against tax investments in enterprise zones, research and development, and many forms of new capital investment.
•Above all, corporation tax, currently 28%, has been cut by 2% with the promise of further cuts to 23% in three years’ time.
•Osborne has also promised that the 50% top rate of tax on those earning over £150,000 will be reduced in the future. This highlights an important aspect of the Con-Dems’ policy. Many of the current taxes levied on big business and the wealthy minority are regarded as temporary, to be reduced in the future. On the other hand, the cuts in public spending, with the massive loss of services and public sector jobs, are regarded as part of the permanent reduction of the public sector - in other words, a permanent blow to the living standards and well-being of many millions of workers.
Thursday, 7 April 2011
Portugal becomes latest country to ask for a austerity bailout
So as we hear our news tonight we hear Portugal is the latest country to aqquire a financial bailout from the EU. this is the third country now after Greece and Ireland. If this trend continues this really could spell a crisis for the major forces in the EU.
Portugal's caretaker Prime Minister Jose Socrates has said that he has asked the European Union for financial assistance.
Mr Socrates said the country was "at too much risk that it shouldn't be exposed to".
The government has long resisted asking for aid but last week admitted that it had missed its 2010 budget deficit target.
Portugal follows Greece and the Irish Republic in seeking a bail-out.
"I always said asking for foreign aid would be the final way to go but we have reached the moment," Mr Socrates said.
"Above all, it's in the national interest."
European Commission President Jose Manuel Barroso said in a statement that Portugal's request would be processed "in the swiftest possible manner, according to the rules applicable".
He also reaffirmed his "confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners".
Borrowing costs
Mr Socrates did not say how much aid Portugal would ask for. Negotiations will now be underway and the BBC's business editor Robert Peston said rescue loans could amount to as much as 80bn euros ($115bn; £70bn).
Mr Socrates was speaking after Finance Minister Fernando Teixeira dos Santos said it was necessary to resort to financial aid from the EU.
Matthew Price
Europe correspondent, BBC News
--------------------------------------------------------------------------------
First Greece, then Ireland, now Portugal. But unlike the previous two bail-outs, this one does not seem to have provoked panic - either in the corridors of power here, nor on the markets.
The EU's top economic official Olli Rehn called the Portugese decision a "responsible move". The President of the European Commission Jose Manuel Barroso - himself Portugese - said the request would be processed as quickly as possible.
A team could be dispatched to Portugal in the coming days.
EU finance ministers hold a scheduled meeting in Hungary at the end of the week. Portugal will be top of the agenda.
The European Commission and the European Central Bank are both expected to be involved in the bail-out funding. The International Monetary Fund says it stands ready to help as well.
Earlier, the government raised about 1bn euros after tapping the financial markets in order to repay loans, but will have to pay a higher interest rate to lenders.
Portugal's cost of borrowing has risen sharply since the minority Socialist government resigned last month after its proposed tougher austerity measures were defeated in parliament.
Since then several rating agencies have downgraded the country's debt.
An informal meeting of European finance ministers had already been scheduled for Thursday in Budapest. Portugal was not originally on the agenda but is expected to be discussed.
The UK Treasury Minister Mark Hoban will attend. A source at the Treasury said that the bilateral loan the UK offered to the Irish Republic was "very much a special case" and a similar offer is "not on the table" for Portugal.
Jan Randolph, head of sovereign risk at IHS Global Insight, told the BBC that Portugal might organise "some sort of bridging loan" in the short term.
But he added: "The real big loan over several years will require a medium-term plan and I don't think that can be agreed until the new government comes into place."
Elections are likely to take place in a few months' time.
Many things stand out for me in this piece i've found from the BBC. One is the simialrities in language used by this guy. The term "national interest" again reminds me of David cameron's arguement that the cuts in the Uk wre in the national interest and dealing with the deficit is in our national interest. Plus again i feel that any bailout for any country now will result in heavy cuts that again you guessed it fall on the working class. Portugal isnt a very rich country and its working class will unfortunatly have to suffer from these cuts again i am sure. Not if they resist though.
Again i am sure that as in Portugal as in Ireland as in Greece mistakes from teh bankers and the gambling nature of these bankers has caused this crisis. But instead of the bankers paying for their mistakes of which they should the burden is placed on the shoulders of the working class again and again. They want to take back all that we have won over the years and put us back in our box. I do hope the good people of Portugal can organise and form a resistance to these oncoming cuts. They like us face the same struggles and battles ahead in Portugal and we stand by the comrades in taht country to build for an alternative with strikes and demo's on a large mass scale.
Portugal's caretaker Prime Minister Jose Socrates has said that he has asked the European Union for financial assistance.
Mr Socrates said the country was "at too much risk that it shouldn't be exposed to".
The government has long resisted asking for aid but last week admitted that it had missed its 2010 budget deficit target.
Portugal follows Greece and the Irish Republic in seeking a bail-out.
"I always said asking for foreign aid would be the final way to go but we have reached the moment," Mr Socrates said.
"Above all, it's in the national interest."
European Commission President Jose Manuel Barroso said in a statement that Portugal's request would be processed "in the swiftest possible manner, according to the rules applicable".
He also reaffirmed his "confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners".
Borrowing costs
Mr Socrates did not say how much aid Portugal would ask for. Negotiations will now be underway and the BBC's business editor Robert Peston said rescue loans could amount to as much as 80bn euros ($115bn; £70bn).
Mr Socrates was speaking after Finance Minister Fernando Teixeira dos Santos said it was necessary to resort to financial aid from the EU.
Matthew Price
Europe correspondent, BBC News
--------------------------------------------------------------------------------
First Greece, then Ireland, now Portugal. But unlike the previous two bail-outs, this one does not seem to have provoked panic - either in the corridors of power here, nor on the markets.
The EU's top economic official Olli Rehn called the Portugese decision a "responsible move". The President of the European Commission Jose Manuel Barroso - himself Portugese - said the request would be processed as quickly as possible.
A team could be dispatched to Portugal in the coming days.
EU finance ministers hold a scheduled meeting in Hungary at the end of the week. Portugal will be top of the agenda.
The European Commission and the European Central Bank are both expected to be involved in the bail-out funding. The International Monetary Fund says it stands ready to help as well.
Earlier, the government raised about 1bn euros after tapping the financial markets in order to repay loans, but will have to pay a higher interest rate to lenders.
Portugal's cost of borrowing has risen sharply since the minority Socialist government resigned last month after its proposed tougher austerity measures were defeated in parliament.
Since then several rating agencies have downgraded the country's debt.
An informal meeting of European finance ministers had already been scheduled for Thursday in Budapest. Portugal was not originally on the agenda but is expected to be discussed.
The UK Treasury Minister Mark Hoban will attend. A source at the Treasury said that the bilateral loan the UK offered to the Irish Republic was "very much a special case" and a similar offer is "not on the table" for Portugal.
Jan Randolph, head of sovereign risk at IHS Global Insight, told the BBC that Portugal might organise "some sort of bridging loan" in the short term.
But he added: "The real big loan over several years will require a medium-term plan and I don't think that can be agreed until the new government comes into place."
Elections are likely to take place in a few months' time.
Many things stand out for me in this piece i've found from the BBC. One is the simialrities in language used by this guy. The term "national interest" again reminds me of David cameron's arguement that the cuts in the Uk wre in the national interest and dealing with the deficit is in our national interest. Plus again i feel that any bailout for any country now will result in heavy cuts that again you guessed it fall on the working class. Portugal isnt a very rich country and its working class will unfortunatly have to suffer from these cuts again i am sure. Not if they resist though.
Again i am sure that as in Portugal as in Ireland as in Greece mistakes from teh bankers and the gambling nature of these bankers has caused this crisis. But instead of the bankers paying for their mistakes of which they should the burden is placed on the shoulders of the working class again and again. They want to take back all that we have won over the years and put us back in our box. I do hope the good people of Portugal can organise and form a resistance to these oncoming cuts. They like us face the same struggles and battles ahead in Portugal and we stand by the comrades in taht country to build for an alternative with strikes and demo's on a large mass scale.
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