We survived the Asian financial crisis of 1997, the collapse of Long Term Capital Management and the Russian debt default of 1998, the dotcom crash of 2000, the 9/11 attacks the following year; for over a decade now, the world economy has given every appearance of being teflon-coated
Now something is clearly sticking to the saucepan, as last week's failure of Carlyle Capital Corporation and JP Morgan’s dramatic rescue of Bear Stearns over the weekend underlines.
The job losses on Wall Street will translate into job losses on Main Street soon enough. There can be little doubt that the US is currently in recession, even if the time lag involved in collecting and processing data means that this is yet to be confirmed by the stats.
Americans are no longer in a position to act as the world's consumers of last resort; the repercussions will be felt globally.
Until now, the prognoses offered by serious economic commentators for the coming period have been divided. But in the last few days, the optimists appear suddenly to have gone to ground. A consensus seems to be emerging that we are about to witness a sharp downturn, and perhaps the nastiest since world war two.
Some are even drawing parallels with the 1930s, a decade whose events are indelibly impressed into the collective consciousness of the international ruling class. Yet economics textbooks insist that a re-run of the Great Depression - pictured - is now impossible. Welfare payments - even at the nugatory levels on offer on the other side of the Atlantic - supposedly constitute built-in stabilisers.
Unfortunately, the same smelly little orthodoxies that prevailed in the Hoover era have been received wisdom ever since the collapse of the Keynesian consensus in the late 1970s. Even now, some neoclassical economist somewhere is arguing that benefits need to be cut so that the labour market clears.
Efforts by policymakers to influence the economy deploying solely the prescriptions of the last three decades will prove, to use Keynes' own analogy, as efficacious as pushing on a piece of string. As the experience of Japan in the 1990s proves, not even interest rates tantamount to free money are guaranteed to restart an economy once a property bubble bursts.
What is more, if the Fed does go ahead with today’s anticipated full percentage point interest rate cut, one consequence could be the destabilisation of emerging market economies that peg or tightly manage their currencies against the dollar.
US interest rates below 3% will fuel inflation in places such as China, Russia and Saudi Arabia. The resultant surging food prices could even fuel social unrest in these countries.
It’s odd to reflect that nobody under 35 will have experienced a serious or protracted recession in their working lives. Younger readers can take it from those that have; they are not much fun. They don't translate into automatic radicalisation, either.
Comments (13)
Imo, one of the most strident similarities betwen now and the 1930's is that of New Labour's welfare policies and that of Mcdonald and the means test. Though, that did lead to the growth of the National Unemployed Workers Movement and riots across the country. The sad thing is now the left ignores issues like welfare and benefits and uk poverty, which is a very bad thing as NL would not hesitate to slash benefits in a crisis.
soory, what was that?
oh, they already have
RIP welfare state
Correct me if I'm wrong, but I can't see how New Labour's approach to the welfare state (and as a consequence their supply-side approach to the economy) can survive any serious economic downturn. If jobs were lost and unemployment went up significantly their 'welfare to work' policies would look about as useful as a boat in the desert. Costs would go through the roof as people are trained and advised and pushed towards an already flooded labour market, and falling tax revenue would simply make it unsustainable.
Which direction would New Labour go from there? I dread to think.
When people start talking about depressions and recessions, start to panic.
"When I were lad growing up in't '30s, we did slumps must better...none of this loony git Robert Peston ramblin' away on Radio 4...We had Keynes.."
A crisis of capitalism.
Form the Revolutionary Party now!
Labour to power on Socialist Policies. Nationalise the banks...OK, we've already started with one...Force Brown left...Elect (Cmde) Polly "Rosa" Toynbee on a revolutionary platform...
ALL POWER TO COMRADE DARLING AND THE (embro) WORKER'S NEW MEDYA SOVIETS!
"Tramp, tramp, tramp, the boys (etc) are marching!"
Looking on the bright side, does that mean that the military interventions in Iraq and Afghanistan would have to be ended? Or, would they still have money for that whatever happens?
It's not just a property bubble, it's a more general "five credit cards owing £15 000 in total" debt bubble. Back in August, Grant Thornton were forecasting that gross domestic product (GDP) would hit £1.33 trillion for 2007, less than the £1.35trn which was outstanding on mortgages, credit cards and personal loans in June.
At a time when pension funds are going to take a tremendous hit, and therefore when we should be saving more, food and energy bills are going up. The Telegraph today said a family spending £70 on their weekly groceries are now paying £400 more a year. Household energy bills? 13% increase on last year.
This is an interesting article:
"Due to our fractional reserve banking system, more than 95 percent of our money supply is created in the form of interest-bearing bank loans. These loans represent a claim on the real wealth of individuals, businesses, and governments. Compounding interest creates a positive feedback loop that causes the growth of our debt to accelerate over time, far outstripping our capacity to pay. During the 30-year period between 1976 and 2006, the total outstanding U.S. debt (household, government, and foreign) has increased 11.5 times compared with a 2.5 increase in GDP. The ratio of outstanding debt to GDP was 255 percent in 2006, compared to a debt to GDP ratio of 55 percent in 1976.
Using resources more efficiently and closing the loop are not new concepts to the sustainable business community. What is new is a slowing economy that threatens to undermine the urgency to act on climate change, resulting in even greater peril to our economy.
As we run up against the limits of the earth's natural resources, I expect that we will increasingly run up against limits in our economy. These encounters provide opportunities to reinvent our economic model in a way that recognizes that the economy is a subset of the environment and not the other way around. A sustainable future may ultimately depend on finding our way out of the positive feedback loop of escalating debt and developing new sustainable technologies, processes and practices to restore the health of our economy and planet."
Interesting article just posted over at the WSPUS website:
Bubble Troubles
But I would say that.
Yes when you combine together the fall in employment, the slowing of personal income, plunging residential construction sector and ongoing credit crunch it appears that a slow down is under way.
How far though, basically depends on at what point the Fed can stem the fall in house prices - and hence the level of write downs in the financial sector. What's decisively different between today and the 1929 is that then the US was booming while the rest of the world was in slump, today the US is undergoing a slow down while the rest of the world is booming.
Non oil imports have declined for the last two months in a row, yet exports from the rest of the world have barely skipped a beat. For a simple reason, the world isn't nearly as dependent on the USA as it was even a few years ago.
``What's decisively different between today and the 1929 is that then the US was booming while the rest of the world was in slump''.
If I recall what I have read correctly, it was only the financial markets that were booming up to the stock market crash in October, 1929---as a whole the US economy had actually started into a recession prior to the stock market collapse.
I've been trying to understand the Economics side of things, though it's quite a challenge with all the semi-academic semi-scientific theorising and analysis knocking around out there.
One thing I'm still struggling with is the justification for systems of interest. There are plenty of explanations of how varying interest rates have an effect on trade and monetary value when an interest system is already in place, but very little as to why you would design interest into an economic system in the first place (and I definitely haven't seen any argument for interest as a naturally occurring phenomenon).
Could anyone point me to such a justification or argument?
Yeah fair point, US industrial production had begun to slow before the crash, but the basic point about the world economy stands.
On interest rates, its simply the price of money, when profit rates are high and there's lots of money available to lend, then interest rates are low, when profit rates are falling and there is a shortage of money, then interest rates rise.
This is mediated by public bodies like the Federal Reserve in the USA, who can issue low interest rate bonds backed by future tax income and therefore very secure, to increase the supply of money in the short term and hence decrease the cost of money and interest rate - as they're doing now.
I heard that as a result of these measures, that the proportion of sub-prime borrowers who would see a rise in their interest rates when they were re-set this year had fallen from 100% to 20%. This is important as if they're able to reduce the defaults of sub-prime borrowers this will put a floor under the fall in house prices and therefore the losses on securitised debt.
This is again only possible because of the strength of the world economy, which means that inflation while rising, particularly in raw materials, is relatively low still.
On a separate point the current collapse of the US banking and financial sector raises the issue of the US place in the world.
As a result of the fall of the dollar Euroland will overtake the US in the next few weeks as the largest economic entity in the world economy.
Japan has seen the sharpest rise in its currency for many years.
China will grow by over 25% this year to exceed $4tn up from $900bn in 2000.
Which poses the question is this the end of US hegemony?
The world has been dominated by one super power since the collapse of the USSR in 1990. Globalisation was predicated on the opening up of the world economy to unlimited exploitation by the imperialists, but under the total dominance of the USA.
No longer?
After the humilitation of its forces in Iraq, the US can no longer risk or even threaten the further deployment of its military forces, certainly not in the short run.
But now its financial power is declining too and at a rate of knots.
Is this the end of America's domination of the world?
It's an interesting question Bill, but I am not so certain that we aren't witnessing a shift of capitalist hegemony from what was previously considered the global north to parts of the "new global north" that had previously been considered the "Global South" like China, India and so forth. I think the role of the EU has yet to be seen but certainly I wouldn't rule out a loss of economic power in Europe as well as the US.
The important point to highlight in all of this, as you have done, is that this is by no means the end of capitalism as doubtless some left groups who are wedded to Trotsky's catastrophist perspecitve will try and claim - and as they have been claiming since the Old Man's death. But it may be a shift in who the dominant capitalist powers are.
The interesting thing for leftists is that such a shift would be largely unprecendented in the modern world and could bring about very dramatic political and historical change as the populations of previously relatively wealthy countries are faced with poverty and starvation.
That being said, I think you (Bill) too easily dismiss the reality of US military hegemony. I don't believe that the US or the EU for that matter are willing to let go of their "Empire of Capital" without a bloody fight. If there really is a shift away from US hegemony and towards a new world economic dominance which is not in the traditional global north, I believe there will be quite a lot of bloodshed between now and then.