Central Bankers: A blind guide dog

by Michael Roberts

‘Forward guidance’ is the central bank buzz-word.  Three of the top four central banks in the world have now officially adopted it.  And the fourth has already made it very clear where its monetary policy is going.  Forward guidance is an attempt by the leading central banks to indicate more clearly what monetary policy will be for a reasonable period ahead along with the conditions for sustaining it. It aims to allow households, businesses and financial markets to know what to expect in central bank base rates for the foreseeable future.  In the current environment of low growth, high unemployment and an overhang of capacity, central bankers hope that forward guidance will exert downward pressure on long-term interest rates as economies recover.

Following their December 2012 meeting, US Federal Reserve policymakers announced their new policy of ‘forward guidance’. The Federal Open Market Committee (FOMC) said it forecast that a target range for the federal funds rate of 0-0.25% will be kept for as long as the unemployment rate remained above 6.5%, inflation between one and two years ahead rose no more than 50bp above the FOMC’s target of 2% a year, and longer-term inflation expectations remained ‘well anchored’. The FOMC reckoned that this meant the federal funds rate would be unchanged at least through mid-2015. The thresholds for unemployment and inflation were not trigger points for an immediate change of policy, but points when the FOMC would consider its options.

More recently, the European Central Bank has adopted its variation on ‘forward guidance’. In July, its governing council said it expected to keep its refinancing and deposit rates at present levels ‘for an extended period of time’, assuming it was right in its forecast of subdued inflation, weakness in the Eurozone economy and low credit growth.

And only last week, the Bank of England (BoE) joined the party, when its new governor, Mark Carney, former governor at the Bank of Canada, made his first monetary statement and announced that the BoE would introduce forward guidance too. The BoE followed the Fed, as usual, in almost exactly the same terms of guidance. It pledged to keep its base rate at its lowest level in its 300-year history until unemployment falls to 7% from its current level of 7.8%. How long would that take? The UK’s Monetary Policy Committee (MPC) reckoned that that unemployment ‘knockout’ target would not be reached until mid-2016 after the creation of about 750,000 more net jobs. However the MPC couched that guidance with some caveats. If the annual inflation rate looked like staying at 2.5% or higher in the medium-term, or if inflation expectations were out of control, or if the policy was threatening financial stability, then interest-rate policy could change earlier.

The reality is that ‘forward guidance’ from central banks is to the blind capitalist investor is being done by blind guide dogs.  Neither Bernanke nor Carney have any idea where unemployment, GDP growth and inflation will be next year, let alone in two or three years time.  The efficacy of this new policy is thus shot through with holes.

Forward guidance is really an addition to quantitative easing (QE), the policy of the central bank buying financial assets, like government or corporate bonds and printing the money to do so.  The idea is that with interest rates already near zero, the only way for the central bank to stimulate the capitalist economy is to boost the quantity of money rather than lower its price (interest rate).  But QE is based on a fallacy that increasing supply of money can lower its cost or price, in other words, the price of money can be set exogenously to the transactions made by banks and other lenders and borrowers of money and credit.  Actually, the demand for money is endogenously, by the decisions of capitalists to invest and consumers to buy (see my posts, http://thenextrecession.wordpress.com/2013/06/26/the-failure-of-qe-2/  and http://thenextrecession.wordpress.com/2012/08/25/qe-uk-banks-and-the-economy/).

While investment remains low and consumption is muted, the demand for more money is low.  So all that happens to this supply of ‘liquidity’ is that it flows into the purchase of financial assets and property, the unproductive sectors of the economy.  So the stock market is booms and house prices inflate, while the real economy stays weak.  A recent paper by Vasco Curdia and Andrea Ferrero at the Federal Reserve Bank of San Francisco (Efficacy of QE) found that the Fed’s QE measures from 2010 had helped to boost real GDP growth by just 0.13 percentage points and the bulk of this ‘boost’ was thanks to forward guidance, namely convincing investors that interest rates were not going to rise.  If that factor had been left out, the US real GDP would have risen only 0.04 per cent as a result of QE.

So if QE continues and interest rates are kept low until 2016 as Carney and Bernanke plan, then any boom will take place in property and the stock market not the real economy.  Already we have seen a sharp rise in home prices in both the US and the UK in the last year.

The UK’s consumer price inflation has always been higher than in the rest of Europe, partly because the UK is a rentier, service economy, with monopoly companies in many key sectors, which have pricing power, while pro-capitalist governments have raised indirect tax rates in many sectors, like travel, insurance, energy.  The inflation figure for July is just out at 2.8 yoy, down slightly from 2.9% yoy in June.  That’s still way higher than Carney’s target of 2% a year.  Factory gate inflation rose at its fastest pace in six months and further rises look set to come, with manufacturers crude oil input costs rising at their most rapid rate in over a year.

Even more significant is the move up in house prices.  The Royal Institution of Chartered Surveyors’ monthly survey pointed towards the biggest rise in house prices since 2006 and official data showed house prices rising faster than inflation at an annual 3.1%.  House prices in London were racing along at 8.1%.

And this is at a time when UK average earnings from work are rising at just 1% a year.  Indeed, wages in the UK have seen one of the largest falls in the European Union during the economic downturn.  Average hourly wages have fallen 5.5% since mid-2010, adjusted for inflation.  That is the fourth-worst decline among the 27 EU nations. Across the European Union as a whole, average wages fell 0.7%.  Only Greek, Portuguese and Dutch workers have had a steeper decline than the UK in hourly wages.  The Institute for Fiscal Studies said that a third of British workers who stayed in the same job saw a wage cut or freeze between 2010 and 2011 amid a rise in the cost of living. “The falls in nominal wages… during this recession are unprecedented,” the IFS said.

So with the biggest fall in real incomes in a generation, what does the UK’s new governor do?  He announces ‘forward guidance’ that will mean higher house prices and bigger speculative profits for the stock market.  After doing so, Carney had a weekend off in upper-class Oxfordshire, the British version of the US east coast Hamptons.  Apparently, according to news reports, Carney is a clubbable, “very social” man who mixed “among the movers and shakers” of Canadian society.  Now he has joined the so-called Chipping Norton Set — the group of powerful friends who live in Oxfordshire, including UK PM David Cameron and members of the international media mogul family, the Murdochs.  Carney is married through his wife Diana into a family of British aristocrats.  Diana is apparently “an outspoken economist who has written about the need to rebalance global wealth towards the poorest!”  economist who has written about the need to rebalance global wealth towards the poorest”!  A senior UK government source described Carney as “the perfect Davos man” — referring to the annual gathering of decision-makers in the Swiss ski resort where contacts and smooth-talking oil big deals.

So the Fed and the BoE will continue with useless ‘forward guidance’ that will only fuel a credit boom for the rich, while inflation and house prices spiral for the rest of us.  It’s the rich leading the blind.

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The advanced world picks up at start of H2 2013

by Michael Roberts

Stock markets around the world head towards new highs. And this is not surprising because recent economic data and surveys suggest that there has been a pick-up in activity in the advanced capitalist economies last month.   Despite weak employment figures in the US last week and very weak GDP figures for Q2 (see my post, http://thenextrecession.wordpress.com/2013/07/31/the-us-economy-bigger-but-not-healthier/) , it seems that the US had a better July.
My measure for US economic activity – a combined ISM index for manufacturing and services sectors – ticked up in July.

The more frequent but less reliable ECRI weekly indicator of US economic activity also supported that trend.

And for the first time since 2010, the purchasing managers’ indexes (PMIs) for the major economies all rose, even in the Eurozone, which is no longer contracting.  The UK PMI in particular leapt forward after several quarters of stagnation, if not contraction.  Indeed, the pace of expansion is the fastest since 2006..

But don’t get carried away, like the stock markets are.  The PMIs just show the pace of expansion or contraction not the level of manufacturing output or services growth or decline.    All the UK PMI shows is that the UK economy is growing at last after stagnating.   Indeed, real GDP growth is still likely to be little more than 1% this year.  And UK manufacturing is hardly cracking along.

At the same time, manufacturing PMIs for key emerging economies indicate that the pace of growth is slowing, not accelerating.

Overall, world GDP growth is modest at best, with the average real growth rate well below that before the crisis.

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Global capitalism: The global search for value

by Michael Roberts

In my view, we are now in a Long Depression, centred in the advanced capitalist economies but also affecting the emerging capitalist economies.  The latter do better because they still have ample supplies of cheap labour available to exploit (well, at least some larger emerging economies do).   So absolute surplus value can be increased without Marx’s law of profitability applying too strongly.  What do I mean by that?

Well, capitalists are permanently engaged in the search for value, or more specifically, surplus value.  They can get that globally by drawing more of the population into capitalist production. The big issue is how much longer capitalism can continue to appropriate value from human labour power when the workforce globally can no longer expand sufficiently.

Ironically, the UK’s right-wing City paper City Am put it from the perspective of capital: “People, not commodities, land or even capital, are the ultimate resource of an economy, as the US academic Julian Simon famously put it. Without talented, motivated, skilled and educated individuals, nothing is possible; capital itself is a product of labour.  Human ingenuity is able to overcome everything. Malthusians who dream of a shrinking population and who reflexively believe that every country is over-populated are wrong. This is always a lesson that nations suffering from shrinking populations relearn at great cost: all the productivity growth in the world is rarely enough to compensate for the psychological and actual effect of a declining population.”

More important, more people means more potential value to be appropriated by capital.  But getting more value and surplus value through extending the size of the workforce is increasingly difficult or even impossible in many advanced capitalist economies.

Instead, in these economies, capitalists must try and raise surplus value though the intensity of work and through more mechanisation and technology that saves labour i.e relative surplus value.  But that, as Marx explained, brings into operation the law of the tendency of the rate of profit to fall and the ultimate barrier to further accumulation and growth in value (see my post on http://thenextrecession.wordpress.com/2012/09/12/crisis-or-breakdown/).

Indeed the crisis in the south of the Eurozone is creating permanent damage to these economies: it is not just that their GDPs are shrinking, but there is an exodus of the workforce. The number of Greek and Spanish residents moving to other EU countries has doubled since 2007, reaching 39,000 and 72,000 respectively in 2011, according to new figures on immigration published by the OECD.  In contrast, Germany saw a 73% cent increase in Greek immigrants between 2011 and 2012, almost 50% for Spanish and Portuguese and 35% for Italians.

Japan is also suffering from the lack of expansion of its workforce.  In the short term GDP per capita growth in Japan looks better than its GDP growth so that US GDP per capita growth in recent years is little better than Japan.  Indeed on a per capita basis, the US has been stagnant since 2008 and Japan has risen slightly.

But longer term, this is bad news for Japan as its debt burden will mount and its working population to dependents will decline.  This is a growth and debt time bomb.  The move to crisis may be slow because Japan has huge reserves of FX reserves and foreign assets built up over decades so it has lots of funds to fall back on.  Japan’s net international investment position is 56% in the positive while the US is 19% in the negative.  Also its debt is mostly owned by its own citizens (only 7% by foreigners) while US government debt is 40% owned by foreigners.  However, the US dollar is still the world’s reserve currency, giving the US considerable leeway in funding its deficits and debt.  Japan’s banks and government are so intertwined that they will both go down together.  In the 1990s, the banks were bailed out by government; currently the banks are bailing out the government.  Next time, they both go down together.

George Magnus (Economic insights by George Magnus, 19 June, Demographics: from dividend to drag) recently pointed out that the support ratio in the US and Europe in the early 2000s was similar to that of Japan ten years earlier. It shows that from about  2016, the decline in China’s support ratio starts to speed up, so that by 2050, it will have fewer workers per older citizen than the US. It also includes India, by way of comparison, as the representative of the bulk of emerging markets and developing countries. India’s support ratio is predicted to grind lower but even by 2050, it will still be only the same as that in Western countries in the 1990s.  From the 1960s onwards – a little earlier in Japan – the total support ratio rose everywhere and more or less continuously, until about 1990 in Japan, and 2005-2010 in the US and Europe.  Japan’s support ratio is now approaching 1.5 workers per older citizen, and is predicted to carry on falling to parity in the middle of the century. The US and Europe are predicted to follow Japan, though support ratios are not expected to fall as far.

China and other emerging economies have not yet reached the point where the working population is no longer rising and the expansion of absolute surplus value is restricted – the so-called Lewis turning point (see my post, http://thenextrecession.wordpress.com/2012/11/16/chinas-transition-new-leaders-old-policies/).  But China is not far away.  In the meantime, China is pushing ahead with a sweeping plan to move 250 million rural residents into newly constructed towns and cities over the next dozen years — a massive of expansion of labour power into production.  The broad trend began decades ago. In the early 1980s, about 80% of Chinese lived in the countryside but only 47% today, plus an additional 17% that works in cities but is classified as rural.

And there are still huge reserves of labour as yet untapped, particularly in Africa.  The latest UN population projections for the world’s economies show that Africa is expected to dominate population growth over the next 90 years as populations in many of the world’s developed economies and China shrink.  Africa’s population is expected to more than quadruple over just 90 years,  while Asia will continue to grow, but peak about 50 years from now then start declining.  Europe will continue to shrink. South America’s population will rise until about 2050, at which point it will begin its own gradual population decline. North America will continue to grow at a slow, sustainable rate, surpassing South America’s overall population around 2070. 

China’s population is soon expected to go into decline , whereas India’s is expected to grow strongly for another 50 years, and the US’ and Indonesia’s populations are projected to grow steadily. Nigeria’s population is expected to explode eight-fold this century.

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World Economy: The story of inequality

by Michael Roberts

The 15th conference of the Association of Heterodox Economists took place last week.  The keynote theme of this gathering of economists who are not of the mainstream was inequality.  The world’s greatest economic expert on inequality of wealth and income is Tony Atkinson, or should I say, Sir Anthony Atkinson.  Atkinson is senior research fellow at Nuffield College, Oxford and a distinguished econometrician.

Atkinson’s address was entitled “Where is inequality headed?”.  Inequality is back on the economic agenda after being ignored for decades by mainstream economics.  But official spokespeople and mainstream economists everywhere are now looking at the subject, after the financial crash and the revelation that the top 1% (bankers and top corporate executives) have been stacking up their ‘earnings’ while the 99% have been stuck with unmoving real incomes for years.
Atkinson was careful to define inequality for his purposes: namely inequality of income within a country, not inequality of wealth or income between countries. 

In previous posts (https://thenextrecession.wordpress.com/2010/01/10/20/), I have referred to the groundbreaking work of Branko Milanovic from the World Bank who has shown that the biggest inequalities of income and wealth are engendered by the gaps between the rich and poorer countries rather than inequalities between rich and poor within a country.  But Atkinson concentrates on inequalities within countries.  Atkinson reckons that the best measure of inequality of income is between households, not individuals, and after tax and benefits have been distributed.   This household disposable income includes not just earnings from work but also capital income (rent and interest and dividends).

On this measure, Atkinson has an interesting story to tell about the changes in inequality of incomes in the advanced capitalist economies.  Using the gini coefficient, which measures average inequality across the spectrum of households, Atkinson finds that in the OECD economies there has been a rise of about 3% pts in the coefficient from about 28 to 31 since the 1980s, or a rise of about 10%.  This confirms the evidence of the OECD that in a recent post (https://thenextrecession.wordpress.com/2013/05/17/inequality-theres-no-stopping-it/) I had previously referred to.

Adding to that OECD study, Atkinson pointed out that between 1911 and 1950, inequality of income actually declined slightly, reaching its most equal point (still pretty unequal) in the years immediately after WW2.  But from the 1980s it rose sharply.  Interestingly, the largest rise in inequality in the UK was in the 1980s during the Thatcher years, when the gini ratio rose a staggering 10% points, briefly exceeding the US by the early 1990s.  The other shocker was the rise in inequality in social democratic Sweden, which now no longer has a more equal society, at least as measured by disposable household income.  In contrast, inequality of income in France fell a little during the same period.
The latest data from the UK’s ONS confirm this story of rising inequality during the 1980s and then a levelling off in the 1990s onwards

Atkinson then asked the question: why?  What were the causes of the rise in household inequality of income in the advanced capitalist economies after the 1980s?  The usual reason given by mainstream economics is that new technology and globalisation led to a rise in the demand for skilled workers over unskilled and so drove up their earnings relatively.   This is the argument presented by Greg Mankiw recently in his defence of the top 1% of earners (https://thenextrecession.wordpress.com/2013/06/19/defending-the-indefensible/).

Atkinson dismissed this neoclassical apologia.  The biggest rises in inequality took place before globalisation and the dot.com revolution got underway in the 1990s.  Atkinson pinned down the causes to two.  The first was the sharp fall in direct income tax for the top earners under neoliberal government policies from the 1980s onwards and the sharp rise in capital income (i.e. income generated from the ownership of capital rather than from the sale of labour power).  The rising profit share in capitalist sector production that most OECD economies have generated since the 1980s was translated into higher dividends, interest and rent for the top 1-5% who generally own the means of production.  In 2011, capital income constituted 60% of the top 10% earners’ income compared to just 32% in the 1980s.

Higher returns from capital have been coupled with lower taxes on capital and on the income earned by the top earners.  The total effective tax rate is the total amount paid by households in both direct and indirect taxes as a percentage of their gross income.  In the UK, the effective tax rate grew during the 1960s and 1970s from 28.4% in 1961 to a peak of 39.4% in 1983.  But from then on, under Thatcher, Major and New Labour, the trend has been downward, reaching a low of 32.8% in 2009/10, before increasing slightly over the last two years to 34.6%.

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As a result, even though the rich pay more in tax than the poor because they earn more, the bottom 20% of households now pay more in tax as a percentage of income (36.6%) than the top 20% in the UK (35.5%)!

The other key issue on inequality is whether it is the main reason for the last global crisis.  Many leftist and some mainstream economists reckon that restricted incomes for the lower income groups caused the Great Recession because consumption and ‘effective demand’ weakened and because households resorted to taking on more debt to compensate for the lack of growth in the incomes from work.  I have argued before in previous posts that rising inequality was not the cause of the Great Recession of 2008-9 or the ensuing Long Depression now being experienced in the mature capitalist economies of the OECD (see my posts: http://thenextrecession.wordpress.com/2012/05/21/inequality-the-cause-of-crisis-and-depression/ and http://thenextrecession.wordpress.com/2011/10/21/1-versus-99/).  But this argument persists and many papers at this year’s AHE conference pressed on with this argument with some evidence.

But the evidence for this thesis remains questionable.  A paper by Michael Bordo and Christopher Meissner from the Bank of International Settlements has analysed the data and concluded that inequality does not seem to be the reason for a crisis. Credit booms mostly lead to financial crises, but inequality does not necessarily lead to credit booms. “Our paper looks for empirical evidence for the recent Kumhof/Rancière hypothesis attributing the US subprime mortgage crisis to rising inequality, redistributive government housing policy and a credit boom. Using data from a panel of 14 countries for over 120 years, we find strong evidence linking credit booms to banking crises, but no evidence that rising income concentration was a significant determinant of credit booms. Narrative evidence on the US experience in the 1920s, and that of other countries, casts further doubt on the role of rising inequality.“

Edward Glaesar also points to research on the US economy that home prices in various parts of the US did not always increase where there was the most income inequality. That calls into question the claim that income inequality was inflating the housing bubble. And Glaesar refers to Atkinson on this: “Professors Atkinson and Morelli’s international data also suggest little regular connection between inequality and crises. Looking at 25 countries over a century, they find ten cases where crises were preceded by rising inequality and seven where crises were preceded by declining inequality.”  Moreover, inequality was higher in two of the six cases where a crisis is identified, which is exactly the same proportion as among the 15 cases where no crisis is identified.

It is one thing to recognise that inequality has rocketed in the last 30 years and quite another to claim that this explains the credit crunch and the Great Recession.  What is wrong theoretically with this argument is that it assumes, as the Keynesians do, that the fundamental weakness of capitalism lies on the demand side of the economy. Since many people had insufficient incomes to consume, they borrowed money to maintain their living standards.  Radically different conclusions follow if the problem is located on the supply side (with the cause to be found in profitability).  From this perspective, falling profitability explains the sluggish character of the productive economy and is at the root of the crisis.  If the economy had been more profitable, there would have been less need for such a rapid or ‘excessive’ expansion of credit.  From this perspective, the widening of inequality is more of a symptom than a cause of economic weakness. The rich became richer with the emergence of the asset bubble, but the underlying economy was far from healthy in the first place.

What is decisive for capitalism is surplus value (profit, interest and rent), not wage income or spending.  Control of that surplus is key.  The main feature of the last 100 years of capitalism has not been growing inequality of income – indeed, as Atkinson shows, inequality has not always risen.  The main feature has been a growing concentration and centralisation of wealth, not income.  And it has been in the wealth held in means of production and not just household wealth.

A new study shows how far that has gone in the recent period.  Three systems theorists at the Swiss Federal Institute of Technology in Zurich have taken a database listing 37 million companies and investors worldwide and analyzed all 43,060 transnational corporations and share ownerships linking them (147 control). They have a built a model of who owns what and what their revenues are, mapping out the whole edifice of economic power.  They discovered that a dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the network.  A total of 737 companies control 80% of it all.   This is the inequality that matters for the functioning of capitalism – the concentrated power of capital.

There were other themes at the AHE conference, in particular the claim by Keynes that capitalism would achieve prosperity for all and increased leisure for all within 100 years of the 1930s.  I have dealt with Keynes’ arguments in a previous post (https://thenextrecession.wordpress.com/2013/05/04/keynes-being-gay-and-caring-for-the-future-of-our-grandchildren/) but I’ll return to that issue and also the paper that I presented on cycles in capitalism in a future post.

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Global Economy: The world is slowing

by Michael Roberts

There has been much talk of recovery picking up pace in the advanced capitalist economies but slowing down in the emerging economies, particularly China.  To get a more timely feel on the level of activity in the world economy, I use the purchasing manager’s indexes (PMIs).  These are monthly surveys compiled from companies in various countries on the state of production, employment, prices and orders, indexed up into a country by country figure.  The PMIs for June look like this.  These are PMIs for combined manufacturing and services sectors.

Anything over 50 implies that the economy is expanding.  In June, the only region still contracting was the Eurozone – still deep in recession.  But note that the Eurozone PMI is up from the figure in April.  So it would appear that the the rate of the Eurozone’s contraction is slowing – a small mercy.  Everywhere else, there is expansion.  However, the PMI data confirm that China and thus the World as a whole is expanding but at a slower rate than in April.  And that also applies to the US.   The US economy is still growing but according to the PMI at a slightly slower pace than in April.

The interesting development is that there has been a pick-up in the pace of expansion since April in the UK and Japan.  This would seem to confirm that the fear of a ‘triple-dip’ or ‘double-dip’ recession in the UK was unfounded.   Indeed, now all the economic forecasters are raising their guesses on UK expansion, including the IMF, from their dismal forecasts of a few months ago.  But just as the forecasters overdid their view on the UK to the downside, they are probably now swinging to be over-optimistic on the upside.  At best, UK GDP is going to grow by just 1% in real terms this year and even less per head of population.

And the world economy as a whole is slowing down in its expansion. driven by slower growth in China and the other major emerging capitalist economies.  Just as the very weak recovery in the advanced capitalist economies dragged down overall global growth between 2009-12, now it seems that the supposedly fast-growing emerging economies will dampen the impact of any relatively faster growth in the advanced economies.   In particular, the Chinese economy slowed to 7.7% a year in Q1-2012 from 7.9% at the end of 2012.  It is going to be even slower in the quarter just gone and through the rest of the year.  Of course, a real growth rate of 7%-plus is huge compared to the rest of the world, but it is not enough to absorb the flow of new labour into Chinese industry and services.  Elsewhere, Brazil, India and other major emerging economies are also slowing.

But it is the US economy that remains key to the health of the world capitalist economy – it remains the largest, the biggest trader and the dominant financial force.  And if we look at the US economy through the eyes of its combined manufacturing and services sector PMI, it remains stuck in a low-growth path, where it has been for almost the whole time since the end of the Great Recession.  If anything, the trend is for even slower growth going forward.
The more frequent but less reliable weekly indicator from ECRI tells the same story: the US has not achieved the usual economic recovery that comes after a slump.

Much has been made of the latest US jobs figures.  Employment rose 195,000 in June and after upward revisions for previous months, it seems that average employment growth is now 200,000 a month, higher than the less than 150,000 in the first quarter of this year.  But that increase has not made much of a dent in the unemployment rate because more Americans out of work have attempted to look for jobs after having given up for a while.  Indeed, the measure of long-term unemployment rose in June, from 13.8% to 14.3%—the highest level since February.  This suggests that new jobs are being snapped up by new claimants while those who lost their jobs in the Great Recession remain on the scrap heap, with their benefits being cut or expiring.

Moreover, just as in the UK, most of these new vacancies are not full-time permanent jobs at good wages, but part-time, low grade work. The number of people working part-time rose by 322,000 to 8.2 million. These people aren’t working part-time because they want to—it’s because they can’t find full-time work.  And of the  jobs created in June, 60% were in low-paying positions: 75,000 jobs were created in the leisure and hospitality sector and 37,000 jobs were created in the retail sector.  This will eventually translate into low or falling productivity in the US economy, just as it has done in the UK.  US corporations are taking advantage of the huge reserve army of labour still out there to introduce part-time and temporary jobs to save labour costs – reduced benefits, no holiday or sick pay etc.

Back in the UK, amid the new hope that the economy is about to burst forward at last, the latest data on UK corporate profitability were released with substantial revisions to the historic data.  In Q1-2013, non-financial corporations’ net return on capital stock, a pretty good measure of profitability, if not a la Marx, was 12%, slightly higher than the level of the last four years since the trough of the slump.  Manufacturing companies continued to achieve a much lower return at 8% on average.  So UK corporate profitability has improved a little from the slump, but it is still 20% below where it was at its peak in early 2008 and that was below its 1997 peak.


As I have shown in previous posts, this is the story of profitability in most capitalist economies, including the emerging economies.  A new slump may be necessary to ‘cleanse’ the capitalist economy of too much debt and too many inefficient ‘zombie’ companies.  As the leading global bond investment manager, PIMCO put it this week: “Statistically speaking, the global economy experiences a recession every six years or so, and the frequency of global recessions tends to increase when global indebtedness is high and falling as opposed to when indebtedness is low and rising. Given that the last global recession was four years ago, and also given that the global economy is significantly more indebted today than it was four years ago, we believe there is now a greater than 60% probability that we will experience another global recession in the next three to five years.”

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The Failure of Quantative Easing

by Michael Roberts

Just a couple of months ago, mainstream economic analysts were lauding the record high stock market prices as an indicator that the global capitalist economy was well on the way to recovery, thanks to the efforts of central bankers like Ben Bernanke at the US Federal Reserve in applying ‘unconventional’ monetary policy called quantitative easing (QE) to boost liquidity and keep interest rates near zero.  In various posts, I have queried both the likelihood that the stock market boom would continue and that QE had been effective in restoring economic growth (see my post, http://thenextrecession.wordpress.com/2013/03/30/its-still-a-bear-market/).

Well, in the last month stock markets have turned.  In just 23 working days, the FTSE 100 lost 846 points, collapsing from 6,875 on 22 May to 6,029.10 23 June.  And bond markets have also tanked, with the yield on US 10-year Treasuries rising from 2.2% last week to 2.61%, a massive 0.41 percentage points rise in just four working days.  This reversal has been mirrored across the globe.  Chinese stocks sank to a four-year low, pulling most other Asian markets lower.  In Brazil, the price of 30-year dollar bonds is down by 26% since the start of last month.   The rise in UK 10-year gilts has now reversed the entire drop since the start of QE2 in October 2011.  The previous euphoria has given way to a degree of pessimism.

Some leading mainstream economists are perplexed.  Tyler Cowan, a leading neo-classical economists pointed out that Keynesian guru, Paul Krugman had said in 2011 that:  ” Like Bernanke, I don’t believe that the flow of Fed purchases has been an important factor holding bond rates down, and hence don’t believe that they will jump when the purchases end.”  Cowan goes on:  “I was of the same opinion.  It no longer seems this is true.  We’ve had a significant runup in rates fro mere talk about slowing down Fed purchases.”

It all turned pear-shaped last week after Ben Bernanke stated that QE was now over – or to be more accurate that the buying up of US government debt by the Fed through the ‘printing of money’ was to be gradually reduced (‘tapering’, it is called) by as early as September and ended completely next year.  The reaction of the financial markets confirms that the stock market boom since the trough of the Great Recession in mid-2009 has been driven, not by a sustained recovery in the main capitalist economies, but by the sharp rise in profits (at least in the US) while wages have been held down; and the blowing up of a new credit bubble by central banks (the Fed, the BoE and more recently, the Bank of Japan). 

With the threat that the credit taps are to be turned down, financial markets melted.

The Keynesians are panicking.  For them, the Great Recession was caused by a ‘lack of effective demand’ and made worse by the policy of ‘austerity’ adopted by most governments.  So they argue that cutting off the liquidity tap when governments are continuing to apply ‘fiscal austerity’ will just push the main capitalist economies back into recession.  As Gavyn Davies, former chief economist at Goldman Sachs, advisor to the previous New Labour government in the UK and now a columnist for the FT put it:  “There are two risks with the Fed’s exit plan. The first, raised by Paul Krugman and other Keynesian economists, is that it sends a premature signal to the world economy that the central banks will tighten before the private sector recovery has achieved escape velocity. This has happened before: the Fed made this error in 1937-8 and the Bank of Japan in 2006. … The US recovery might peter out, taking the global economy down with it.  The second danger, in sharp contrast, is that the Fed has left it too late to bring market exposures under control, in which case the unwinding might take bond yields and credit spreads much higher than economic fundamentals seem to justify. In the famous phrase of Warren Buffett, the legendary investor, we only discover who is swimming naked when the tide goes out. Higher bond yields would spell danger for the financial system – and would mean rising mortgage rates at a time when the US housing market is only just starting to recover.”  So we are either going back into recession or heading for another financial bust.  Better to keep QE going, then.

In contrast, the Austerians argue that Bernanke has left it too late to ‘normalise’ monetary policy and may find that the credit bubble has got out of hand and now that he intends very gradually to ‘exit’ his QE measures, he will cause another slump anyway.  For them, the Great Recession was caused by ‘too much’ credit that had to be reined in.  In its latest annual report (BIS annual report 2013), the central bankers association, the Bank for International Settlements (BIS) argues that quantitative easing and ultra-low rates have failed to restore economic growth and instead have stoked up new levels of debt that could eventually plunge the world economy into a new financial crisis.  The BIS points out that the debt of households, non-financial corporations and governments has increased as a share of GDP in most large advanced and emerging countries since the crisis. In a sample of 18 countries – including the US, UK, China, India, Japan and the big Eurozone nations – this debt surged by $33 trillion between 2007 and 2012, up 20% of GDP.  Central banks now own a chunk of this new debt, equivalent to about 25% in advanced economies and 40% in emerging economies – from $10.4 trillion in 2007 to $20.5 trillion now.   If the value of these assets start to plunge as they have done this month, the central banks and governments will start to make significant losses.

The Keynesians are really angry at the BIS.  Krugman called those at the BIS “Dead-enders in Dark Suits”.  Krugman railed: “The Bank for International Settlements is the central bankers’ central bank; accordingly, it tends to exhibit the prejudices of the tribe in especially concentrated form. In particular, it has been relentless in making the case for higher interest rates, on the grounds that … well, the logic keeps changing. For a while it was warning about inflation and commodity prices; when the inflation failed to materialize and commodity prices slumped again, it simply changed the argument to one against bubbles, plus the quite amazing argument that central bankers must not keep rates low because that would take the fiscal pressure off governments. Who, exactly, elected these people to run the world?”

Krugman attacks the BIS idea that large private and public sector debt will inhibit economic recovery in a capitalist economy.  He argues that the evidence for this has been trashed after the scandal of the Reinhart and Rogoff study apparently proving that high debt restricts growth as having been exposed as full of errors and misleading analysis.  Actually, it is not quite as cut and dried as Krugman and other Keynesians make out (see my post Revising the two RRs, http://thenextrecession.wordpress.com/2013/04/17/revising-the-two-rrs/).  And contrary to what Krugman says, the BIS report is well aware of the RR controversy and thus cites other reports to back its case, if somewhat disingenuously.  But Krugman’s main argument is the one that he has promoted for some time: that more debt is not a problem when a capitalist economy is in a slump engendered by a ‘liquidity trap’.  And anyway, the debt has risen because austerity has cut economic growth.  What is needed is more QE, not less until the economy recovers through  increased demand from consumers and businesses.

Our own British Keynesian guru, Simon Wren-Lewis, in his blog takes a similar line on the BIS, (The intellectual bankruptcy of the austerians).  “It is both amusing and tragic to watch the advocates of fiscal austerity try and deal with the fact that the thin intellectual foundations for their approach have crumbled away, while at the same time the empirical evidence of their folly accumulates. … The BIS says reducing government debt is good for long term growth. But because there are long run benefits to reducing government debt, must it be the case that the sooner we start the better? No. Exercise is good for you, but you don’t start when you are down with the flu”.

The Keynesians are right that QE has not caused inflation in economies that are on their knees.  But the Austerians are right that QE has not enabled the major economies to recover either.  Instead all QE has done is support a stock market boom and stimulate yet another credit bubble that now looks likely to burst if the drug of QE is withdrawn.  The Keynesians answer that by saying that QE is not enough and what the economy needs alongside easy money is more fiscal spending, financed preferably by more borrowing.  The Austerians say that such borrowing is also a hostage to fortune and it will hold back recovery.  The Marxists would say that the Keynesians are wrong if they think QE and fiscal spending will restore sustained economic growth if there is not a recovery in profitability.  And the Austerians are wrong if they think cutting government spending, particularly government investment is going to help.  Relying on the free market has been a hopeless failure too.
(see my posts, http://thenextrecession.wordpress.com/2012/06/13/keynes-the-profits-equation-and-the-marxist-multiplier/ and http://thenextrecession.wordpress.com/2013/01/13/multiplying-multipliers/ and http://thenextrecession.wordpress.com/2012/09/30/can-austerity-work/).

The reality is that, although the business sectors in many major capitalist economies are flush with cash, investment is not taking place, while consumers are saving or paying down debt rather than spending in the shops.   What is clear from the last month is that QE has failed.  As I have argued before, you can take horses to the water fount but you cannot make them drink (see my post, http://thenextrecession.wordpress.com/2013/03/04/you-cant-make-a-horse-drink-2/).

QE is based on the idea that if you throw money at banks they will lend. But banks only lend if the risk versus return profile is in their favour. At the moment, banks don’t want to lend, because their balance sheets are a mess.  QE is based on the idea that if you make borrowing ridiculously cheap for corporates (i.e. throw money at them) they will invest. But corporates only borrow to invest if the risk versus return profile is in their favour. At the moment they don’t want to invest, because the economic outlook is very uncertain and profitable investment opportunities look few. Instead, large companies prefer to speculate in the stock market or pay out dividends while borrowing is so cheap.  Small and medium-size businesses are much more dependent on bank lending, but they are living in a financial desert.

This is the problem with the plan of Japan’s government to introduce a massive QE programme of buying government and corporate debt with the aim of driving up inflation and getting the economy going
(see my posts, http://thenextrecession.wordpress.com/2013/04/05/kurodas-triple-whammy/
and http://thenextrecession.wordpress.com/2013/06/11/abenomics-a-keynesian-neoliberal/).

Ironically, those economists who support QE and easy money argue that it will not engender inflation as the BIS and the Austerians fear.  But if that is right, then Japan’s ‘Abenomics’ wont work!  As one economist put it: “Not one QE programme has ever generated significant inflation. Not one. In fact no central bank in history has ever succeeded in deliberately creating inflation. It’s magical thinking.  When banks aren’t lending and corporates aren’t borrowing to invest, QE does not affect the wider economy in any very helpful way: its effects if anything are contractionary, because of the hit to aggregate demand for some groups caused by the depression of interest rates on savings.”

Mainstream Keynesian, Brad de Long concluded: “that Bernanke’s monetary policy has failed to raise inflation demonstrates that Bernanke’s policies have failed.“  Yet de Long clings to the hope that this won’t be the case for Abenomics:  “I tend to say that they have failed because they were tried only half-heartedly, and confusedly. And if Abenomics succeeds, I will regard that as strongly confirmed.”

Some hope.

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The euro recovery: half full or half empty?

by Michael Roberts

The OECD has just issued its half-yearly forecast for economic growth.  It reckons that world real gross domestic product (GDP) will increase by just 3.1% this year and by 4% in 2014. Across the OECD countries, GDP is projected to rise by a meagre 1.2% this year and by 2.3% in 2014, while growth in non-OECD countries will rise by 5.5% this year and 6.2% in 2014.    In the US, activity is projected to rise by 1.9% this year and by a further 2.8% in 2014.  However, GDP in the euro area is expected to decline by 0.6% this year and then turn up just 1.1% in 2014, while in Japan GDP is expected to grow by 1.6% in 2013 and 1.4% in 2014.

These forecasts are more or less repeated by the IMF in its spring estimates. What stands out is that the mature capitalist economies are crawling along while the developing capitalist economies are growing at a reasonable lick.  But the Eurozone area of 18 nations shows no sign of recovery from the Great Recession, with southern Europe deep in depression.   The Euro leaders met last Monday and agreed that France, Spain, Greece etc could have more time to meet their fiscal targets on government budgets and debt because economic recovery was non-existent.  So the pace of austerity was eased by the Euro leaders.  But it’s still the message.  As ECB President Mario Draghi recently maintained: “There was no alternative to fiscal consolidation, even though, we should not deny that this is contractionary in the short term. In the future there will be the so-called confidence channel, which will reactivate growth; but it’s not something that happens immediately”.   Clearly not!

Christian Noyer, governor of the Bank of France, also echoed Draghi in saying that austerity was necessary to encourage the ‘confidence fairy’ to make an appearance: “Over a certain threshold, which our country has probably crossed, any increase in public spending and debt has extremely negative effects on confidence.”  In other words, recovery is possible only if capitalists become confident that it will happen and that apparently depends on getting budget deficits and debt down.  Why? Well, because “the old model doesn’t work any more”, namely traditional Keynesian efforts to boost demand by encouraging spending.  Noyer added that France had to move away from public policies “overly concerned with preserving the jobs of the past” and allow for ‘liberalisation’ that could help future job creation.

And there we have it.  As I have argued many times in this blog, the aim of austerity is not just to reduce public debt and government spending as such, but to restore the profitability of the capitalist sector.  As Draghi puts it, “that’s why structural reforms are so important, because the short-term contraction will be succeeded by long-term sustainable growth only if these reforms are in place.”  And that’s why when the Euro leaders relaxed the pace of austerity for several governments, they did so on the condition that ‘supply-side reform’ was stepped up, namely cuts in job security,wage levels and ‘protected’ industries along with more privatisation.  That is the real aim of austerity: more neoliberal policies to restore the capitalist sector.

But is austerity working to achieve this?   Well recently, JP Morgan economists put together some measures of progress: the amount of deleveraging achieved in public and private sector debt; more competitive prices for trade by the distressed states; making it easier to hire and fire employees; opening up ‘markets’, more privatisations and interestingly, progress on reducing democratic and constitutional obstacles in various states to imposing neoliberal policies.

JPM concluded that the Eurozone was only halfway there in this neoliberal recovery programme (The Euro area adjustment: about halfway there, 28 May 2013).  For example, on the fiscal austerity targets, Italy was 75% on the way, Spain just 38%, Greece 97%, Ireland just 26% and Portugal 55%.  Longer term austerity targets (meeting the Fiscal Compact in 2030) were more or less along the same distance.

Wage cuts and reductions in labour costs had gone further, with Ireland and Portugal having done enough, Greece a little further to go (after a 30% cut in living standards!) and Spain still another 25% to go.

But when it came to ‘structural reform’ i.e. reducing the size of the public sector, selling off state assets, reducing labour and pension rights, lower corporate taxes etc, progress had been much slower.  Apparently, Italy, Greece, Spain and Portugal were still way less oriented to allowing the capitalist sector free rein than the likes of the Netherlands or Ireland.

JPM’s estimate of progress on the neoliberal programme is more realistic than the talk in financial markets that the likes of Greece or Ireland have ‘turned the corner’.  Take Greece.  The three parties in the coalition over the last year have stuck rigidly to the EU-IMF fiscal adjustment program. They have been awarded with an upgrade in the evaluation of Greek sovereign debt as a result by financial markets.  Greece’s upgrade to B- comes almost a year to the day from the downgrade Greek sovereign debt to CCC, i.e. junk.  So the ‘confidence fairy’ has shown itself from the undergrowth.  But it is nowhere near enough to talk about the Greek crisis being over.

All the Euro bailout funds to Greece have gone on paying off Greece’s creditors, namely other European banks, pension funds and speculative hedge funds, the latter have made a killing as Greek debt interest rates have fallen as a result.  But the real economy remains in a mess.  The economy has had 19 consecutive quarters of contractions.

About 1.3 million Greeks are out of work, some 400,000 families have nobody earning an income, about 300,000 workers have employers who have not paid them for months and thousands have left the country to seek work, while the forces of neo-Nazism grow stronger. About 800,000 or so long-term unemployed have lost any access to benefits and free healthcare.  Public services, such as health, have been ravaged, while the incessant rise in taxes has put terrible pressure on even the healthiest of businesses.

People in Greece worked 2,032 hours a year in 2011, considerably higher than the OECD average of 1,776 hours.  By contrast, the Germans, clocked in on average 1,413 hours a year.  Yet the average annual disposable household income in Greece is €15,800, way less than the OECD average of €17,820 a year.  On indicators used of the OECD’s better life index, Greece ranks 30^th out of 36 countries. In the EU, only crisis-ridden Slovenia ranks worse. Portugal came in at 28.
Small businesses in Greece are paying an interest rate of around 7% for credit assuming they can even get a loan from the country’s semi-comatose banking system.  In contrast, similar firms in Germany borrow at half that rate.  The current account deficit may have shrunk by about 7% pts of GDP but this been achieved largely on the back of a substantial fall in imports rather than a significant rise in exports.  Even the dreaded Troika  admitted in analysing the impact of its austerity programme that: “The rich and self-employed are simply not paying their fair share, which has forced an excessive reliance on across-the-board expenditure cuts and higher taxes on those earning a salary or a pension.”

Recovery in Greece depends on a return of investment in industry and key services.  But there is little sign of that.  In 2012 investment fell by 20% from the already ridiculously low levels of 2011. And the government is predicting a further fall in investment in 2013.

So if austerity is only half working at best to restore capitalism in the Eurozone, what is the alternative?  Well, there is another that is gaining prominence, especially within the distressed Euro states like Portugal, Greece and Italy.  It is the Keynesian alternative of leaving the euro and restoring a devalued national currency. For example, in Portugal, economist Joao Ferreira do Amaral has published a book urging Portugal to exit the euro.  This has become a best seller and is backed not just by the Communist Party but also endorsed by the Supreme Court President!  The book argues that austerity won’t work and the divergence between rich Germany and poor Portugal will only get wider if the current government’s policy is maintained.  The only answer is to exit the Eurozone and for Portugal to restore its escudo as in the 1990s.

The claim of these ‘exit’ supporters is that the cost of exiting the euro to the economy will be much less than the continuing cost of austerity imposed by the Euro leaders on the likes of Portugal or Greece.  These arguments are presented more theoretically by a new paper from Heiner Flassbeck and Costas Lapavitsas (Systemic_Crisis).  Flassbeck is  a former Vice Minister of Finance under left Social Democrat Oskar Lafontaine and seems to have formed an alliance with ostensible Marxist economist Lapavitsas to argue the case for exiting the euro as the only solution.  In doing so, they seem to have arguments very similar to those of many neoliberals like Dr Werner Sinn, now a leader of the new ‘exit party’ in Germany that calls for a return to the mark.  Lafontaine has also moved to this viewpoint.  So there is an alliance between some nationalist neoliberals and Keynesians for an exit policy.

The problem that I have with this exit policy is that it is a bit like the position of  the Irish Republican Army (IRA) on the issue of Irish unity.  The IRA argued that first we must end ‘the border’ that divided north and south Ireland and then we can adopt socialist policies.  Yet Ireland is still divided and still capitalist and the former leaders of the IRA now work within the existing two regimes for social change – a reversal of their old position.  The euro exit is also a ‘two-stage’  theory: first, we must exit the euro as the top priority and then we can talk about socialist policies to end the crisis.  I am sure that Lapavitsas and Amaral want to adopt policies for public ownership of the banks and major industrial sectors, public investment and a plan for Europe, but I think they obscure the battle against austerity by emphasising euro exit and devaluation as the major cure.  Surely, this is a diversion.

Why? Well,as I said in a  previous post
(http://thenextrecession.wordpress.com/2013/03/16/workers-punks-and-the-euro-crisis/), it is because the euro crisis is a crisis of capitalism and not a crisis of the euro. In other words, even if  the euro were to collapse and EMU states returned to running their own monetary and currency policies, the crisis would not go away and may even get worse.  That’s because the euro crisis is the product of the failure of the capitalist mode of production globally.  It has had the worst impact on the weaker capitalist economists like Greece, Portugal or Slovenia, but it has hit all economies.  The crisis is only partly a result of the policies of austerity being pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK.  If that is right, then alternative Keynesian policies of fiscal stimulus and/or devaluation where possible, will do little to end the slump and will still make households suffer income losses.  Austerity means a loss of jobs and services and thus income.  Keynesian policies also mean a loss of real income through higher prices, a falling currency and eventually rising interest rates.

Take Iceland, a country outside the EU, let alone the Eurozone.  Devaluation, or Keynesian-style ‘beggar-thy-neighbour policies, have still meant a 40% decline in average real incomes in dollar terms and nearly 20% in krona terms since 2007 (see my post, http://thenextrecession.wordpress.com/2013/03/27/profitability-the-euro-crisis-and-icelandic-myths/).  If not Iceland, then Argentina in 2001 is dug up as a successful ‘exit’ strategy.  Argentina ended the peso’s peg with the dollar and devalued, apparently escaping its depression.  But for Greece it is not just a question of breaking a peg with the euro.  It will have to introduce a new drachma.  Would this new currency issued by an effectively bankrupt state have any exchange value whatsoever? Will the Russians accept a Cypriot pound in exchange for oil, and the Americans drachma in exchange for medicines?  Greece, which, unlike Argentina, is not a net exporter of raw materials with rising prices and so has little to support any new currency. Greeks can print as much as they like of it, but will they be able to buy electrical appliances, cars or even foods produced abroad with it?

And anyway, Argentina did not escape its crisis by breaking the peg with dollar.  Guglielmo Carchedi and I are just about to publish a paper (The long roots of the present crisis: Keynesians, Austerians and Marx’s law) that will show that it was not competitive devaluation that restored Argentina’s growth after the 2001 crisis, but default on state debt caused by the previous destruction of productive capital.  Argentina’s recovery was fuelled neither by devaluation nor by redistribution policies, but by the re-creation of previously destroyed private capital in the private sector with a low organic composition; a rising rate of exploitation; and improved efficiency. This is the cause—rather than Keynesian policies—of Argentina’s economic revival.

The euro project was unique in one way.  It was designed to achieve integration and convergence among various European capitalist states but without establishing a full federal union of Europe, with one government, one budget, one set of tax laws and one banking system. For a while, it seemed to work until the crisis came, although even in the boom years, there was more divergence than convergence.

Can the euro’s halfway house now survive?  It is clearly not going towards some federal union of European states, whatever the claims of the nationalist sceptics of UKIP or Front National.  A united states of Europe under capitalism is not on the agenda.  But the halfway house could lumber on if economic growth returns.  But growth depends on investment.  And investment has collapsed and not just in the weaker capitalist economies of the Eurozone.

The figure above is from Greek Default Watch (http://www.greekdefaultwatch.com/2013/05/the-eurozone-since-2007-in-one-image.html).  The first column shows real GDP indexed at 100 in 2007.  The Eurozone as a whole by 2012 remained below the level of 2007.  And most Eurozone economies are still well below their 2007 levels – Greece is down 21%.  The next columns show the changes in GDP since 2007 by expenditure sectors.  The drop in GDP is really a factor of Germany growing (+€85 billion) but without a supporting cast to offset the declines in Italy (-€102 billion), Spain (-€40 billion) and Greece (€42 billion). On a net basis, Italy’s decline accounts for the bulk of the decline in the overall Eurozone, while Germany’s gain offsets the decline in Greece and Spain and the rest of the union is more or less even.

The Eurozone has a clear investment problem: investment rose in only one of the 17 countries (Luxembourg).  The issue of external competitiveness that the Keynesian exit economists emphasise, just like the neoclassical neoliberals is less important.  For the seven countries whose 2012 GDP was higher than in 2007, net exports made a big difference in only three cases; of the ten countries where GDP declined, net trade made a material contribution in seven, but this was not enough to offset the decline in investment. In other words, the problem for the weaker Euro capitalist states is not external competitiveness, but investment— it’s a very conventional capitalist crisis.

And as I have shown in previous posts, investment under capitalism depends on restoring profitability.  Yet, with the exception of Ireland, all the peripheral EMU economies still have much lower rates of profit than their peaks before the global crisis of capitalism hit. With the exception of Italy, profitability did recover in 2012, while in the case of Ireland, profitability turned round as early as 2010.

It’s a halfway house.  Austerity is working but very slowly.  Last Monday, ECB Board member Jörg Asmussen denied that there is a “Euro Crisis”, though he admitted Europe has ‘a decade of “adjustments” ahead.  Can the euro project survive another five or more years of austerity?  Is it half full of success or half empty?

There is a third way out of the Eurozone’s crisis: a socialist option.  That would involve Eurozone governments renegotiating and writing off public sector debt owed to the banks and other financial entities.  To pay for the losses that the banks incur, rich bank share and bond holders would be liquidated and Europe’s big 30 banks would be taken into public ownership.  They would become part of a Europe-wide New Deal to start public investment projects that could deliver jobs and housing and new technology. Governments would share Europe-wide revenues from each according to their abilities and to each according to their needs – as in a proper political and fiscal union based on common ownership and under a democratically endorsed plan for growth and welfare.

Of course, such a ‘Soviet Europe’ is not on the agenda and is thus utopian.  But then exit from the Eurozone by ‘oppressed states’ is also not on the agenda of any government in the Eurozone or even in the main opposition parties.  So it is equally ‘utopian’ with the added problem that it would not solve anything.

Leaders of Leftist parties like Syriza from Greece, IU from Spain, Front de Gauche in France etc have been meeting to discuss a joint programme for the Euro 2014 elections (http://www.publico.es/456053/la-izquierda-europea-se-pone-en-marcha-para-conquistar-bruselas).  Will that programme adopt the vision I expressed above or not?  If not, then we are faced with years (decade?) of more austerity.

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The capitalist system will not, change so we must change the system

Source: FT.com

The Financial Times advised it readers to "Read the Big Four" in the aftermath of the crash and published this image The 1% are not stupid, they consider Marx very relevant. 

by Richard Mellor
Afscme Local 444, retired

Debt allows the capitalist system to reach beyond its limits; but only temporarily as the economy has to be brought back to reality at some point.  Home prices and debt drove the huge increase in spending prior to the crash of the sub prime housing market, an event that one commentator said would be the greatest loss of African American wealth in US history. Since 1980, the aggregate stock of US debt rose from 163% of GDP to 346% by 2007.   Household debt rose from 50% of GDP to 100% during the same period while the indebtedness of the US financial sector climbed from 21% to 116% (Financial Times 9-24-08).  

People thought their houses were banks, and safe banks at that. According to Freddie Mac, cash taken out of home equity went from $21 billion in 2000 to $321 billion in 2006. The figures are staggering.  In total, the debt boom of 2001-07 pumped $3 trillion in to the economy.  It was the most pronounced credit cycle in history during which the personal sector took in as much debt as the last 40 years combined.  That's an incredible injection of cash in to the economy in such a short period. It was inevitable that this bubble would burst. The severity of the crash stunned the capitalist class.  The headlines and comments in the serious journals of capitalism at the time give some idea of the dour mood among them about the future of their system.  “Capitalism in Convulsion” wrote the Financial Times on Sept. 20,  2008.  “A week that shook the system to its core”, reads another headline in the same issue. The main story in the September 28, 2008, issue of Business Week read, “Wall Street Staggers” and was accompanied by the picture of a bull, head down with blood dripping from its mouth and body from the numerous swords that are protruding from in between it shoulder blades; the defeated animal’s blood is all over the page.

Something drastic had to be done, “heavy costs will be inflicted on the American taxpayer, who is now subsidizing Wall Street.”, wrote John Plender in the Financial Times. How true that statement was as the politicians in the two Wall Street parties dipped their dirty little hands in to the public trough and allocated as much as $16 trillion dollars to bail out the bankers and rescue capitalism from total collapse. The housing industry and auto was basically nationalized although the US capitalist class preferred the term “conservatorship”so as not to implant in any way the idea that public ownership, considered socialism in the US, was rescuing capitalism from itself.

The young up and coming coupon clippers with their tee shirts and jeans had never experienced such a crisis; they thought it would never end.  Their confidence in the system was severely shaken and the theoreticians of capital and the old guard had to ensure them that all would be well, they’d been through this before.  It was time for a history lesson. The pages of the serious journals of capitalism were filled with articles explaining the nature of the system and the history of such crashes dating back to the great Tulip bubble of the 1600's.  Readers flocked to bookstores to get a copy of Marx’s Das Kapital, the most thorough analysis of the capitalists system of production.  The Financial Times, the journal of British finance capital urged its readers to study Marx.

“The beginning of wisdom is to recognize that financial booms and busts have been a feature of capitalism from the very start,” wrote Samuel Brittan in the Financial Times. Gillian Tett, also of the Times wrote: “…many bankers have believed—at least until recently---that this decades burst of market innovation had re-written the rules of finance.” . Ms Tett pointed out that Lehman Brothers, (the bank that was allowed to collapse) estimated that there had been 60 market crashes since 1622, “This summers turmoil will not be the last”she warns her class brethren. “This neo-modern credit market is not very dissimilar after all from its classical predecessors” she quoted a Leheman Brothers analyst as saying. We will get through this, was the message.

The mood was so tense and anger so pronounced in the aftermath of the crash that Obama was forced to chide his banker friends as they continued to receive huge bonuses as workers lives were shattered.  The bonuses were  “..the height of irresponsibility” he said at the time, “It is shameful” he added and appealed to his class to show, “some restraint and show some discipline and show some sense of responsibility.”  He assured them that profit taking will return but now is not the time.  The situation was too volatile; the anger too great.

Not one of these bankers served any time for their crimes though “at least 21 of the top 25 subprime originators…..were either owned or financed by the biggest recipients of the troubled asset relief funds.”  Included in these were Bank of America, Wells Fargo and JP Morgan according to the Center for Public Integrity (FT 5-6-09).

 These episodes “…. occur with striking regularity—typically at least once a decade.”, Ms. Tett had assured the young coupon clippers. Considering they claim to know so much you’d think they’d have figured a way to avoid them.  Plus, knowing that, one would wonder how come respected journals of capital would even entertain the idea that the business cycle was dead; it shows how confused they are about these issues.  The answer to that is simple---profits---the gold at the end of the rainbow; the goose that lays the golden egg; money without working.  This is what blinds them to the reality of their system.  Only the regularity of such capitalist crisis will likely not be limited to once a decade or appear in quite the same way each time as this historically bankrupt system of production blunders along towards the abyss wreaking havoc along the way.

Such great social shocks leave their mark as once venerable institutions (Leheman, Kodak) enter the history books and new movements arise. The Occupy Movement that arose at the time appears to have ebbed somewhat due to its own mistakes and violent and brutal repression on the part of a beefed up state apparatus. But the Great Recession has left a bad taste in the mouths of millions. Polls have shown that as much as 36% of us favor some form of socialism.  In the aftermath of the crash Business Week launched a campaign to counter the unfavorable view about the market that existed in society but found through its focus groups that the term “Capitalism” could not be used as respondents considered it to represent the powerful crushing the weak.  This reflects a poweful tendency for fairness and equality in society despite the massive propaganda of the 1% promoting selfish individualism and a winner take all mentality.

It’s not likely what the capitalist commentators refer to as our “profligate” spending habits will return any time soon, no matter how hard they try to convince us otherwise, certainly not before the next crisis.

Consumer spending has grown at a 2.1% annual rate since the end of the Great Recession compared to 3.2% for the twenty years prior to the crash as money is not so readily available.  Moneylenders are wary about lending and corporations are sitting on trillions in cash. Homeowners who thought that housing prices would rise forever and saw their homes as a bank and a secure one at that, have been badly burned.  Thousands of layoffs, massive cuts in social services and education and lost homes have taken their toll on the American psyche.

As hedge funds pour millions of dollars in to buying up foreclosed homes, sometimes renting them back to those from whom they were stolen and jacking up home prices in the process, those seeking home as a shelter are rethinking things. Instead of the house being a source of disposable income the feeling now is that a home is “more a nest egg to be secured” writes Rich Miller in Business Week adding,  “Cash-in refinancings, in which borrowers invest more of their own money in the house, outnumbered cash outs by more than 2 to 1.”

The consequences of this sea change in attitude is that every dollar increase in the housing sector may only yield 1 cent compared to 3 to 5 cents prior to the crash by Business Week’s estimations. It will not be the driver it was.

My point in all of this, other than writing being somewhat of a catharsis, allowing me to vent my frustrations about the destructive nature of the capitalism mode of production, is to keep history in perspective and the fact that their behavior that brought us the Great Recession is still there despite their glowing although somewhat guarded reports about growth.  Growth for them is stock market numbers.  It is the laws of the system that drives the big capitalists to do what they do, the same laws that drive them to war.

The old habits are returning, the financial swindling, speculation, lack of regulation or finding ways around it, the accumulation of capital in to fewer and fewer hands; more for those at the top, less for the rest of us including in the form of social services and of course the destruction of the environment. Coupled with this we see increased repression and curtailing of civil rights as those on whose backs their wealth is made are driven to resist being driven to starvation in some parts of the world and pauperism in others.  The US will have its “Arab Spring” there is no avoiding it.

I am optimistic because I am confident the US working class will fight back. Our history is one of rich and militant struggle against the most callous and ruthless ruling class in history.  We didn’t get this far by sending e mails to Congress.  It is to this history and great tradition that we must return.

As the ecosocialists like to say: System change not climate change. For a democratic socialist world.

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Global Economy: Boom or crawl?

by Michael Roberts

Stockbrokers and financial analysts were ecstatic yesterday when the famous Dow Jones stock index for the 30 top companies in the US passed its all-time high and went above 15,000.   It was another landmark in the current rally in financial assets around the globe.   The only way is up – it seems.  The Dow index was at 14,000 just 66 days ago and is now up by 129% since the 2009 trough.  The other US stock index, the S&P-500 reached all-time highs earlier last month.  And the UK index, the FTSE 100, also doing well.  Graphs from Doug Short’s website.

But does this imply that the world capitalist economy is now finally making a significant recovery in growth, investment and jobs after the Great Recession?  Well, the first thing to say is that the US stock market is still in a bear market, despite its recent spectacular rally.  When inflation is stripped out of the equation, the S&P-500 index is up 89% from its 2009 low but it is still 22% below its 2000 peak, which kicked off a bear market in equities that has lasted 13 years and bear markets in the past have lasted anything between 15-20 years
(see my post, https://thenextrecession.wordpress.com/2013/03/30/its-still-a-bear-market/).

This stock market boom does not reflect an anticipation of sustained economic recovery.  It really indicates the massive amount of credit that has been created by central banks around the world.  The monetary authorities have cut interest rates to near zero, the latest reductions being that of the ECB (-25bp) and Australia’s RBS (-25bp) in the last week.  And the major central banks continue to ‘print’ money through so-called ‘quantitative easing’, the most recent and ambitious being the programme of the Bank of Japan to print as much money as it can to drive up inflation (not growth)!
Most of this credit is not finding its way into the ‘real economy’, however.  Instead it is fuelling a bubble in financial assets, such that even the governments of economies in deep recession, like Italy, Spain or Portugal and Slovenia, can sell their bonds into the market at reduced interest rates (see my post, https://thenextrecession.wordpress.com/2013/03/04/you-cant-make-a-horse-drink-2/).
While the US stock market explodes upwards, the latest quarterly earnings results of top 500 US companies reveal a less rosy picture.  Sure, corporate profits remain near all-time highs but 44% of US firms reported lower than expected sales, with revenue growth slowing.  Cost-cutting and refusing to invest significantly remains the main way that US companies have sustained high profits.  But corporate profit growth has slowed to a trickle, so stock market investors may be in for a rude awakening soon.

And the story on activity in the real economy is little changed, despite the stock market’s view.  Sure, the UK avoided a ‘triple -dip recession’  according to the data for the first quarter of this year, but real GDP growth is unlikely to be more than 1% this year.  And sure, US jobs growth in April was in line with a trend of slowly reducing unemployment, but mainly through the creation of part-time and temporary jobs.

Actually, the US economy took a slight downturn, according to the measure of business activity I have developed from the US ISM data for manufacturing and services activity.  The combined ISM index shows that the US is still in low-growth mode and, if anything, turning down.

A more high-frequency indicator is that provided by the ECRI.  Their weekly indicator for the US confirms that the low growth mode is in place, although the ECRI  suggests a slight uptick in April.

But what is really interesting is that the world economic activity indicator from Markit PMI dipped in April and is now only just above the 50 threshold for showing economic expansion.  For the first time,  the world PMI score is below that of the US, Japan, the UK and China combined.  It seems that, outside these major economies, the expansion of activity is slowing.  Of course, the Eurozone remains depressed and contracting.

The stock market may be booming, but the world capitalist economy is still crawling.

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