By Leonard Gentle · 30 Sep 2011
The world is tipping over into unknown territory. All the pundits are now starting to agree with US economist, Nouriel Roubini, famous for his prediction of the 2008 financial crash, that a second recession is inevitable. South Africa’s Reserve Bank governor Gill Marcus has also added her voice to the chorus warning of another “Lehman type event.”
Since the last recession, the major governments have spent in excess of $24trillion bailing out the banks, dwarfing the money spent on rebuilding Europe under the Marshall Plan. And yet despite all the talk of recovery these measures have only taken us back to where we were in 2008...only with apparently no further options available.
Meanwhile the call from economists is for the politicians in the US and the EU to get their act together, to “act decisively,” to “satisfy the jittery markets.” It’s now all the fault of the politicians.
Yet what every politician has been doing is precisely what has been asked of them: showing decisive leadership to satisfy the markets - but it isn’t working, and its time to confront the need for alternatives to capitalism!
September 21 heralded the spring equinox in the Southern hemisphere but a dark foreboding autumn in the financial capitals of the world. When the US Federal Reserve (the Fed) announced another bail out – this time a $400b bond-buying scheme called Operation Twist - the event precipitated more market chaos. This bailout is about the Fed buying US$400bn worth of long-term Treasury bonds and selling shorter-term bonds. The measure is aimed at driving down long-term interest rates in an attempt to reduce the cost of borrowing.
Once again the thinking is “let’s give the banks cheaper money so that they will lend to firms who will restore productive economic activity and produce jobs and growth.”
But with profitability levels in long term decline in productive economic activity and stagnation in global markets for real goods and services, there is no incentive to invest in expanded production of real physical goods. So the cheaper money just fuels the frenzy of financial speculation and the trading in debt further.
In Europe, Italy and Spain have joined Ireland and Greece in the debt crisis. In Greece unemployment is approaching 900,000 and is projected to exceed 1.2 million, in a population of 11 million. GDP fell by a further 7.3% in the second quarter of 2011.
In early 2010 Greece was effectively bankrupt. In its wisdom, the European Central Bank and the IMF underwrote Greece’s debt and then imposed policies of severe austerity and deregulation consistent with the neoliberal ideology of the EU. Quite predictably, demand collapsed and banking credit became scarce, with the result that the core of the Greek economy was crushed.
The rest of the world has its problems as well. New IMF leader, Christine Lagarde, noted that the repair job to the global economy, after the 2008 recession, was supposed to involve two rebalancing acts: 1) a shift of demand from the public to the private sector, and 2) stronger domestic demand from surplus countries such as Germany and China to allow deficit nations like the US to export more.
Neither is happening.
All that has happened is that we have swapped a private debt crisis in 2008 with a sovereign debt crisis in 2011.
The truth is that the political choices made by politicians to promote, or comply with financialisation has delivered us all into the hands of the speculators, the financialised corporations and the private equity holders who have made debt tradable and money chase money – taking private profits to enrich themselves in the good times and foisting their debts onto all of us in the bad times.
Rather than let the banks and the speculators carry the can for their impropriety, they were deemed to be “too big to fail” and governments spent trillions of dollars bailing them out.
This was not a Keynesian or “New Deal” style spending programme on full employment and stimulating demand to boost economic activity. This was a bail out of the banks, re-directing state spending away from full employment, public services and stimulating demand.
But a much deeper understanding of the current crisis would be to trace its origins to the events of the 1960s, a time of the Vietnam War and the US in trouble. This is when capitalism started experiencing dramatic drop-offs in the high growth and profit rates that the major industrialised countries had experienced after World War II.
Fuelled by the rebuilding of Europe and the Far East as well as the expansion of global demand with welfare states ensuring near full employment and public services – and operating within the Bretton Woods regime of regulated financial markets and fixed exchange rates, the capitalist world recovered from the Great Depression of the 1930s. At the epicentre stood the US as the imperial hegemon with its currency - the dollar - the global means of exchange and the world’s reserve currency.
But the combined effects of the US’ expensive adventure in Vietnam, the resurgence of Germany and Japan as competitors, the holding of dollar reserves outside the US and the stagnation of global markets saw corporate profit rates decline. By the early 1970s, the US sank into recession. With the additional shock of the oil crisis, the US devalued the dollar, tore up the Bretton Woods Agreement and began to wage war on the welfare state and Keynesian perspectives of capitalist growth.
By the end of the 1970s a new strategy was unleashed on the world, called variously neo-liberalism or globalisation, which has as its figureheads politicians such as Margaret Thatcher and Ronald Reagan and economists like Milton Friedman, but which has also become the biggest restructuring of social relations, tearing up the Keynesian consensus and taking us back to the 19th century idea of dog-eat-dog.
Neo-liberalism is often falsely understood as mere “market liberalisation” or taking the state out of the economy. In fact it has been little more than a new form of capitalism – one that has altered our lives way beyond what people understand to be economics. Stretching from the deeply personal sense that we are all just private predatory beings with no social solidarity (seen in the way middles class houses have high walls with privatised “home entertainment”) to the way our children are indoctrinated to hero-worship “entrepreneurship” at school, all the way to Greece shutting down hospitals and schools because a rating agency has junked its bonds.
It’s a world of casual labour, outsourcing, cost centres, denuded media rooms and billions being made (or lost) in a day because of the behaviour of derivatives. Far from the state having withdrawn from markets and the economy it is a world in which the states act against their own democratic mandate, taking public money to bail out banks and arresting people who protest against such corruption.
It is this neo-liberal world, which has now dragged us all to the brink of the abyss.
Of course the economic crisis may be global, but its causes and effects are manifested differently across the world. Temporarily some countries were favourably positioned, including South Africa.
Gold reached record levels of more than $1600 dollars an ounce benefitting South African corporations. Likewise SA’s bond markets boomed in the midst of the crisis as investors switched to emerging markets and drove up the value of the rand.
But, as every priest intones at funerals: “The Lord giveth and the Lord taketh away.” A further intensification of the crisis has seen investors pull their money out of developing country bonds and move back into US Treasury bonds and the dollar - the very sites that were deserted yesterday in favour of the “emerging markets.”
From being the flavour of the year in 2011, the rand has become the worst performing of 18 emerging market currencies against the dollar this past week. Nearly R14bn left South Africa in the first few days of September – R6.3bn due to equity sales and R7.7b from bonds.
Net portfolio investment in South Africa for 2011 fell from R35.4bn to R25.5bn in a matter of days. This compares with cumulative portfolio investments of nearly R56bn at the end of the second quarter, according to the Reserve Bank’s quarterly bulletin.
South Africa is now showing signs of reaping the same whirlwind sweeping over other countries. A recent small news item - that the Mandela-Rhodes development in the Cape Town city centre was a victim of the Irish meltdown - has given these events some local poignancy.
It is therefore inappropriate that all this bad news is seen as an economic problem – something of interest to business people only and economists. The choice of language for characterising this is also so modest - “recession.”
“Recessions,” in the language of economists, are little more than two successive quarters of decline in GDP. Recessions do happen, they’re inconvenient, somebody loses (most of us) but the system is, according to the economists, self-correcting so the pundits normally predict a new return to growth in the near future.
None of this can compete with Malema or the Springbok Rugby team in the battle for news. So while everyone had an opinion on the choice of Chief Justice and the long-term consequences for human rights of selecting the wrong guy to head up the Constitutional Court, in stark contrast, there is absolute silence on our privatised Reserve Bank, the selection of interest rate economic policies and the people who make these choices on our behalf.
And then there are the economists, ostensibly specialists who are the only ones who can really tell us what’s going on. By way of sustaining this power the language of economic analysis is buried in dense impenetrable jargon - quantitative easing, the markets, investor confidence, etc. - which hide the very human guesswork, the decision-making and the choices that shape our world – and which on the basis of all the available evidence out there, shows that we’re on the edge of an abyss.
And, while the world order of the last 30 years is collapsing around our ears, the economists largely have no idea what’s going on and how to do anything different.
In Britain Observer journalist, Will Hutton, has come up with the most honest assessment of a mainstream economist:
“Eighty years ago, faced with today's economic events, nobody would have been in any doubt: we would obviously be living through a crisis in capitalism. Instead, there is a collective unwillingness to call a spade a spade. This is variously a crisis of the European Union, a crisis of the euro, a debt crisis or a crisis of political will. It is all those things, but they are subplots of a much bigger story: the way capitalism has been conceived and practised for the last 30 years has hit the buffers. Unless and until that is recognised, western economies will be locked in stagnation which could even transmute into a major economic disaster.”
Of course a crisis of capitalism does not mean that socialism is on the horizon. The 1930s crisis strengthened the calls for socialism, but also gave rise to fascism in Europe as sections of capital sought “final solutions.”
Unless the left is organised as a popular social force the fallout of crises can produce the opposite - the victims fall prey to internecine battles, seeking scapegoats for their declining living standards. The same Greek streets that are home to the protests of the “indignant” and debates about democracy are also roamed by gangs attacking immigrants. Right wing sentiments and xenophobia are on the rise throughout Europe and the crisis sees centre left parties disgracing themselves by using their electoral credibility to carry out the austerity cuts demanded by the “markets.”
Thirty years of neo-liberal capitalism have produced levels of inequality unprecedented in modern history. The mighty citadels of power are cracking whilst millions of people all over the world are beginning to express their anger and disgust in various ways. Keynesian economic policies saved capitalism before…only to be replaced by the disaster that is neo-liberal globalisation. What’s left in the kitty for capitalism?
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Constructing an Entirely New System
At last someone is saying it out loud - capitalism is in crisis and could, indeed, fail completely. I've been of the same opinion for some time but, needless to say, have been repeatedly lambasted for daring to say so.
In fact, ten years ago, when I said it was inevitable that capitalism would fail - and that it was just a matter of time before it did - I was nearly lynched!
And yet, the blnkers are still on - so indoctrinated are we with the idea that capitalism is the only way of organising socio-economic life and that it simply can't fail, that we just can't imagine a post-capitaliist world. It seems only complete system collapse will shake us out of our stupor and galvantise an appropriate response.
Finally, it was Einstein who said that one can't fix a problem with the same thinking that created it. Wise words. It's not a choice between capitalism and socialism any longer, it's about constructing an entirely new system.
Every 10 Years
Of course we're going for another recession. We had one in the early 80's, 90's, and 00's. We have one every 10 years. The 2008 one was something special created by the Bush administration.
Capitalism or What?
A free market system is in my belief always the best, yet a mix of capitalism and socialism seems to work out best. How can we prevent greed from ravaging any economy? In the West, these large corporations swallow it all and want more and a few fat cats suck it all up. In Africa it is the politicians who suck it all up and maybe that is even worse, because they do not do not do well in generating business, just using power and corruption to pocket it. It we are able to promote the values of altruism, honesty, and transparency, we will have something.
The ills of greed is the issue and do not be fooled that capitalism is the thing that feeds greed. In Soviet days it was not communism they had, but government capitalism. In socialist countries greed can do the same harm. It is a moral education, and a stellar rule of law that does more good than a new economic order.
It's the Ecology, Stupid
It's not just capitalism that's unsustainable, it's any economic system predicated on exponential growth.
We are destroying the natural supersystem on which the human economy depends.
There is no technological fix for our predicament. Either we slow down and concentrate on using the earth's resources more wisely, well and equitably or we face the collapse ecologists have long warned us about.
Or are we there already?
Fractional Reserve Banking
I agree with Hilary we are in an ever expanding ecological crisis and it is greed that is driving this expansion. Not just individual greed but greed that has been built into the structure of our very economic systems in order to feed individual greed.
Money is the foundational component of any economic system. Money is not just notes and coins however, it requires a system for issuing it, handling it and controlling it. Consequently the money system forms a sub-system within the total economic system. There is however, in our current money system, a fundamental flaw. This flaw feeds the greed of those who control the current money system. The flaw exists in how new money is issued into the economy, it is called Fractional Reserve Banking.
An economy comprises the the exchanges of real goods and services that take place between the economic actors in that economy. The original and sole purpose of money was to act as a store [recording] of value between the two halves of an exchange of real goods and/or services taking place between two parties. It has no value in and of itself, it is just a recording of value. What money enabled was the separation, both in time and in location, of the two halves of an exchange. This was an incredible boost to economic activity as the activity was no longer hamstrung by the difficulties associated with bartering. It also enabled people to start treating money as if it was in itself intrinsically valuable, which it isn't, and if you could accumulate money you appropriated to yourself increased power and influence. Not only that but it enabled a select group within society, in our case banks, to take control of the money system within society, particularly the issuing of new money, and thus to cream off unearned wealth for themselves.
Under the current dispensation, this issuing of new money happens within what is known as Fractional Reserve Banking [FRB] and it is quite legal. What FRB means is that banks can issue new money to borrowers, up to a specified fraction of the 'old' money already deposited with them, by just printing it. There are three major flaws in FRB, one is that the banks then treat this new money as if it was old money, which it isn't as it has not come into existence to record the value in a real exchange so it generates inflation, and two they charge the borrowers interest on loans that are comprised of this new money, which is a fraudulent practice because it is not old money.
So our current money system is founded upon a dishonest practice at its very core.