Ten key aspects of developed economies, post recession

20 12 2010

There are times when the ideas of the world’s rulers and the institutions through which they govern are adequate to the needs of the era, and there are times–like the present–when they are not.   Walter Russell Mead

1. The shift in economic weight from west to east has been accelerated by the recession and its outcomes, leading to growing tensions

The latest G20 meeting took place in South Korea, a symbolic recognition of the growing importance of the east both from the venue and from the fact that the G20 itself, containing the dynamic eastern growth countries, is now the main international economic forum. The global imbalances between developing countries which helped to fuel the credit boom remain in place. Tensions over currency valuations between the US and China reflect both the interdependence between the two countries and their long-term divergence.

Low interest rates in the US and elsewhere lead to investment money pouring into China. This continues to stimulate the Chinese economy and promotes exports back to the US. This continues to make US exports less competitive. The US tries to combat this through more stimulus to the domestic economy and therefore the requirement for lower interest rates persists. The US would like China to allow the value of its currency to rise, something the Chinese have resisted up until now.

China is by far the largest holder of foreign exchange reserves, with stockpiles of $2,454bn at the end of June, around 65% of which is dollars – almost 30 per cent of the global total. In addition China holds 22% of foreign-owned US government debt or$843.7bn. As Hillary Clinton said recently in relation to China ‘how do you deal toughly with your banker?’

2   The US remains the global consumer of last resort

While the US continues its slow decline as a global power it remains the only one with a global reach. It also continues to play its role as the global consumer of last resort. 70% of US GDP is consumption based and its recovery from recession is based on increased domestic consumption not exports.

3. Political incoherence is encouraging the pursuit of narrow national self-interest

Most western economies are struggling to get out of the recession. This has led to a breakdown in international cooperation and the pursuit of what Philip Stephens calls ‘a pinched nationalism’ of countries that have ‘lost confidence’ in their future.

As Sean Collins argues

The underlying pressure comes from the fact that the major economies have not seen a robust recovery, and countries are pursuing their national interests, defined narrowly.

In particular the loosening of US influence has encouraged a breakdown in international cooperation between debtor and creditor nations

 4.  The eurozone may buckle under the pressure

Nowhere is the breakdown of political cooperation clearer than in Europe, whose eurozone countries constitute together the second biggest economy in the world. The long-term contradiction between countries whose currencies are linked but which have separate political systems has come to the fore. Germany, which is the main dynamo of the European economy, has now decided it is no longer going to bail out the weaker peripheral countries, the so-called PIGS. These economies can only exist in their current form on the basis of continued economic support from Germany and other large European economies.

This pursuit of a narrow self-interest by Germany could lead to the break up of the eurozone.

5. There has been insufficient restructuring of developed countries to create the conditions for growth

Wikileaks revealed that even the Governor of the Bank of England, Mervyn King, recognises that the UK economy has not been restructured enough to create the conditions for a new growth spurt

As Sean Collins has argued, even the kind of limited restructuring that General Motors has undergone in the US, under US government control, is both atypical and probably inadequate to return GM to its dominant position in the car market.

6. Big corporations are saving not investing

The main outcome of the recession for big western corporations is that they are sitting on piles of cash. In Europe cash now comprises between 9 and 10 per cent of assets on balance sheets and may break 12 per cent in two years time, a third higher than the peak of the previous cycle. As the graphs below illustrate, this cash hoarding is at the expense of investment

The opportunity to take advantage of the new growing markets in developing countries is being spurned due to conservatism and risk aversion.

 

7. Austerity not growth is the watchword

With the exception of the US all western economies are being subjected to austerity packages. While these are being justified on the basis of the need to appease global bond markets there is no doubt that governments really have no idea of what else to do. George Osborne, the UK Chancellor of the Exchequer, recently had to abandon plans to produce a white paper on growth because there were insufficient ideas to put into it. Austerity is the only policy they have, which leads to a decline in domestic demand, a dampening of international trade and probably an increase in protectionism.

8. The recovery,such as it is, is jobless

Austerity policies and the absence of investment has led to a situation that while most economies are now growing slowly, this has not led to an increase in employment.

9. The debate about our economic future is painfully inadequate

Both free market and neo keynesian economists have been discredited by the recession. Economic debate is now characterised by its pessimism, and a general belief that slow or even no growth in the west is both impossible to avoid and in some cases desirable. The door has also opened wide for those who have psychological explanations for economics, the behaviouralists. David Cameron’s attempt to switch the focus of the economic debate from ‘growth’ to ‘happiness’ is a sign of how bankrupt the economic debate has become.

10. The absence of opposition leaves considerable room to manoeuvre

The absence of any political opposition or economic alternative to austerity means that the elites have plenty of room to manoeuvre in managing their domestic economies: indeed, there is even some popular support for austerity measures.

On that note I would like to wish you all a merry Xmas and a very happy new year!!

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Bankers’ bonuses-the great evasion

4 09 2009

images[9]The G20 meeting of finance ministers this weekend and the G20 itself two weeks later both look set to be dominated by the issue of bankers’ bonuses. Gordon Brown has joined with President Sarkozy and Chancellor Merkel in signing a ‘letter of intent’ to find a way of bringing banking remuneration under control.

Why are they focussing on this issue? Is it because the question of toxic finance, which triggered the recession, has gone away? Not at all, in fact banks around the world are still sitting on trillions of dollars worth of rubbish investments. The only reason they have not been written off as losses in their entirety is that such a move would render the banks bankrupt. Instead the bust banks continue to be propped up by government guarantees. The response of the banks has been to desperately save as much cash as possible to rebuild their balance sheets instead of lending it, which after all is their prime function as businesses, leading to a continued credit crisis, particularly in the UK and the US.

Is the focus on bankers’ bonuses  because the impact of the recession has gone away? Absolutely not. Unemployment is rising throughout the developed world and while there are some signs that the fall in production has stopped, there is little evidence that the world economy is back on a growth trajectory.

So, if there is still much to be done to get the world economy back into growth mode why the focus on bankers’ bonuses? Firstly, political leaders  are under pressure politically to find scapegoats for the crisis. The bonus issue has been the one thing that has stuck in the public mind as an ‘explanation’ for the crisis. The absence of any serious public debate about the recession and its causes has reduced the public discussion to a mere scapegoating exercise. Politicians posturing on the world stage about the need to contain bonuses is a cheap political gimmick aimed for domestic audiences. As there is almost no possible way in a market economy to restrict the pay of the rich, it is doomed to failure even were the political will really there to carry it through.

Secondly, a debate focussed around bankers’ pay  helps to distract attention from the fact that the world’s leaders have very little to say about the real long term problems facing the world economy. There is little evidence of a willingness, for example, to address the question of global trade imbalances which lie at the heart of the world recession. The G20 will discuss bankers’ pay because they have little else meaningful to discuss. The prevailing mood is to hope that we are out of the worst and that ‘business as usual’ can be resumed as soon as possible.

There are good reasons to oppose any restrictions on bonuses, but we should be clear that the fact that any debate about it at all is taking place is a clear sign of how empty the public discussion of the economy has become. It is a warning that there could be much worse to come down the line.





After the G20 – what next?

3 04 2009

Low expectations have been met

The first line of The Times editorial today sums up what most of us must feel about the G20. The big issues which existed before the G20; the toxic debt problem, the changing balance of world power and the absence of any alternative to managerial capitalism, remain.  Beyond that we can only be grateful that the world’s leaders are still all talking to each other and not (yet at least) going down the road to rearmamant and war to settle their differences. 

There are big battles ahead. Already more and more voices are being heard calling for austerity and questioning whether economic growth and free trade is something to strive for.  Although the violent nature of the demonstrations was highly overblown, you only need look at some of the demands made by these protestors to hear these voices.  Check out the newspiece below from the online news channel WORLDbytes which looks at  the protests and ensuing summit, and where I gave an interview:

The voices of those who encourage austerity and reject economic growth are getting stronger at the same time as developing countries in Africa and elsewhere are experiencing economic disaster as a result of the collapse of world trade. Those of us who believe that economic growth is the basis for human freedom will have a tough task arguing against the new advocates of austerity, particularly as the public debt balloons.

In the UK we have to face up to the consequences of having lived beyond our means for the past ten years. But this should not mean that we accept austerity. We need to renew our collective efforts to encourage new kinds of economic growth. It may be that we need to take a long hard look at the huge amount of resources that go into the public sector and decide whether this is all money well spent.  There are undoubtedly areas , particularly where the state has invaded the family,  where we could do with some savage cutbacks.  But overall, cutting public spending only makes sense if any resources freed up are invested productively elsewhere.

If you are interested in taking part in a serious debate about the future of the economy, you should attend The Battle for the Economy conference on May 16. We have a great line up of speakers and ample time for discussion about the best way forward. There has been far too little serious debate so far about where we wish to go as a society and we need to change that.

This blog is on holiday for the next ten days. Despite all the bad news the sun is out and spring is on the way. Fortunately, as Leonard Cohen said, cheerfulness keeps breaking in.





The three interlocking crises of global capitalism

1 04 2009

As the G20 leaders begin their deliberations today it is worth trying to assess the problems that face them, and us. Everybody has been competing to describe this recession as the worst since the 70s/30s/black death, yet the full scale of the crisis has yet to be properly discussed.  The world is facing three interlocking crises.


Firstly…

The recession is severe, but what makes it worse is that it is happening when the coherence and the credibility of the political elites is at an historical low ebb.  The coexistence of a political with an economic crisis is what makes this recession so dangerous.

The entwining of the political and the economic crises has meant that the world’s response to the recession has been slow and lacking coherence. For example,we are nearly two years into the toxic debt crisis and still the bank bailouts appear to be having very little impact. The weakness and isolation of the political elites has led them to scapegoat  bankers, and by extension the whole financial system of capitalism, as the cause of the problem. This has in turn undermined the bailouts of the banks as investors have become wary of being seen to be making money out of the crisis and governments have become constrained about what they can do for fear of upsetting their voters.


Secondly…
A key element of the crisis is the changing balance of world power. The imbalance between productive economies like China and the less productive economies in the west lies at the heart of the recession. China and others built up huge financial surpluses which were recycled into consumer debt in the west. Now China is demanding that it be recognised as a new global power and wants to see its economic clout recognised by changes in global institutuions like the International Monetary Fund. The very fact that it is now the G20, which includes China and other developing nations, that are meeting today is a recognition of the shift in the balance of power. But changing the way the world is run will be a tricky process as there will be losers as well as winners.


Thirdly…
There is an absence of any alternative to the status quo. This may seem an odd thing to say. Why should an absence of any critique of capitalism be a problem for the system? The answer is that in the absence of contestation the global elites have lost their way. For most of the 20th century the west was driven on by its conflict with the Soviet Union. The technological and scientific breakthroughs that came with the space race, for example, came about because of the US’s determination not to let the Soviet Union put a man on the moon first.

The absence of opposition of any kind to capitalism today has contributed to a sense of drift and general loss of impetus in society in general and has also affected the political elites. The global elites have themselves begun to lose faith in the market system, so much so that the G20 looks to be dominated by arguments about how much global regulation the system needs.

There are other social and natural problems facing the world of course. Huge numbers of people in the world still live close to the breadline. We need to develop new, cheaper and cleaner energy sources. But the three interlocking crises mean that developments in these areas will be held back until politics and politicians themselves are given a new lease of life.





Capitalism, anti-capitalism and the G20

30 03 2009

The fault line in politics today is not between capitalism and anti-capitalism. It is between those who favour economic growth and those who are opposed to it. The ‘anticapitalists’ who will be protesting this week against the G20 do not have any kind of coherent alternative to capitalism. They are only anti it in the sense that there are aspects of capitalist society that they do not like very much. What they do have in common is an opposition to economic growth. 

Marx’s critique of capitalist society was profound and all embracing, but it had at its heart a central belief that capitalism needed to be superceded because it could not consistently develop the means of production globally. It was prone to economic breakdown and even war. This analysis has proved to be correct over the past century and is true today. The current recession is a product of the declining productivity of the economies of the west and the tensions between global powers. But Marx never rejected the economic growth that capitalism can bring.  He understood that freedom from want was the basis of civilisation and that remains true today.

If it were just a ragbag of anti-capitalist who held these anti-growth views that would not be a problem. However the sentiments they espouse are  shared by large sections of society. There are people who back the anti-capitalist demos who believe that we need a permanent recession to combat global warming.  This may seem extreme but it is now commonplace to hear people argue that we have too much and need to cut back.

One consequence of the recession in the UK is that we face austerity in the years to come. Public services will have to be cut and living standards will decline. Our response to this should not be to rationalise it by saying it is good for the planet or good for our souls. It should be to look for more ways to invest and innovate in order to find solutions to the technical,  environmental and social challenges we have to face.