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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

perpetual growth? « Previous | |Next »
August 5, 2011

Of late we have been serenaded by the market's cheery stories about the global economy--ie., the worst was behind us, we are on the path to global economic recovery, and sunshine is just around the corner etc. It would appear that the turmoil in global markets goes beyond the incompetence of Washington to deal with the budget deficit and high unemployment; or the ongoing sovereign debt crisis on the EU's periphery (eg., Portugal, Ireland + Greece) and its disastrous consequences.

It appears to be more systematic, but few connect the dots. It is dawning on people that the aftermath of what was a banking (financial) crisis in 2008-9 (the banks were carrying too much unsecured debt) has taken the form of becoming a sovereign debt crisis. Italy and Spain are now in the firing line, in that they are now borrowing money at unsustainable bond rates, and they may be forced into the kind of slow-motion default on sovereign loans as is happening in Greece.

Servicing their debt is impossible for Italy and Spain when growth is low and interest rates are 6%-plus and rising. Deprived of the ability to devalue its currency, Italy has struggled to remain competitive with Germany and growth has been sluggish.

RowsonMfatcats.jpg Martin Rowson

Greece is now experiencing the shock of orchestrated raids on the public sphere in the wake of catastrophic event of financial meltdown. They are being forced to repay the loans to the mostly German and French banks. The big banks rule in Europe as they do in the US.

In The Guardian Larry Elliot starts to connect the dots:

There was a colossal stimulus provided in the winter of 2008-09 but the results have been profoundly disappointing. Cheap money and big budget deficits certainly averted a second Great Depression, a very real prospect three years ago when no bank looked safe and factories were lying idle and that is success of a sort. But it has not produced the normal snap back from recession seen during the post-second world war era. Indeed, the deepest recession since the 1930s has been followed by the feeblest recovery.

It increasingly appears that, though the dominance of finance capital has been protected by the state in the US and Europe, the western economy has run out of momentum, and is actually contracting in some places.

If the global financial system had been patched up reasonably well (according to Wall Street), then the global economy is not on the mend. We have dysfunctional government responses (bailouts, austerity packages, privatization); a lack of effective governance; faltering recoveries; lots of muddling through; and a deliberate shredding of social contracts.

The neo-liberal mode of governance promises that through hard work, shrewd educational and other "life" choices, and a little luck, individuals – or their children – would reap the benefits of perpetual economic growth. The access to cheap credit would keep the machinery oiled, help ease the pain of ever increasing inequality, and soften the suffering from winding back the welfare state's social safety net. The market would deliver the goods.

The future for many people in Europe and the US is now one of bleakness: decreasing living standards ("you cannot live beyond your means" say the neo-liberals) and children leading poorer lives than their parents because of unemployment ("the debt burden is crushing" say the neo-liberals). The positive side of capitalism---higher standards of material living and well-being ---is now being punctured by a phase of substantial disruption and upheaval that will cause massive economic hardships and gross injustices.

Crisis and instability are inherent to capitalism and, under neo-liberalism, surplus capital since the 1970s has been directed towards the acquisition of property or absorbed within the banking system as speculative capital (casino capitalism). And whilst temporarily effective, both of these avenues proved to be problematic in that they fueled bubbles, which eventually burst. It is now difficult to achieve the continual compound rate of growth per annum of 3 per cent that is required for the reproduction of a healthy capitalist economy.

So how will capitalism reproduce itself in these conditions? How will it find the 3% growth it requires to do so?

Update
There is a link on philosophy.com to David Harvey's recent book The Enigma of Capital and the Crises of Capitalism. Harvey is well known for his work on a Marxian theory of crisis through reconstructing Marx, by piece a heap of fragments into a coherent theory.

Harvey basically works with the ‘overaccumulation of capital’ model. When capital over accummulates a portion of the overaccumulated capital will then be devalued, until what survives can seek a satisfactory profitability again.Thus asset prices plunge, firms go bankrupt, physical inventories languish and wages are reduced, though this devaluation is no more equally divided among the respective social groups (rentiers, industrialists, merchants, labourers) than prosperity was during the good times.

The history of European-debt crisis is that one economy finds itself under pressure, "help" is offered in return for fiscal austerity, austerity worsens the underlying economic situation and thus the fiscal position, and funding pressures resume. This is now happening with Italy.

It looks increasingly likely that global economic growth is going to be low. The veto on public debt in the US and Europe and low growth means that it is difficult to pay down both private debt in the banking system and public debt . In an economy already hamstrung by depressed aggregate demand, the short-term source of economic growth cannot come from the private sector. Yet little is being done to promote economic growth. Without publicly or privately generated economic growth the way to pay down debt is default or inflation.

Austerity--- slashing government spending, selling off assets, laying off public-sector workers and cutting the pay of those that survive--can lead a downward economic spiral and the transformation of the country.

| Posted by Gary Sauer-Thompson at 12:10 PM | | Comments (21)
Comments

Comments

Sherry Ortner in On Neoliberalism highlights the human hardship and suffering involved in “economic restructuring” and “polarization of wealth” that is caused by the massive dislocations of late capitalism/neoliberalism/globalization.

She adds that the making sense of these economic upheavals involves:

A sense of humiliation and abjection, a great deal of magical and irrational thinking, as well as a certain clear-eyed sense of injustice and the necessity for standing up to it when it is not too dangerous to do so – all of these and many other ways of understanding/experiencing/reacting to/dealing with the pitilessness of neoliberal theories and practices can no doubt be found, in various mixtures, in most parts of the world.

It is going to be hard times for people in the US and southern Europe. Will China's growth and its demand for mineral resources protect Australia?

In the London Review of Books Benjamin Kunkel highlights how a financial crisis has a very clear pattern:

The flow of credit, at one moment lavished to all comers on the flimsiest pretext of repayment, at the next more or less dries up. In the resulting conditions of uncertainty, those without ready cash, forced to cough it up anyway, can be pushed into fire-sales of their assets, while those who do have cash prefer to save rather than spend it, so that the economy as a whole sinks toward stagnation.

It's so very familiar. The next stage, given the lack of rising American consumer incomes upon which global growth relied (eg., China's exports to the US) is accumulation by dispossession (Greece).

I'm scared.

its going to be a rough ride, even for Australia.

Commodities (eg., iron ore etc) will go down in price because of reduced demand, given the diminishing prospects for global growth and demand. China's weakness is that its economic growth is primarily export based and is geared towards the big spending western consumer. The latter--especially in the US--- are indebted and are not spending.

We in Australia will feel the ripple effects of this.

"The positive side of capitalism---higher standards of material living and well-being ---is now being punctured by a phase of substantial disruption and upheaval that will cause economic hardships and gross injustices."

That's capitalism's history.

Lyn,
just think of all those bargains--its a good time to buy for punters. Let speculation rule.

Nan,
when I saw that headline I just rolled my eyes. With a series of structural problems, different problems in different nations, let alone the structural problems of the eurozone, and no political will to do anything about any of it, gold looks like the safest place to park for a while yet.

Still scared.

How things have changed... or maybe they haven't...

Less than twenty years ago, how the powerful were gloating! The Soviet Union had fallen. Their experiment had been undermined by chronic inefficiency and corruption. Capitalism... built on freedom, individualism and creativity was clearly the superior system! Our citizens were "consumers" and our society was an "economy". What could go wrong?

Now, I'm not university educated or particularly well-read, but I remember thinking that some of us were getting a bit over-enthusiastic. Then I saw the way the MSM demonised the anti-globalisation movement. Hounded into oblivion.

I couldn't understand the way the tech boom/bust was so quickly forgotten. And the way the US Federal Reserve splashed the cash around seemed a bit foolish. The Enron/Andersen fiasco was portrayed as a minor hiccup in an otherwise flawless system. A few perp-walks and the issue went away.

These things didn't seem right to me... with my high school education.

But I guess the wizards and moguls knew better, eh?

The finance system didn't maintain good risk practices, the illusory nature of a whopping load of capital was rammed home with the "Global Financial Crisis", and the governments bailed out the finance industry.

Now... many governments owe money ... will the finance industry cough up? No.

The screwup has been socialized, and with austerity measures, the wealthy who screwed up /still/ end up relatively wealthier, starving any new players in markets or governments.
It seems if you are a financier you get relatively richer than the average person (it's relative wealth that gives power, not the absolute amount) whether you do your job properly or completely screw up.

Wasn't that a stunning quote offered by Anon, of Sherry Ortner?
They, big capital formations exogenous and endogenous to formal states have tried to rock and roll, the stakes and consequences appear to be high.
But what shabby movements crypto brownshirt populist movements have been, becoming symbiotic and parasitic of "civilisation" with big capital and nation states happy to whip uncertainty within competitors.
You can think of Goldman Sachs, Lockheed, Murdoch, comment on the $ hacking of the global economy twice in four years and on an industrial scale makes one muse, a bit close to a 1933 moment.
I think Gary's comment feels "gut" fair, though.
In fact, its a great thread when a warning can't go amiss.

For years now, we have seen the steady increase of inequality particularly in the Anglophone countries, yet how many commentators have seriously tried to examine the consequences of this for economic growth? Why is it so hard to connect the dots?

As well as inequality, there is also the issue of fraud. Lots of people have complained about the essentially fraudulent nature both of the US housing bubble and of the weird financial instruments invented to finance it. Jamie Galbraith (JKG's son) made a speech about it:

http://my.firedoglake.com/selise/2011/08/01/james-k-galbraith-the-final-death-and-next-life-of-maynard-keynes/

His view is that the whole international financial system is essentially and irretrievably fraudulent.

In a article by Geoff Winestock in the AFR---"The Great Debt Divide"--- Sinclair Davidson from the IPA is quoted thus:

The cuts in the Congress debt deal are too small and it would give the economy a boost to cut more. The private sector is too frightened to invest because the government is crowding them out.

So the core problem is that the government is too big. The solution is reduce the size of the government with a near stagnant economy. This solution, presumably will inspire confidence in the private sector and corporations will start investing big time because they are no longer crowded out by big government. It is more likely that banks, anticipating the contractionary effects down the line, will be even more reluctant to lend.

Davidson avoids saying what should be cut to reduce the deficit. Sack more teachers and police? Reduce the military budget because its level of military spending is unsustainable given its economic decline? Privatize social security? He also avoids saying that the budget cuts would reduce demand in the immediate years and whether or not the cuts would reduce US interest rates or the exchange rate.

The view that "Austerity will restore growth" is economic gibberish---an example of what Joseph Stiglitz calls bad ideas. The single most important driver of deficit growth is weak tax revenues, owing to poor economic performance. So the single best remedy would be to put America back to work. The recent debt deal is a move in the wrong direction.

I'm beginning to think that the US mortgage robosigning scandal is going to seem less bad, in retrospect, than this sort of "crowding-out" robowriting (ie. Winestock quoted in Gary Sauer-Thompson's comment).

See Krugman for an antidote. One could start here:

http://krugman.blogs.nytimes.com/2011/08/04/wrong-and-right/

The Reserve Bank of Australia continues to maintain in its August Statement of Monetary Policy that the central scenario in Australia was for inflation to accelerate above its 2-3 % target band next year.

We could say that there is a disconnect between the Reserve Bank's thinking and the realities of the global financial markets and the global economy. The latter is close to recession.

The Reserve Bank didn't see the global financial crisis coming either.

The Federal Reserve in the US is also preoccupied with inflation even though the real problem is that what the US needs is fiscal stimulus to offset consumer deleveraging and failure of businesses to invest. Is there a loss of lost faith that central bankers can or will intervene successfully emerging?

Joseph Stiglitz says that central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least “cognitively”) by the banks that they are supposed to regulate.

Most of the economic talking heads that appear on the TV screen are cheerleading to restore confidence in the market. The stock market meltdown is only a blip, a little self correction. The recovery is on course.

They appear as zombies to me.

"If the global financial system had been patched up reasonably well (according to Wall Street), then the global economy is not on the mend."

In the US the Republicans will do whatever they can to prevent the economy from improving before Nov. 2012. Their priority is to ensure that Obama loses the presidential election. From the Chinese perspective there is a very severe risk to the full faith and credit of the United States due to potential political gridlock in the Congress.

China must be worried about America’s ability to perform its critical role as the anchor of the global financial system.

gordon,

the concentrated financial power poses a threat to our economic well-being. They use their power and prestige in the US and Europe to reshape the political landscape.

They have no intention or incentive to change their behaviour towards excessive risk taking.

In the US we have a Democratic administration demanding cuts to Medicare and Social Security in order to protect the military budget from further reductions. This is necessary in order to have the national defense the US needs to protect itself in a dangerous world; ie., the US is at war with Islamist extremists who attacked them on 9/11.

Over at The Drum we have Steven Kates, a senior lecturer in economics in the School of Economics, Finance and Marketing at RMIT University in Melbourne, writing:

The carbon tax, just to take one example, is being introduced because the Government needs the revenue. Maybe they'll give back half as they say, but they will very definitely keep the other half.

Bizarre. There's no mention of greenhouse gas emissions causing global warming! What are we to infer? That it is a fiction?

Kate, a free market economist, s then continues with a point he has made before --- namely, the stimulus packages that were put in place after the Global Financial Crisis have been a disaster everywhere they have been applied. He says:

Public sector investment has replaced (crowded out, as we economists like to say) the private sector. In no sense should this be seen as a recovery and until these facts on the ground are reversed, any talk of Australia being on a strong upwards trend is premature to say the least. We have been dependent on rising resource sector prices and an increase in demand by the Chinese for maintaining living standards. How doubly bizarre therefore was the introduction of a mining tax which sought to plunder our one major area of growth. But so desperate has the government been to find the money to return its budget to surplus it was willing to put our one genuine economic success story at risk.

His argument is that the reality was that Australia was never heading for the slowdown from the global financial crisis Treasury foresaw, and its panicked overreaction and subsequent over-the-top stimulus expenditure have served Australia very badly.

There's nothing about the government propping up the banks at the expense of competition.

The subtext is that interventionist regulators are bad news. Kates is basically attacking Keynesian economics from the perspective of the Austrian school which holds that the idea that the boom and bust cycle is natural and inevitable. So unemployment, as in economic recessions and depressions, is traced back to state intervention in the market, which effectively blocks the natural balance---left to its devices, the market will adjust efficiently.