Showing posts with label stagnation. Show all posts
Showing posts with label stagnation. Show all posts

Saturday, 20 February 2016

The Brexit Vote


The confusion of the left on the question of the European Union was shown by an event at my alma mater, the School of Oriental and African Studies, London University, on 16 February. It also revealed a more general absence of critical faculties among many of those who do not like the way the world works today. Tariq Ali was promoting his latest book, The Extreme centre: A Warning. He made the standard complaints about the lack of any political alternative to ‘neoliberal’ politics in most major countries, and he also tied this theme into the question of the vote on Britain’s membership of the EU (now set to be on 23 June 2016). I have not read his book, but based upon what he said in his presentation, I would make the following comments, ones that also set out how to understand the forthcoming UK vote on EU membership.
Firstly, as an old hand at these events, it was surprising that Tariq Ali did not reflect upon the lack of any widespread opposition to what he calls the ‘neoliberal extreme centre’. He did hope that the rise of Jeremy Corbyn to the lofty pinnacle of the British Labour Party leadership showed that the Labour Party was not actually dead, and he also cast a positive gloss on the popularity of the Scottish National Party as a sign of some popular opposition. My problem with this searching in the dustbin for a gem is that it does not understand that much UK public opinion is welfare-nationalist at best – ‘save our NHS’ – or that any materialist analysis would have to draw the conclusion that this opinion is because the mass of people see that this is where their immediate economic interests lie. A prime piece of evidence for my perspective is that half the British public voted for the Conservatives or UKIP in the 2015 general election, while the Labour Party had ‘controls on immigration’ as one of the policy demands carved into the infamous stone monolith of Ed Miliband, the former Labour leader. Instead, Tariq Ali gave credence to the implausible notion that the British media are responsible for right wing opinions.
Secondly, Tariq Ali made a telling point, almost as a confession. He had formerly been in favour of Britain’s membership of the EU, but now he had grave doubts. There seemed to be two connected reasons: what ‘EU policy’ had done to Greece, Spain and other countries was unacceptable, and the EU-driven policy was a machine for implementing the wider policies of financial capital, not those of the mass of people. Just consider what this position amounts to. It identifies a policy driven by the EU as the problem, not recognising that it results from capitalists in each country trying to restore their viability in the global market, still more that it is one that the richer countries are imposing on the poorer in order to get some of their money – bank loans, etc – back. So, it becomes a policy decision that progressive forces could change, not one that is inevitable unless the market logic of capitalism is overturned. It is not a question of ‘the EU’ demanding nasty policies; these are the consequence of the crisis that these economies face. The ECB, EU Commission, etc, are the messengers, and the message is that your economies are uncompetitive in the world market!
Thirdly, the political confusion of Tariq Ali, and many others, on the question of the EU is based on accepting the alternatives such a vote gives the electorate. There will be a ‘Yes’ or ‘No’ answer to leaving/staying in the European Union. But the terms of the debate are already set. Each side is based on what is best for Britain: whether to stay in a ‘reformed’ (on capitalist terms) EU, although the changes are minimal, and so keep the UK’s global bargaining power, or whether the UK should strike out on its own into what might be a more enticing, faster growing, wider world. The debate only reflects an anxiety of the British ruling class since at least 1945: what to do about a Europe in which the UK could only realistically play a manipulative, tactical role, when it is a minor country with much wider global interests. I have covered these issues previously on this blog (see, for example, here). There is no basis upon which the Stay or Leave vote could be construed as being in favour of something else, anti-capitalist, given the lack of any progressive alternative in the UK. For this reason, I will not be voting Yes/No on which is the best way to save British capitalism.[1]
Tariq Ali’s confusion also goes further. In the SOAS meeting he noted that there was a political problem of many of Europe’s right wing parties – for example, the Front National in France – being in favour of welfare spending. ‘And so are we!’ Well, the unacknowledged problem comes down to the fact that western welfare spending is based upon the privileges that rich countries have in the world, something that his kind of analysis is reluctant to recognise. The attack on welfare spending today results from the chronic stagnation of most economies, ones that are just about buoyed up by huge levels of debt, but which debt also calls time on the previous status quo. Rather than recognise this, Tariq Ali bemoaned the attacks on the welfare state and the ‘breach of the consensus’ that had previously been achieved. So much for the analysis of an anti-capitalist who sees unfavourable policies as a result of decisions that could be changed within capitalism. I heard nothing from him to suggest that what he called ‘neoliberal’ policies could not be changed by a more enlightened policy under capitalism.
The rich country welfare system represents part of a deal/consensus that is now being broken by many governments. Policies that are called ‘austerity’ have not been implemented much in the richer countries, though they will be in the next couple of years. However, the political reaction, especially in northern Europe, is often to bolster reactionary nationalists that want to restore the status quo ante against the ‘hordes’ of migrants and other unwelcome drains on the national wealth and welfare that rightfully ‘belongs’ to the ‘legitimate’ recipients. This is the basis of a reactionary trend in European politics today. While this is exacerbated by the flows of migrants into Europe from the destruction of the Middle East and North Africa, such events only harden the views of those in Europe (and the US) whose states have done so much to cause the damage. It is heartening to see the humanity of many people in Europe helping refugees, especially in Germany. But the problem remains that the overwhelming majority of the population in European countries takes a different view of the world and their economic interests in it.

Tony Norfield, 20 February 2016


[1] For the record, I will probably turn up and scribble something on the ballot paper. Pointless, but amusing for me, at least.

Friday, 22 January 2016

Oil Prices, Equities and Debt


Equity markets have begun 2016 with the biggest falls on record, while the price of a barrel of oil dropped below $30. This is more than just a coincidence. The fall in oil prices results from, and also exacerbates, the continued malaise in the world economy
At first sight, lower oil prices should merely redistribute income from producers to consumers, via the lower of cost of energy, transport, etc. What is such a disaster about that, at least from the point of view of the world economy as a whole? One problem is the different concentration of the losses and gains: a small number of producers lose a lot, while many millions of consumers gain only a little. So news headlines report cancelled investment projects and job losses, rather than the motorist at the petrol station saving pennies on a litre of fuel. The negative impact on producers, especially on their investment, could well outweigh the demand that might result from consumers spending on other things. For example, many huge investments in shale production that looked viable when a barrel of oil was priced at $100 or above now look unprofitable – at least the loans given to these companies now look poorly backed by their prospects.
What is often overlooked, even by ‘Keynesian’ advocates of demand management, is that although consumer spending is bigger than investment in the economy, the swings in investment spending are much bigger than the percentage changes in consumption, and usually lead the up and down cycles of demand. Furthermore, what such analysts always overlook is that investment spending is basically driven by potential profitability. But this should not be a surprise in a capitalist economy!
More importantly, all this takes place in the context of continued, huge levels of debt compared to what the economy produces. There has been a sharp rise in debt levels versus GDP between 2007, ‘pre-crisis’, and 2014. This had occurred for almost all countries: poor countries such as China saw the sharpest rises in debt ratios; but rich countries saw a further increase from already elevated levels. This is the important context for the apparent reaction of equity markets to the fall in oil prices. The underlying problem is that debts cannot be paid back. It does not matter that the increase in debt in richer countries between 2007 and 2014 has largely been borne by the government, as the public sector took on private liabilities - all this means is that the pressure for austerity via cuts in government spending is all the greater. This casts doubt on the value of the full range of financial securities. Those securities linked to oil and gas prices now get hit directly because there is a clear focus of potential loss that is visible every second of the financial trading day. But the myriad of other equity securities issued by other financial, industrial and commercial companies get caught up in the downward vortex. This is not only because money capitalists work on the basis of what looks like giving the most attractive yield, so a fall in energy-related security prices has a knock on effect on other, non-energy-related securities too. More troubling is that there is clearly a broader problem affecting the whole economy.
This problem of debt and insufficient incentive to boost production overwhelms the otherwise mixed, plus and minus economic outcome (mainly plus) that follows from lower oil prices. In the oil market, refiners will be making more profit as the cost of their feedstock falls with lower crude oil prices faster than will their output prices of refined products. To some extent, this will insulate the integrated oil corporations from the downturn. Airline and other travel companies will also benefit from lower energy costs. So will China and Japan, major consumers of oil, although their energy companies will suffer. Nevertheless, governments, from Russia, Iran and Venezuela to Saudi Arabia, Norway and the UK will find their oil and gas tax revenues falling. This has already led Saudi Arabia to make very sharp cutbacks in its public spending to reduce a dramatically high deficit, while other countries have seen a drop in their currency exchange rates.

Table 1: Core Debt Levels of Non-Financial Sectors as a % of GDP, 2007 and 2014


Source: BIS, Quarterly Report, September 2015


All of this might simply be a series of local difficulties offset by positive developments elsewhere. But, in the absence of any momentum to support profitable capitalist investment elsewhere, it results in continued capitalist stagnation and the promise of yet more government measures to prevent a collapse of their system.

Tony Norfield, 22 January 2016

Thursday, 22 September 2011

It Can Always Get Worse …

The IMF recently issued its World Economic Outlook, a document that has the advantage of comparing trends across the global economy. Although the text is written in international policy bureaucrat newspeak, luckily the charts and tables more or less speak for themselves. Below I have copied some of the more salient figures to illustrate how the crisis has recently intensified in the major capitalist economies. In addition, I note some points from recent press reports that illustrate how trouble is also brewing below the surface.

Economic stagnation after the failure of stimulus policies


The first chart shows the economic cycle based on data from purchasing manager surveys. These surveys track the broad economy closely, and the reports are released more promptly than official GDP statistics. The 50 level for the index in the chart means no change in output; above 50 means growth, below means contraction. After collapsing in 2008, global output growth resumed from mid-2009, but now economies have dropped back towards stagnation. In general, the ‘advanced’ economies are doing worse than the ‘emerging’ economies, partly because the latter did not take on as much crippling debt.[1]



The basic message from this chart is that all the extreme policy measures enacted since 2008 to boost the global economy – huge budget deficits, the public sector taking on private sector liabilities, zero interest rates, etc - have failed to restore conditions for profitable capital accumulation and growth.

The latest policy innovation from the US Federal Reserve has not changed anything, and global equity prices dropped by 3-5% today.[2] The IMF itself is left asking governments that have low borrowing rates to borrow more and spend more to boost demand in the global economy. But these same countries are afraid that more borrowing may find them also on the road to financial ruin.

The view from the end of the road


That road does not look attractive. This is shown in another chart from the IMF report, depicting the extra amount of interest over Germany’s that governments in the euro area pay to borrow for two years. As can be seen from the left hand section of the chart, the curve for Greece moved towards 8000. This means the market was demanding it paid an astonishing 80% per annum more than Germany! (Today it was much lower, a mere 65% premium!) Less extreme are Portugal and Ireland, but an extra 10-15% is still catastrophic, even if it is not as surreal. On the right hand section of the chart, the scale of premium borrowing rates is far less for the stronger countries (an extra 0-5%), but Italy, Spain and Belgium stand out as under pressure from credit markets.





Germany clearly remains in the best position: the German government can borrow for 10 years at a rate of just 1.7%. However, it will be wary of spending to try and boost the global economy when it is widely seen as liable for bailing out indebted euro members.

Behind the scenes


All this looks bad, but behind the startling pictures things are actually worse. Take for example, Siemens. Last year the German industrial group set up its own bank, partly because it would then have more financial flexibility and partly because it was worried about the other (mainly European) banks with which it dealt. A few weeks ago it withdrew €500m from a French bank and added to the €4-6bn deposits that it holds directly with the European Central Bank.[3] This company’s concern is not exceptional, in fact European banks face serious problems getting cash from their counterparts in the money markets.

This is shown by the wider ‘spreads’ that European banks are paying for funds. The credit risk of lending to them has risen, so that if they can get any cash at all, they have to pay more to borrow. French banks are seen as the most at risk among the major European countries, given their exposure to Greece and other indebted countries, although they are far from being the only ones. Senior executives from BNP Paribas are currently on their way to tour the Middle East to try and drum up friendly investments from local potentates.

Safe havens?


In the latest phase of the crisis, the US dollar has strengthened against most other major currencies. This is not because the US is a ‘safe haven’ in troubled times, even though it has more weapons than anybody else, but because, for now, it may look in better shape than crisis-stricken Europe. The definition of safety in capitalist economic terms is a movable feast, depending on where next the focus of panic falls. This is difficult to forecast, especially because the cracks in the system are manifold.

Another recent IMF publication, its Global Financial Stability Report, has a useful colour-coded review of the crumbling structure of the major capitalist economies. This is shown in the next chart (you may have to increase the viewing size to see the numbers clearly) . Red means bad; amber means not good, green means OK, and possibly good, or at least better (white means no data available).



The data are percentages of 2011 GDP, except for bank leverage that is the ratio of bank assets to bank equity.[4] Most of the red boxes are on the European side, showing high levels of debt and bank leverage, principally in the suspected countries. However, disturbingly for those who think Germany is completely safe, its banks have the highest leverage in the world at 32! The US gets off relatively lightly on this assessment, with a few green boxes. But it is not clear how far the IMF ignores the huge loss potential to the government of the US Fed owning nearly a trillion dollars of mortgage assets, and its other implicit financial guarantees. Overall Germany and Canada seem to do best (though there are some gaps in the Canada assessment). Interestingly, the euro area as a whole is not so dreadful, but this is an average of a range from very bad to not bad. The UK has a mixed picture that makes it reluctant to boost spending and raise its risk level.

So, there are plenty of pressure points ready to explode as the crisis enters another phase. As the movie Airplane! might have noted, this is a bad year for capitalist policy makers to quit smoking.


Tony Norfield, 22 September 2011


[1] See the chart of the debt levels in different countries in my article ‘Debt and Austerity’, 8 August 2011, on this blog.
[2] See my article ‘Operation Twist’, 21 September 2011.
[3] See ‘Siemens shelters up to €6bn at ECB’, Financial Times, 19 September 2011.
[4] See my article ‘Bank Profits & Leverage’, 25 August 2011, for more on detail this.