Each day that passes, the narrative of politics and economics never ceases to become more interesting. And so these interesting times continue with yet more bad news for our economy.
I remember some time ago, soon after the crisis of Autumn 2008, having a conversation with a friend who stated quite confidently that the only companies going to the wall were badly run businesses. How house prices (one of his main concerns) would recover and there was plenty of money in our economy.
The conversation followed the belief that this would be a short blip on the economic landscape, and times would return to normal fairly quickly. Indeed, within a few months the same person, along with various media publications were stating that the banking crisis was either “over”, or nearly “over”.
Several years down the line – 3 1/2 years since the queues outside of Northern Rock – if we look back we can see a timeline which is significantly longer than we were led to believe.
Today, no one knows how long the banking crisis will last, or indeed where it will lead next.
It seems like every week new news is broadcast casting doubt on any economic recovery with commentators always pointing to the fact that “technically” we are no longer in recession. This however denies the seriousness with which the world economy is stumbling from one economic shock to another affecting the standards of living of billions of people.
We Avoided Going From A Recession To A Slump
As we know, Gordon Brown “saved the world”, from the worst effects of the banking crisis, and we are constantly reminded how this action prevented a recession from turning into a slump or depression. (Please note the hint of sarcasm before people start giving me abuse!)
My reading of the action taken by world leaders at the time, including Gordon Brown, is that their action was decisive and needed to prevent a collapse of the capitalist system as we know it. I am glad that Gordon Brown was actually in power at the time, the thought of George Osborne et al being in power, staring into the headlights fills me with horror.
However the structural problems have still not been dealt with and the terms behind the bailouts were poorly thought out. Like the snooker player planning a centenary break, our esteemed leaders were only thinking as far as the next black.
The idea that we prevented a slump in my opinion is looking less and less like fact and more like propagandist rhetoric.
The more economic indicators are released across the world, the more the economic crisis continues, and for some gets worse and not better.
If I were living in Spain today would I be thinking that this is the normal “economic cycle” or recession, or would I be thinking that this was far more serious?
Spain has 22% unemployment and 45% youth unemployment – a country in debt – and had negative economic growth for 6 consecutive quarters and in the last 5 quarters has not grown more than 0.3% in any quarter. The economy is stagnant at best with now the prospect of enormous cuts in public expenditure, sucking enormous amounts of money out of the economy.
If you were living in Spain would this have been a recession or would you see this as a depression? The prospects for the population over the next decade in terms of standards of living and general employment is bleak at best.
Spain is by no means the most badly effected economy in the world following the financial crisis, yet these figures give pause for thought after the recent elections and demonstrations there.
Spain though is possibly the most pivotal country within the Euro zone, the country that will have the most effect on the outcome of the Euro’s fate.
Whereas bail outs can be discussed and organised for Greece, Ireland, Portugal and maybe even Italy, to talk of bail outs for Spain would be a bridge too far.
The European Union is the largest economy in the world, a homogeneous trading area, overtaking the USA in GDP in the last decade with over 15 trillion dollars and over 20% of the worlds market share. The US and EU account for over 40% of the GDP of the planet, so despite the rise in the growth of China and India, the old engine rooms of the world economy are still incredibly important.
Although the rise of these developing economies can aid world economic growth, the fact that these countries “make things” and sell them back to markets in the developed world means that if the developed economies are on their knees then the developing world will grow less as well.
In addition to this there is a massive discrepancy with debt and surplus as China saves too much and collects the debt of the largest single country economy in the world, the US.
The World Economy shrank for the first time in post war history by 2.031% in 2009 showing just how bad the economic crisis has been and how the words of Alistair Darling were so prophetic back in 2008, that this is the worst economic crisis in 60 years.
The crisis appears to be worst where the neo-liberal philosophy was strongest and where the financial markets and economies are at their most mature.
Like 1929, the crisis originated in the US, but due to the spreading of the same ideology across the world by the IMF and World Bank and the ever increasing “Globalisation”, it exposed many interwoven economies and affected those in developing countries who are least able to cope with the fall out.
I remember seeing an interesting debate on the current affairs programme “Newsnight”, before the catastrophic events of 2008, when it was argued that the globalisation and capitalist ideology of the past 25 years had reduced world hunger down to approximately 650 million, that is people who actually go hungry everyday. Within 6 months of that interview, the amount of the people who go hungry in the world increased back up to 950 million or so. 25 years to decrease it by a third and 6 months to push it up 50%, back to the levels it was previously. An excellent achievement!
The above graph shows the trend of those who are undernourished courtesy of the worldhunger.org website. Indeed this graph shows that the figures often banded about are actually worse than originally thought. This graph shows that currently around 13.1% of the worlds population go hungry/are undernourished everyday, 1 in 7 people on the planet.
Globalisation has in fact created more vulnerability in the world economy and the well being of people than before. Where as many countries were cushioned somewhat from economic strife in one area of the world, the interconnectedness now exposes everyone rather than spreading the risk.
Like the Sub-Prime housing market that started this mess, the spreading of risk added to the problems, hiding them in accounts, products and market values that no one could value or understand.
The scandal that is the IMF, World Bank and WTO
There appears to be irony in every aspect of life these days, as the two institutions that were becoming almost irrelevant to the developing world prior to the credit crisis are now centre stage “saving” the developed economies of the western world.
Prior to the crisis, the IMF and World Bank were being side lined in trade agreements and loan agreements as developing countries would no longer accept opening up their markets to foreign companies to asset strip them, or deregulating fledgling financial sectors so that speculators could decimate their economies; or sell off their education and health services to the private sector in return for loans so that private companies could make money out of the poorest people on earth while allowing millions to go without education and health provision. In short the “penny” had dropped.
The WTO constantly struggle to impose its will on developing countries now as deal after deal is scuppered by those who know the harm they do.
These organisations, dominated by the interests of western economies and especially the US, seek to open up markets for the benefit of developed countries with the spin that they will allow “inward investment” and open up markets for developing countries.
Yet the very same US and European Union constantly employ trade restrictions and in some cases the most restrictive practices in the world to prevent damage to their interests. The US protects its Agriculture sector, steel industry, car industry and airline industry to just name a few.
Irony again rears its head as the IMF prior to the 2007 beginnings of the financial crisis recommended that all countries should follow the US and UK in their approach to light touch regulation in the financial markets. Praising the US and UK and endorsing their economic policies. This incidentally is the same IMF that every world leader mentions when justifying their austerity measures, including our own George Osborne.
The IMF was WRONG in 2007 over light touch regulation and DID NOT SEE the crisis coming. The IMF was WRONG in the way it spread the ideology of neo-liberalism around the world and the WORLD BANK was WRONG in insisting in the liberation of fledgling markets and the privatisation of health and education institutions in developing countries.
Most of these criticisms are barely within the discourse of economics in the mainstream media or political parties. Both the Labour Party and Liberal Democrats appear to be wedded to the same discourse.
The Effect of Cutting Public Expenditure
As we all know in the UK, we have a deficit that needs to be reduced. As discussed here in the Truth About The Uk Deficit, the reason for the deficit is largely due to the reduction in tax take rather than simply “over spending” as the chart below shows:
Although outlays were higher at the time of the crisis than tax take by around 2.7% to 3.1% of GDP depending on how you measure it, this was within tolerance limits. The reason for the decline in tax take and the ever increasing deficit is due to the lack of credit available in the economy and the realisation that much of the wealth created on Banks accounts were not real. As credit reduced and money was effectively taken out of the economy the recession ensued and people were able to make less money and thus pay less tax.
If we are to bridge this gap we HAVE TO GROW. If the economy does not grow the deficit will get bigger no matter how many cuts we inflict on our public expenditure.
Over the next 4 years the European Union is embarking on large cuts to public expenditure. So to are other countries in the world economy like the US. This will have the effect of deflating the economies in those countries effected, which in turn effect the countries they trade with as they will be able to buy less products, therefore importing less.
This is not a short term problem. Japan has had mounting debts now for decades and has stuttering growth.
The current rounds of austerity will be affecting the next 4 years, even though most discussions appear to be focussed on the next 2 years. Effectively the Euro zone average of anywhere between 1.86% to 2.4% of GDP depending on how you measure it (economic statistics are never straight forward!) as the Full fact shows here.
Note this diagram only projects cuts in the first 2 years and the cuts in the UK will be far more in the 2 years after this.
The US is cutting even quicker and plans to decrease the deficit by $4,000 billion or 2.2% of GDP by 2015.
If the 2 economic areas of the world cut between 2% and 2.5% of GDP how will this affect the economy of the areas affected or the world economy?
Nobody really knows is the true answer, the same as no one really knows what will happen next with the banking crisis.
The UK Position
The UK position is perilous at best. Over the past two days we have had yet more bad news for George Osborne and his plans for growth and reducing the deficit.
Yesterday it was shown that the deficit is increasing under George Osbornes leadership rather than decreasing, and yet growth is also on the wane. Every month we get a further downgrading of growth expectations, today was the turn of the OECD who have down graded to 1.4% this year. This is after the UK economy has not grown for 6 months and recent figures showing not only consumer confidence is low but that consumer spending is decreasing and is technically in recession after declining for the second quarter in a row by 0.6% in the last quarter, the lowest since the technical recession in 2009.
The “good” news for the UK economy is that the great “re-balancing” of the economy is happening with the stuttering recovery being led by exports.
Many, including the OECD today are calling for the rising of interest rates steadily to counter inflation. Inflation is not home grown as the depressed wages show, but rather due to commodity markets and increased costs of raw materials. However, it is argued that increasing interest rates to a more “realistic” level will strengthen the pound and therefore help counter inflation.
Yet it is the weakness of the pound which is helping our exporters, making them more competitive. If they lose that competitive advantage will that not damage the fragile recovery? Is this not the classic sign of what happens when you have an effective devaluation?
Further Shocks Will Knock Us Off Course
We have many more shocks to the economy over the next few years, and which ever way we look at the economic figures they look bad.
Over the next 4 years both the EU and US will go through massive public expenditure cuts and with it probably massive unemployment to go with it. This will suck out money from the economy causes more stress for consumers and businesses. If interest rates increase, this will again add costs to businesses, put pressure on households making it harder to pay mortgages that has been the saving grace for many people over the past few years.
This will increase the value of the pound and probably reduce our exporting capacity further having a negative affect on the economy.
Further shock will come as the debts of Greece are most probably going to have to be “re-structured” and Italy may well be the next domino to fall in the Euro zone”.
Speculators have now gravitated to the commodity markets causing further hardship to the real economy and will add to inflationary pressures, putting more pressures on interest rates.
Food riots due to rising prices are likely yet again, while the natural disasters, sadly effecting many areas of the world (including our own, with crop yields looking to be significantly lower this year due to drought), will cause more hardship.
Then we have the prospect of Peak Oil on the horizon. This is more worrying as it will affect every part of modern life, and is inescapable. No planning has been put into effect by European and western governments generally, it is a forgotten problem, put on the back burner, always something that politicians can come to later.
So are we heading for a Great Recession? Some commentators have already dubbed it as such, but basically without meaning. If you were living in Spain, Ireland, Greece, Portugal or Italy I would say they already think so.
Other than the odd anomaly like Germany, who seem to be well placed to profit from an export led recovery, with the help of a deflated Euro caused by the southern European countries in crisis, the recovery will likely be in two spheres. The developing countries growing somewhat while the developed countries stutter and stumble trying to get back to normality.
The neo-liberal model is still with us, it has not been challenged economically or politically and continues to hold sway. Banking reform, though essential still appears to be on the back burner, while those benefiting from high commodity prices like Australia make hay while the sun shines.
This is NOT about economic cycles in a text book, rather an ideology of madness that has taken over undemocratic institutions like the IMF, WTO, World Bank and the Banking Industry that have a disproportionate amount of power in an increasingly interdependent world.
A crisis of democracy is likely to follow, as seen with the recent protests throughout Europe. This is just the beginning of austerity Europe, and the chances of a “Great Recession” or a “Slump” seem to be closer every day.