We do not know whether the green shoots of recovery some observers claim to have seen in the late spring will wither in the summer heat. But they are unlikely to blossom this year or, for that matter, next. Stock exchanges may have risen by about 20 percent between February and June but the underlying reality is that the world economy is continuing to contract, with any limited revival in China or slowing of the decline in the US outbalanced by continued deterioration in continental Europe. Talk of “recovery” is still talk of a reduction in the speed of contraction in the worst crisis the system has known since the Second World War.1
This is recognised by those capitalist commentators not bemused by the small shifts in market indices that can create quick speculative profits. They see that the huge debts run up by the banking system during the bubble can still return to plague it, despite the unprecedented sums thrown into the system. The IMF has raised its estimate of aggregate financial write_downs to $4.1 trillion, about twice the figure of a year ago, while the estimated total excess of government expenditure over taxation across the OECD area for next year is 8.7 percent of gross domestic product.2
The scale of the debts opened up a debate in the upper echelons of the US ruling class in the early spring, which we mentioned in our previous issue, over whether it was necessary to nationalise the whole banking system. The Obama administration managed to bury that idea with “stress tests” supposedly showing most of the banks were relatively healthy (see Megan Trudell’s piece in this issue). But that has not stilled the voices of those who suspect the tests were designed to get the right result and those who worry that the steps taken by the American, Chinese and to a lesser extent British governments have not been replicated in continental Europe. And now another debate is coming to the fore, on what to do with the burden of debt now weighing on governments as well as banks.
On one side of this debate stand those who believe that the US government should continue with its “Keynesian” stimulus policies. To worry about the cost now, they warn, could cut any revival dead, just as tax rises did in the middle of the New Deal in the US in 1937. What is more, any inflationary impact of government deficits can make the debt burden lighter. “What I hear more and more, both from bankers and from economists,” writes Wolfgang Münchau, “is that the only way to end our financial crisis is through inflation. Their argument is that high inflation would reduce the real level of debt, allowing indebted households and banks to deleverage faster and with less pain”.3
That has produced a backlash from those financial interests who would lose out—and from commentators who claim any danger of deflation has passed and the fear now must be of an inflationary spiral, a new bubble and then a new crash. These figures argue that the only solution is to squeeze the mass of the population to pay for the debts. As Gideon Rachman writes, “Panic has passed; something less frightening and rather bleaker is beckoning. Welcome to the politics of austerity”.4
The US government may be in a position to avoid a clampdown on spending for the time being. It remains the most powerful player in the world system, even if humbled by the crisis and by its setbacks in Iraq, Afghanistan and elsewhere. It biggest creditors, the Chinese and other governments, dare not crack the whip over the scale of its debts for fear of causing a collapse in value of the hundreds of billions in dollar assets they hold. The British state, with a deficit unprecedented except in time of all-out war, is not in the same position. It is this, rather than simply their ideological fixation on neoliberalism, that lies behind the rush towards cuts by the mainstream parties. Martin Wolf of the Financial Times spells out the pressure on them:
The UK has lost control over public spending. It has to get it back again. Whether they like it or not, UK voters will have to elect a government willing to achieve this end… The next government will…find itself in a war of attrition with its own servants…. Government spending must be cut down to size… This must mean: a sustained freeze on the pay bill; decentralised pay bargaining; employee contributions to public pensions; and a pruning of benefits. It is obvious, too, that this will mean massive and painful conflict between governments and public workers… The next prime minister is likely to end up quite as hated as Margaret Thatcher was.5
Willem Buiter, a former member of the Bank of England’s monetary policy committee, shares Wolf’s belief in the necessity of a savage attack on living standards and the public service: “Under the best possible scenario, taxes will have to be raised and/or public spending cut on a permanent basis by between 5 and 6 percent of GDP.” He warns: “The pain will be widely felt. This pain will not be the result of a war fought by a united nation against a hated enemy… It is therefore not clear that the necessary social and political cohesion to accept joint fiscal burden-sharing will be present.” But he continues, “If the necessary fiscal tightening is not forthcoming, markets could panic and Britain could face an emerging market style ‘sudden stop’, with the rest of the world withholding financing from its public and private sectors”.6
In other words, forget the hype about green shoots. Whether they eventually take root or not, we are in for a period of bitter struggles and the likelihood of social and political turmoil. That is all the more reason for the forces to the left of Labour to get their act together and stop leaving a vacuum to be filled by the Nazis of the BNP and the only slightly less nasty types who run the UK Independence Party UKIP.
1: For the decline in the US up to April, see the graph from Paul Krugman in “The Great Recession Versus the Great Depression”, available from http://krugman.blogs.nytimes.com/2009/03/20/ For a more pessimistic picture of the world as whole see the graphs of Barry Eichengreen and Kevin O’Rourke at www.voxeu.org/?q=node/3421
2: Financial Times, 21 April 2009.
3: Financial Times, 25 May 2009.
4: Financial Times, 25 May 2009.
5: Financial Times, 7 May 2009.
6: Financial Times, 22 April 2009.