The financial turmoil since 2007 is a crisis in the making similar to pre-1914, which marked the end of the first period of capitalist globalisation...
It’s clear to most people that government talk of an economic upturn, largely unchallenged in the media, is fanciful. But equally fanciful is the view of many workers that the crisis must be fatalistically accepted and is one which will set itself right in the end.
Just 3 per cent of bank assets are earmarked for investment in industry.
To encourage this outlook the government has spread the falsehood that its borrowing has only been possible due to low interest rates that show the confidence institutional investors place in its ability to run the economy.
The reality is that the government has been buying political time through the monetary device of quantitative easing (QE). Since 2008 we have had one government department, the Treasury, issue a total of £375 billion of IOUs (gilts) to another, the Bank of England.
This circular flow of money printing between two government departments was played out further during 2013 when the Treasury accepted the transfer of £34 bn of “interest” that had accrued in the Bank of England account. The interest had arisen from the debt the Treasury itself had issued in the first place.
The £34 billion of fictitious “interest” plus the proceeds from the “fire sale” of the Post Office has since been used to bolster the 2013/14 public accounts.
The book keeping deception has allowed “honey I shrunk the deficit” Osborne to announce that he has narrowed this year’s budgetary shortfall (deficit). More to the point is the recent comment by the UK Debt Management Office stating that Britain will find it hard to convince investors to buy government debt in the years ahead.
Put another way, it’s saying that now that the Bank of England is maxed out to the tune of £375 billion, who will step in to cover the yearly deficits from 2014/15 onwards and what assets will they demand in return, using the cloak of privatisation?
Britain is not alone in this type of false economy, but in terms of relative scale we are head and shoulders above the other governments and their central banks which have been issuing vast sums of money to prop up balance sheets.
This has led not to a reduction in debt, nor to the hyper-inflation we were always told would immediately follow (that may come later as if out of the blue), but to huge private gains enriching the finance capitalist class. The combined net paper worth of the world’s billionaires has doubled since 2009.
Writing on 11 November in the Wall Street Journal under the headline “Confessions of a Quantitative Easer “, former US Federal Reserve official Andrew Huszar admitted, “the central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”
Huszar wrote, “Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the US central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings, and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.”
EU bailouts also enrich the rich: 77 per cent of the €207 billion of the so-called “Greek bailout” went to large investors to prevent them incurring a huge capital loss due to a spike in Greek bond yields.The bailout did not go to the people whose savings and pensions have been shattered.
Meanwhile, here in Britain household debt is at a record level according to figures from the Bank of England. Individuals now owe a total of £1.43 trillion, including mortgage debt. The previous high was in September 2008, just before the effects of the financial crisis began to bite.
Families are having to borrow to deal with the higher cost of living. But workers' impoverishment can appear to be masked when like now there has been a recent rise in asset values in the form of speculative newbuild housing (plonked in fields) and rising stock markets.
This apparent surge in some workers’ personal wealth can be so great that households substantially increase consumption out of current income. If stock and real estate ownership is widely distributed we can experience the seeming paradox of households assuming that their savings are rising significantly even as the country’s actual savings rate declines.
As savings decline relative to GDP and with inward capital flows being used partly to satisfy speculative demand for additional housing, the consequence must be that imports grow much faster than exports and the country’s trade deficit will expand. This explanation neatly sums up the “recovery” set against the backdrop of Britain's ever-worsening trade deficit.
This summary comes from The Great Rebalancing by Michael Pettis, who in his book dissects in far greater detail contemporary balance of trade theory. He shows that we are living through a massive balance of payments crisis that is hiding under the meaningless title of a “credit crunch”.
Even the new Bank of England Governor admitted that the so-called recovery was based on a new housing boom, not on real growth: “Right now in the UK as a whole the recovery is being led by the housing sector”, he said in October in an interview in the Western Mail. But he still claimed that the property market is “not in a bubble”.
The big five banks hold £6 trillion in assets, but have earmarked just £200 billion to invest in our industries – 3 per cent. As of August, bank loans outstanding to UK residents were £2.4 trillion, 160 per cent of GDP. Out of this, wrote Martin Wolf in the Financial Times in January, 34 per cent went to financial institutions, 42.7 per cent to households, secured on houses, 10.1 per cent to real estate and building, and just 1.4 per cent to manufacturing. So banks mainly used their existing property assets to finance new loans. And three-quarters of loans to business went to finance and property firms.
In the 1990s, Germany and France privatised their banking sectors. In 1997 the World Trade Organization opened up trade in financial services. Then, when the EU introduced the euro, the banks could use their easy access to money to try to win new business by lending to the poorer countries of the EU, which could use euros and get cheap foreign loans. These countries are now tightly bound in keeping with the EU’s political intent, which comes straight from the drawing boards of 1940s Nazi Germany. There the common currency was first thought up and discussed, rather than the post-1945 project portrayed by today’s euro-fanatics.
It is up to workers of other countries to sort themselves out but we British workers have been stuck in the wrong groove for far too long. A country that runs a trade deficit has to have foreign capital inflows to meet its balance of payments.
In Britain these inflows have been euphemistically called inward investment, but countries that export capital to Britain do not do it as a favour. They export it as a way of importing demand for Britain to buy their goods and maintain their employment levels at British workers’ expense.
Having been politically anaesthetised by credit, we are now on course for an overdue collision with reality. ■