And The Kitchen Sink

Yesterday the US Federal Reserve effectively admitted it had lost control over interest rates at the new historic low levels. Rather than setting an actual Target Fed Funds Rate, it had instead to set a target range of 0 - .25%, signalling that it could not actually achieve its target in the face of market action. Rates this low are unprecedented in the US, though they fell this low in Japan for a decade, and the Bank of Japan looks now under pressure, with a strongly rising Yen, to cut rates from their current .25% to 0. The Fed had been thought to give some hint that it would also look at using other measures to avoid deflation in the US by using other monetary tools, including so called "Quantative easing", that is the outright printing of money that I spoke about being likely to happen some weeks ago. Rather than make any such hints the Fed just came right out and said that that was what it intended to do, and pretty much everything else it could do to inject liquidity into the system. In other words they had decided that the risks of Deflation and the dislocation to the economy in general were so great that they decided to throw the kitchen sink at the economy here and now rather than wait.

The response was pretty quick. In CNBC's coverage market reporter, and former trader, Rick Santelli, at the Chicago Mercantile Exchange, could be heard to exclaim loudly in the background, "Oh my God, look at the Euro." The Euro indeed spike upwards by several whole points against the dollar as it resumes its course back to becoming the world's new reserve currency displacing the dollar. The dollar, which has been resuming its decline against the Euro and other currencis, particularly Yen, in recent days, increased the speed of its decline as traders and investors decided that the US State has decided to destroy the dollar to save the economy, and in order to pay off its debts with worthless currency.

Earlier in the day, long-time, legendary trader, Jim Rogers, said that he had been getting out of dollars for some time, and was now selling what he had left. He had already let the US, and set up home in Singapore some time ago, and has been having his daughters taught Chinese, so convinced is he that the US is in terminal decline, and the locus of the world economy is now firmly entrenched in China and Asia. He's not alone the world's richest man, Warren Buffett, has been selling dollars, and investing overseas for some time, as has george Soros, who has also predicted the dollar will lose its reserve currency status within five years.

The US Stock Markets soared on the news, but the Futures Markets, this morning are pointing to a sizeable take back as investors digest what the action means about the dire state of the US economy. Asian Stock markets gained strongly overnight, but Europe this morning is muted. That could be a sign that investors and traders are looking for a similar response by the ECB, and Bank of England. The gains in Asia probably reflect the fact that Asia although it has seen some slow down over recent months, is still in the main growing, driven on by the momentum of growth in China and India, the world's two largest rapidly growing economies, both whom are still growing at around 7-8%. Partly, too it could be in response to the fact that China has been taking further measures itself to boost the housing market and domestic economy in China itself.

But, will the ECB follow suit? Possibly. But, so far it has been a reluctant cutter. Jean Claude Trichet is an adherent of the "Austrian " school of economics, which disdains such intervention that it sees as distorting the action of the market to resolve problems through its own mechanisms. Effectively, they believe that Capitalism needs crises every so often, and that crises are made worse by State intervention such as lax monetary policy which encourage moral hazhard, the taking of bad risks, and discourage necessary saving to promote Capital formation. It is the same ideology adopted by Thatcher in the early 80's, and is a useful corrollary to Capitalist State's looking to throw the burden of a crisis on to the working class. In a Europe where the working class was never subdued to the extent that it was in Britain or the US, where the 35 Hour Week still has some grip, and so on, it is a useful means of exerting pressure on employers to resist workers demands. But, in Britain and the US in the 1980's, government's only followed this ideology as long as they needed to. Once the Labour Movement had been defeated, they ditched "Austrian" economics in favour of Monetarism, an ideology which alloed them to intervene to save the Capitalists by stimulating economic activity, raising prices precisely by injecting liquidity into the system.

Its likely that the ECB could face similar pressure to reflate. But, Europe is divided. Germany, Europe's largest, most dynamic economy, has resisted the idea of a big fiscal stimulus. Indeed, the german Fiannce Minister described Brown's recent stimulus as "crass Keynesianism". Ever since, the hyper-inflation of the 1920's, German politicians of both left and right have feared policies which might lead to a similar outcome. The huge injections of liquidity into the world economy, and now the outright printing of money, are leading inexorably in that direction. The Germans attitude is in some ways understandable. Germany as with other European countries has a different outlook to the so called Anglo Saxon economies. It has not embraced the idea of a "property-owning democracy", for one thing. Like other European countries, the majority of people rent their homes rather than buying them. This means that the kinds of swings in property prices witnessed in Britain and the US simply do not occur, along with the consequent effects on the consumer economy. Where people do buy houses they simply save up until they can afford to buy, in the same way they save to buy other commodities. In Germany, supermarkets and restaurants in the majority do not accept Credit Cards, and far fewer people in Germany have Credit Cards than in Britain or the US. Certainly, the idea of running up huge debts on them would be anathema to the average German for whom debt is a terrible stigma.

So, whereas the Chinese, the Russians, and the Middle Eastern Oil Sheikhs, have been following the course taken by the Pharaoh in the Bible, or by Louis Bonaparte in France, and saying to Britain and the US, "borrow as much money from us as you like to fiannce your spendthrift ways, soon we will own you body and soul", the Germans have been more circumspect. They realise that their hyperinflation of the 1920's came about as a result of the printing of huge amounts of paper money to cover Germany's obligations under the Treaty of Versailles. The Germans say, "You got yourself into this mess, by spending too much, and borrowing too much, don't expect us to get you out of it, by doing the same."

But, Germany is the world's largest exporter. If the US economy does really tank then it will be affected too, despite the growing proportion of its trade that now goes to its economic enclaves in Eastern Europe, and to China. Despite that Germany is likely to come out of the current crisis as the undisputed economic power in the EU, and that will give it an even more powerful political voice in Europe. In many ways it will fulfil a similar role as the centre of an economic hub of trade relations that China and Japan are vying for within the Asian trading bloc.

Since I wrote my blog, "Climbing a Wall of Worry", a week or so ago, Stock Markets have continued by and large to edge upwards. This still sems to suggest that investors and traders see the downturn ending by the second half of next year. Indeed, a number of businesspeople, including even some British retailers, interviewed on CNBC over the last week have echoed that sentiment. The depth of the downturn appears to be likely to be severe, but its duration if it does abate by the second half of next year will not be anywhere like as protracted as the recession that dragged on through the late 1970's into the 1980's, punctuated by short upturns into the 1990's. Certainly, it will not be as long or as severe as the economic crisis that wracked Europe during the 1920's and 1930's, or even the US during the 1930's.

The main problem policymakers will face as the world economy resumes, possibly an even more powerful upswing towards the end of next year, is how to withdraw the oceans of liquidity pumped into their economies - and in a globalised world into the world economy - without causing massive dislocations. The answer is they probably can't, and will have to accept a large dose of inflation, as I suggested some time ago would be likely. And as I said at the time that is likely to go hand in hand with a large reduction in the economic power of those countries such as the US whose currencies will get smashed as a result. The continued growth of the world economy will probably be sufficient to prevent large outright falls over the longer period in living standards for workers in the US, but they may well stand still, and will certainly fall compared with workers living standards in China, Asia and elsewhere, just as workers living standards in Britain fell compared to those in the US and Germany when Britain lost its dominance. Only by such a readjustment can Capital bring about the necessary realignment in the Value of Labour power as a globally traded commodity.

As I said a couple of years ago when predicting the current set of of economic events that will colour the nature of workers struggles. The locus of workers advance will shift inevitably to China and Asia, as workers become more militant and more confident as demand for their Labour-power rises, whereas in the US and Britain, and parts of Europe, workers struggles will tend to have more of a defensive character as they attempt to defend the Value of labour-Power against the tide of the laws of economics played out in a globalised market.