Green Shoots?

Last week one of the Governments Ministers and economic advisors was chastised for speaking of seeing "Green Shoots". In fact, its an indication of how the media, which once supported New Labour has turned sharply against it, sensing a Tory win in sight. The Minister had, in fact, been speaking in a restricted sense in reply to a specific question about credit conditions, and not about the state of the economy at large. The Tories understandably took the opportunity to misrepresent what had been said, and the media simply jumped on the Tory bandwagon.

The reality, is that in that restricted sense of credit conditions there are signs of "green shoots" in the form of a lowering of interbank rates, a sign that all the liquidity pumped into the markets, and all the other panoply of measures being taken by Capitalist states around the globe to remove as much risk from the activities of the Banks and financial institutions is beginning to have some effect. That is far from declaring the Credit Crunch over. As I wrote a while ago it normally takes two years for such a crunch to unwind. Not only are we perhaps 5 or 6 months away from that, but this has been probably the worst such crunch on record. And it is not just a normal Credit Crunch. As I wrote last year, predicting the outbreak of this crisis - See: Severe Financial Warning - this Crunch has been caused by, and is accompanied by huge losses by the banks and financial institutions that have decimated their Balance Sheets. That is not always the case in a Credit Crunch, which can simply arise out of a fear by banks to lend, even though they have huge sums sitting in their vaults. The further massive falls in Bank Shares this last week following the announcements of astronomical losses - £28 billion by RBS for instance - is an indication of that - though partly its the result of the reintroduction of short selling at a time when rumours abound of pending nationalisation, encouraging shareholders to rush for the doors before their shares become worthless.

The TV continues to run stories about how bad things are on the basis of reports that mortgage lending has fallen by 30% as against last year. They seem unaware of the irony in describing this as bad news when in fact it was the previous ridiculously high levels of lending, at very low interest rates, which were the root cause of the current crisis!!!

Yet, the reality is that there are signs that the Credit Crunch is easing. Despite the huge losses, and decimation of Bank Balance Sheets, banks remain probably the most cash generative businesses on the planet. Even allowing for bad debts on loans and mortgages that should never have been made - bad debts which are bound to rise as the recession reduces the ability of some individuals and companies to pay back those loans - the vast majority of people with mortgages, along with the vast majority of companies WILL pay back both the interest and the Capital sum they have borrowed. Day in day out those huge sums will continue to flow into the Banks coffers, and with the cost of borrowing for the banks reduced almost to zero, whilst the interest payments on loans remains at 5, 6 or more per cent - considerably more for all those people who have outstanding amounts on Credit Cards - those repayments will become increasingly profitable for the Banks. The basis is being laid for an end to the crunch, and Bank shares will soar when it does. Its no wonder that some of the sharp players in the market want to short the stocks now to get out the small investors. That way they will make a killing by buying at the current ridiculously low, prices and selling when they have made a killing. They will not be looking at the kind of return that a small saver makes on their meagre savings. If RBS, which only a few weeks ago was trading at 65p, rises from its current 10p to £1 - which would still be only a sixth of its level a year ago - they will make 1,000%. And because of the interlinking nature of the financial system this increase in the price of Bank Shares will strengthen their own Balance Sheets, further loosening the crunch, and once again facilitating an icnrease in their lending activities.

But, the Capitalist economy does not move in a synchronous manner. That is one reason that crises arise due to disproportionality. Even as the financial crisis begins to come to an end the crisis in the real economy that that financial crisis has caused could be deepening. The global nature of the Capitalist economy has ensured that the downturn in the west has spread to even the dynamic parts of the world economy in China and Asia - though they continue to grow at rates that the West could only ever dream about. But, at this phase of the Long Wave upturn even such global dowturns tend to be shortlived, even if they are severe. They produce a V shaped recession, very severe reductions in growth and rises in unemployment, but short lived, and with a rapid recovery that sends growth rates soaring even to higher levels than before the crisis, as the dead wood is cut out of the system, the rate of profit is incrased asa result of the less profitable units being removed etc. That was the pattern of such recessions in past phases of the Long Wave expansion after WWII, at the end of the 19th Century, and earlier in that century. It contrasts to the kind of L shaped recessions of the Long Wave downturn, where having declined sharply economic activity continues at that low level with very little recover for years. That was the pattern after 1974, throughout the 1980's and into the early 90's, despite the initial Keynesian stimulus of the 1970's, and the Monetarist stimulus of the late 80's, and early 90's. It was the pattern in Europe during the 1920's and 30's.

This view of the way economic recovery could be sharp and to some extent unexpected was also echoed in an interview on CNBC this morning Brian Shactman Interviews Bill Spiropoulos from CoreStates Capital Advisors.

In another segment on CNBC today Jean Claude Trichet of the ECB was giving testimony, and speaking about inflation, disinflation and deflation. Trichet correctly pointed out that having seen the prospects of rising inflation only months ago, we now see disinflation - that is rising prices, but rising less slowly. This disinflation is the consequence of falling prices for oil, food, and raw materials some of the commoditis which were rising most quickly last year. There is a good reason for this. Unlike, consumer goods these "commodities" as traders refer to them are traded on large liquid Futures Markets, by professional traders. Although, the Futures Market provides a degree of stability for producers and consumers of these commodities - because both can in advance fix a price that they will buy and sell them at some point in the future - the Futures price itself can be highly volatile, precisely because it is an object of speculation by traders. And because of the nature of production of these types of commodity, involving hige amounts of Capital investment, which must be fully utilised in order that the Capital invested is not standing idle making no profit, these prices are highly susceptible to reductions in demand. As the world worries about recession, and the potential reduction in demand for these commodities the price can drop significantly as suppliers seek to reduce existing stockpiles. Already, though OPEC has cut back oil production, and the big Mining Companies have cut back some potential new investments. As Spriropolous says this is likely to cause new bottlenecks and big price icnreases as existing stockpiles are used up, and supply again fails to meet rising demand.

In fact, Marx theorised this in Capital in his Theory of Rent. He argued that because at that time food production never fully met demand, it was demand that determined the price of that foodstuff, and so the price was set by the most marginal land in production, on which the capitalist farmers made average profit, whilst farmers on better land made above average profit, at least some of which was siphoned off as Differential rent, by the Landlords. In similar fashion with the supply of these raw materials failing to meet demand it will be the prices dictated by the most marginal production which will determine prices, even though a considerable amount of production will be lower cost than that. The marginal cost of a barrel of oil is around $85. That is the cost of producing one extra barrel of oil from the least profitable fields. Although, orthodox economic theory says that the free market price should be set equal to marginal cost, it never is. In fact, in some statistics I saw many years ago prices were generally 10% higher than this marginal cost for goods produced in Britain - it was one way that nationalised industries were ripped off by the private sector, because nationalised industries were required to set their prices equal to marginal cost. It is likely then that once existing stockpiles are used up that demand and supply for oil will achieve some kind of equilibrium at a price around $100 a barrel, or more than twice the current level, though significantly lower than the $147 dollars it was sent up to last year. As, rapidly increasing demand for oil in China and the rest of Asia begins to rapidly outstrip productive potential due to the world having reached Peak Oil i.e. the world cannot increase its oil output effectively beyond current leels, and will indeed in the not too distant future begin to be able to produce less oil than currently - that marginal cost per barrel will rise rapidly.

Already, we can see in the US a determination to find alternatives. This is under cover of energy and national security, and green objectives, but it is really about profits. The world's best known oilman after J.R. Ewing, T. Boone Pickens, has developed a strategy for reducing US oil dependence by incrasing the use of natural gas for motor vehicles, and he now advising Obama. Billions of dollars are likely to be pumped into the new technologies of energy production, and area where the US can still have an advantage over China and other low cost production countries. We can see the way in which the base technologies in IT, and Biotechnology, as well as nanotechnology will begin to be taken up in this phase of the Long Term up wave to create the new industries, and production that will lead to a massive development of productive capacity and wealth. The Labour movement needs to have strategies to deal with that, and to take advantage of the opportunities such a development will present for workers.