In a blog, a couple of weeks ago, Newsnight's Paul Mason, wrote Next: QE2 - and if that doesn't work it's a currency war.
In actual fact, the talk of the US engaging in another round of Quantative Easing – rumoured to be of the order of $1 trillion – was an indication of the fact that such a currency war was already under way. The US has been applying pressure to China for some time to revalue the Yuan. It expressed considerable displeasure at Japan, last week, when it intervened in the currency markets, to push down the value of a rapidly rising Yen, against the dollar. The only area that the US has no reason to complain about is the Eurozone. But, it is only a matter of time before the growing contradictions, and problems within the Euro area, burst forth, and force more QE by the ECB.
An indication of that problem is shown by Ireland. As Alistair Darling pointed out, the other day, the Tories used to refer to Ireland, alongside Canada, when they were justifying their Cuts agenda. Big Cuts, they argued, created the condition for the private sector to step in, and for growth to take off.
They failed to mention that, in the case of Canada, this was at a time when the world economy was growing rapidly, and when Canada could get out of some of its own problems by leaning on its next door neighbour, the US. But, the Tories do not mention Ireland today, because those very same Cuts have had the effect most economists have been arguing they would for some time. Ireland has gone back into recession. That recession means that Welfare Payments rise, and Taxes Fall. Instead of the Deficit falling it widens, requiring on that logic even bigger Cuts. In such a downward spiral, such as that which occurred in the 1980's, the very basis for rebuilding the foundations of growth are undermined. A similar trajectory is inevitable for all those economies whose basis of economic recovery is weak – the PIIG economies, and the UK. And, as I have argued previously, because those economies, like Germany, which do have a more robust basis for recovery, are so tied in to the weaker economies of Europe, they will be pulled down along with them.
The recent Stress Tests carried out on European Banks were a charade, and a charade which is quickly being revealed. A number of European Banks have experienced difficulty in recent weeks, and the latest figures demonstrate that liquidity is once more drying up, as it did prior to the Credit Crunch.
In Ireland, the Anglo Irish Bank is now in need of further support from the state, and there is a possibility that if it goes bust it will bring the Irish State down with it. That is why the ECB has had to say it is standing by to provide support. But, Ireland is not Greece. If the ECB, and the EU has to bail-out Ireland that is a far more serious business than having to bail out Greece. As I wrote two years ago, when State's were coming in to support the banks,
“The problem that could arise given the scale is that the same causes of breakdown of trust and relations between Banks, which led to the Crunch could simply be transferred to the relations between States now acting as banks.”
That is the scenario that is now playing out. Imperialism, understood as that social relation that is global Capitalism, is wrestling with the problem of how to avoid such a problem becoming devouring of Capital itself. It is looking to fudge and mudge to get through the crisis, but that very social relation is built on a whole series of contradictions, of conflicting interests, between classes, fractions of classes, nation states, and economic blocs. At a certain point, it becomes impossible to resolve all of those contradictions, and, like an individual who tries to do that, it eventually arrives at a crisis, it shuts down.
The Bank Stress tests were an attempt to calm nerves, not the nerves of the professional traders, who could see through them, but of the general public. The IMF report, of the last few days, was intended to serve the same purpose, but, with the evidence of Ireland, with the latest economic data for Britain, showing sharp reductions in confidence, and a large slow down in bank lending, in mortgage approvals, in house prices and so on, no one can be fooled.
In fact, another sign of the fear was shown when, at the same time as the IMF was making this statement, Charlie Bean from the Bank of England was coming out with an impassioned plea to the Public to go back to their profligate ways, and spend whatever savings they have to stimulate the economy! This at a time when the Government is telling us that the problem is one of overspending, and not enough saving. That, of course, is what Capital needs workers to do. Consumer spending accounts for around 60% of total spending in the economy. The Tories idea, of the private sector springing to life, to increase investment, and so on, is rather hollow if, at the same time, consumers stop spending! That is especially the case at a time when the other plank of the Tories strategy – exports – looks more than a pipe dream, as other economies sink into recession due to their own austerity programmes.
The contradiction is demonstrated in the Bank of England Monetary Policy Committee by Charlie Bean and Andrew Sentance. Bean recognises the need to prop up Aggregate Demand through encouraging consumer spending and borrowing. He argues that more QE is necessary to ensure that enough money is available in the economy to facilitate that.
But, Sentance points out that inflation is rising. It is rising because of all the money printing that has already happened, that is now monetising the increased prices of imports, which is feeding through, also, into secondary price effects – though not yet wages. The 1970's showed that simply printing more money, at a time of rising inflation, does not have the effect of stimulating economic activity, but only of stimulating further price rises! It leads to stagflation. At best, if cost pressures abate, the increased money supply can simply lie stagnant in bank vaults.
That is the other problem at the moment. Nearly half a year into their period of office the Liberal-Tories have not been able to persuade the banks to increase lending. As I said before that is not because the Banks are acting irrationally. Banks make money by lending. But, not if those who they lend to don't pay them back! The banks are not lending because, especially in conditions of uncertainty caused by the Liberal-Tory Budget, they cannot guarantee that those who wish to borrow will pay them back.
In fact, under current conditions, the most likely potential lenders are those who need money to stay afloat not to expand, or else who have plans to invest in things which the Banks will have good reason to believe will fail. Those who might have the potential to expand on a firm basis, the larger companies, either have large cash balances of their own, or else have much cheaper sources of finance in the Capital Markets by Bond and Share Issues. Microsoft has just borrowed money in the Bond Markets, where yields are at historic lows and falling – which again makes a mockery of the Tories claims - despite having billions of dollars of cash, and has used the money to raise its dividend, which also has the effect of raising its share price.
In a later Blog Paul Mason quotes the Brazilian Finance Minister from the FT, saying that such a currency war had already erupted. Brazil – Now Its Currency War.
The belief is, and Paul Mason repeats the argument here, that a currency war, which will also be the consequence of each country engaging in money printing, must be self-defeating, or a zero sum game. At best, as Paul sets out, its believed that those that pull the trigger first might gain an advantage, and some economies, because of the structure of their economies may gain advantage. The US, did gain from Protectionism during the 1930's, even though it was globally devastating. But, it does not have to be the case.
The consequence of massive QE by all countries is only a zero sum game in so far as the relative values of currencies. If the aim is to try to push the crisis on to some other economy, then the consequences must be negative. But, if the purpose of that money printing is not to devalue, but to stimulate economic activity in each economy or economic bloc, then the consequence can be positive and reinforcing for the whole global economy. But, that is the kind of planning and co-ordination that Imperialism lacks, precisely because of those continuing series of contradictions that wrack it. Only a Co-operative economy, where every part of it worked in co-ordination with every other, to overcome such problems, rather than to try to shift them on to someone else, could achieve that.
Keynes pointed out that, under conditions such as those we have today, simply printing money can never be a solution. You can stuff the banks full of money, but unless someone wants to borrow that money to spend it, it will simply stay there. The banks do not want to lend to many people because, with the high probability of economic downturn, those who want to borrow will lose their customers, and not pay them back.
The banks are already sitting on large loans, made to homebuyers, over the last few years, which they have not foreclosed on because house prices had temporarily risen, and the reduction of interest rates to near zero meant that those homebuyers on tracker mortgages saw massive reductions in their payments. As those tracker mortgages come to an end, and house prices crater, the banks stand in danger of finding that many of those lenders default, whilst the houses mortgaged become worthless.Robert Peston, in a recent News report from Dublin spoke about some properties that were selling for less than half their recent prices.
That is the consequence that is likely to befall, still grossly over priced, property in Britain, as the consequences of the measures of the last 2 years unwind, and as the Liberal-Tory policies send the economy into a new recession.
Keynes argued that simply relying on increased money supply in these conditions was like pushing on a piece of string. Consumers will not borrow or spend if they think they might lose their job, their house and so on.
Businesses will see demand slowing down, and will at least cut back any expansion plans, if not begin to retrench ahead of the expected downturn. The only way of avoiding this is to increase confidence. That is what the authorities have been trying to do, a version of “Crisis, what crisis?” But, that can't change the reality. The only way of changing that reality is to do the opposite of what the Liberal-Tories are proposing. It is to use a large fiscal stimulus to create demand, to provide people with jobs, and, from there, to encourage them to be more optimistic. There are two ways to do that. You can give people big tax cuts. But, those most likely to spend them are those on the lowest pay who will get the least back in tax. And if you think you might lose your job, you might simply put the tax cut in the bank. The other way is for the State to spend the money itself.
That immediately means that other firms receive orders, and their workers jobs become secured. It means that more people are employed as teachers, nurses and so on. That is what Governments, outside Europe, have been doing, for the last two years, with considerable success.
Its no wonder that there was a leak from the Ministry of Defence about the devastating effect of the cuts being proposed. Its one of those areas that the Tory faithful have a knee-jerk reaction to.
But, if the Government caves in to the MoD, then every other Sir Humphrey will take their cue to make a similar case of why their department cannot be cut without similar dire consequences. That actually was what happened under Thatcher's Government, which meant that it was unable to achieve its goal of shrinking the State. Big Capital, then as now, needs a Big State, and the Cuts are not in its interests. It will work behind the scenes to protect its interests, along with those of its representatives at the top layers of the State bureaucracy. The Cuts and privatisation are not in workers interests either. The Cuts will devastate the economy, and, although Big Capital will suffer loss of profits from that, workers will suffer a loss of jobs, and lower living standards, as well as setting back their confidence to resist. Nor is privatisation in our interests, because it is a step backwards from the existing State Capitalism. Our alternative to the oppression, bureaucratism and inefficiency of State Capitalist provision is not privatisation, but the transfer of these services and functions to workers ownership and control, through the establishment of worker co-operatives. We should oppose the Tories Cuts and Privatisation programme, but we should at the same time recognise that our interests are not those of Big Capital, and its representatives in the State who want to protect their own interests. We have to put forward our own interests and our own solutions, based upon regaining control over those aspects of our lives that the State currently dominates.
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