“If the Bank of England were really serious about helping the economy, it would be trying to tank the housing market. That is not quite how the economists at Fathom Consulting would put it, but it's a key implication of their latest report on UK monetary policy. The Monetary Policy Committee are unlikely to follow their advice - or not directly, anyway. But the policy paper will make for sobering reading as they prepare for the start of their November meeting on Wednesday.
How, you might ask, could a sharp fall in house prices possibly help the economy? It would help because it would get it over with. Like many economists, the authors of the report, Danny Gabay and Erik Britton, believe that the British economy will not truly put the crisis behind it until it has fixed the banking system and dramatically lowered the amount of private sector debt weighing on the economy. Unlike some of their peers, they think that a correction in house prices is a crucial part of that process in Britain, and it has barely begun.”
Firstly, a sharp fall in house prices will mean that those sitting on large Capital Gains will see them evaporate. That will necessitate a reduction in consumer spending, and increase in saving to rebalance domestic Balance Sheets.
The disproportion that has arisen due to the over-accumulation of capital in Retailing will then be reversed as the number of stores and shopping centres is slashed as retail spending disappears. The secondary effect of that will be a reduction in imports of consumer goods.
But, the further effect will be that, for the first time in a generation, houses will become affordable for new young workers. Given the extent of housing costs in many household budgets that will act to provide a large reduction in the Value of Labour Power. In consequence, even falling wages may be cushioned as the cost of living falls. Unemployment will soar, and asset prices will drop precipitously.
That in itself will be necessary to restructure Capital, freeing up Land and Capital for development. The good news is likely to be for those who have already passed through Higher Education, for whom the number of jobs will increase, as the new high-value added industries develop. The bad news is that the wages paid for these types of jobs will fall to something around the average wage. Other workers will be given incentives to retrain in order to take up jobs in these industries, but will face similar reductions in living standards.Instead of taking 20-30 years for the restructuring to take place, this process could be carried through largely within the period of around 40 months during which the economy would essentially go through a Depression. Of course, what the political implications are from that cannot so easily be determined. As set out above, for Big Capital, the ideal solution would be that the greater centralisation of the EU, that it has long needed, but been unable to build a coalition to achieve, would be forced through.
But, the experience of the US with the Tea Party demonstrates that programmes in the interests of Big Capital are not necessarily in the interests of small Capital, or the middle classes, and these social layers have significant power within the ranks of right of centre parties such as the Liberal-Tories, the CDU, the Republicans etc. They are also easily played to by even more right-wing and nationalist organisations where they can be linked to the idea of some other group being the beneficiaries of such policies be it the “undeserving poor”, foreigners, or even, as Spain is demonstrating, just some other region!
An indication of the political problems is being seen with the opposition from Austria to the paying of the next tranche of aid to Greece. According to reports, Britain is being asked to contribute to the bail-out of Ireland's Banks. That should cause the Liberal-Tories further problems. British Banks have already effectively been nationalised at the expense of ordinary workers taxes. In theory, that might be justified, if British workers obtained some control over those Banks. But, in the case of Irish Banks, it is clear that British workers will have no control, even theoretically, over them whatsoever, after a bail-out.At a time when the UK Government is likely to be called on to also bail-out Willie Wales and his fiancé, to cover the cost of their wedding – which no doubt despite the idea of us all being in this together will not be a cheap do down at the local Registrar's – Osbourne and Co. are likely to have some explaining to do to justify paying out billions to bail-out Irish Bankers, at a time they are cutting billions from old folks homes and so on in Britain. Given the weakness of the organised Left, it is more than likely that the political forces that will benefit from such events will be the kinds of extreme right-wing populist forces, who may drive a political dynamic that would be extremely dangerous both for Big Capital and for workers.
The responsibility for this situation lies entirely with Big Capital, which, in a whole series of areas, has failed to push through the Bourgeois Revolution to its completion – an obvious example of which is the fact that in the first year of the second decade of the 21st Century, British subjects will still be expected to tug their forlocks, bend their knee, and express their contentment at having paid out millions for the marriage of two Royals whose only claim to their position is that their ancestors were bigger, better thieves and murderers than anyone else.
But, that bourgeois revolution is incomplete in so many other areas as I set out in my blogs A Tale Of Contradictions. Big Capital may, as a result of the kind of momentous crisis that current policies are leading towards, be forced to push through such dramatic political restructuring alongside the economic restructuring, though it is likely, as Paul Mason also sets out in his recent blog, to continue to attempt to do this via the same bureaucratic and behind closed doors methods it has used until now, just more brutally. Or, it may be happy to see workers do some of that job for it, just as it did in the 19th century when it mobilised workers as foot soldiers against the remnants of feudalism, and against small Capital. A reflection of that might have been seen in the Guardian's reporting of the recent student occupation of the Tories HQ here with the heading “Student protests set stage for winter wave of unrest”.
The article is not at all condemnatory of the kind of direct action taken, and discusses calmly the discussion taking place in the Labour Movement itself about the efficacy of such action, rather than simply dealing with the morality or legality of such actions. Moreover, it points to a wider application of that idea. Obviously, the representatives of Big Capital within the State are not going to come out openly to profess their opposition to the Cuts, on the contrary, they cannot be seen to take any position other than that of support or at least studied neutrality. Yet, the Guardian makes the point,“What must also worry the coalition is the response of police who themselves face pay freezes, being forced into early retirement and job cuts. There is a moment, caught on YouTube, when a trio of police officers is seen striding almost casually away from the entrance to Millbank. Behind them, a crowd of students bawls at the retreating officers. One of them has lost his helmet in the melee. The youngsters can barely believe their luck.”
Peter Smyth, Chairman of the Metropolitan Police Federation, is quoted as saying,
"If the British are not going to protest now, they are never going to do it. You don't have to be an analyst to work out a lot of unions are going to come to the fore, perhaps non-union members are going to get agitated. I think we are in for a lot of marches and I'm sure most of them start with the best of intentions, but some of them will get hijacked. Are we in for more than we saw last Wednesday? It's inevitable."
The Guardian points out that he has also said that cuts could leave up to 40,000 officers out of a job and result in rising crime figures.
At the beginning of the 19th Century, it was mainly workers who were cut down at the Peterloo Massacre in Manchester, but the political demands they were demonstrating for were radical bourgeois demands.
The Chartists were almost entirely working-class, yet the demands they were raising remained within the context of bourgeois society, and although the bourgeoisie were hysterical in their condemnation of them, as Engels points out, that same bourgeoisie, or at least the Big Capital component of it, were quick to adopt its programme in their interests. See:Concessions Or Conveniences.But, as I have also pointed out, for the reasons Marx and Engels, and Trotsky set out in the Theory of Permanent Revolution, whatever the interests and intentions of that Big Capital, it will not openly combine with workers to push through such reforms and restructuring. To do so would require it to break openly with the less advantaged sections of its own class, and, more significantly, to create the kind of movement of workers that would be likely to go way beyond what its own interests dictate.
But, as Trotsky points out, it would not be the first time that Big Capital in such a crisis looks to Social-Democracy even a Left variant of Social Democracy to act as its saviour, as a preferable alternative to fascism. That essentially was what Attlee's Government did after 1945, in bringing about the kind of radical restructuring that Big Capital required.What makes the current conjuncture so potentially momentous is the combination of all these factors within the context of the current phase of the Long Wave. The last time such momentous events occurred was in the 1920's and 30's when the Long Wave was in a down phase. That conditioned the potential for workers response. It meant that they were on the back foot. I have been arguing for the last decade that the global economy is in a Long Wave Boom that began in 1999. As Bill Jeffries of Permanent Revolution, has pointed out this view is confirmed by a new analysis by Standard Chartered who argue that a Super Cycle began in 2000, which is likely to see China grow so quickly that it surpasses the US by 2020. A summary of StanChar's report can be seen here at Bloomberg.
The consequences of that are significant. Unlike the 1920 and 30's, when the global conditions weakened workers position, the new global boom means that, internationally, workers strength is increasing, and new labour movements are being established. A look at workers growing organisation and militancy, in China, is an example of that. In Europe too, the resistance of workers in Greece, France, and now even in Britain are also a reflection of it. In many ways, Capital in the West, is needing to restructure in the way it has previously been forced to undertake during a Depression, but under conditions more like those of 1945.
At that time one of the representatives of Big Capital, Lord Hailsham, summarised the position as “We will give them reform or they will give us revolution.” Big Capital needs to head off the working-class in a similar way, and the way that has been traditionally done is to strengthen the position of the Trades Union bureaucracy, and of the Social-Democracy linked with it.The basis of that is already beginning to manifest itself. Merkel is losing ground in Germany, Sarkozy has virtually lost all support in France, Berlusconi looks to be on his way out in Italy, and in Ireland the Labour Party has advanced massively in the polls. In the US, Obama still has two years in office, and the Democrats retain control of the Senate. Even the Republicans advance is a double edged sword, because the Tea Party will ensure that they are divided. The crisis of 2008 caused bourgeois governments to take actions that no one thought was likely before they happened. If even that crisis is made to look minor by the outbreak of a crisis more like the Great Depression, and with everything that goes with it, then it is likely that even more dramatic action is likely. In an interview on Bloomberg's “Charlie Rose”, recently the discussion was openly about the extent to which neo-liberalism and the idea of the free market model had now been replaced with the idea of “State Capitalism” as practised in China. The question is whether such a solution is possible without the kind of Stalinist political regime that exists in China.
Ultimately, of course, the answer to that, both in the West and in China, itself comes down to the working-class. Let me be clear here. This is not the same kind of analysis as that I made when I forecast that the Financial Meltdown was imminently going to erupt back in the Autumn of 2008 - Severe Financial Warning. I was almost 100% confident then that the crisis was literally only days away based upon events in the markets. That is why I was also confident enough about the shape and severity of that crisis to begin my warning with the words,
“This has to be a short post because I did my back in a few days ago, and its painful sitting typing. However, events last night on the markets lead me to believe that a very serious situation might have arisen. If I am right, and it plays out then we are talking a complete financial meltdown, a catastrophe of Biblical proportions, "rivers of blood, cats and dogs living together etc.". “
This analysis is different, because the kind of change I am discussing is a process that cannot so easily be placed into a timescale, and which is itself still possible of prevention, provided the current austerity measures are reversed. I have heard it said by some commentators that although Ireland, Greece and Portugal can be bailed out, Spain is too large, for example. That is nonsense. The US is a much larger economy, and yet it can and has been bailed out by the simple measure of printing money to purchase the debt.
The same measure implemented by a centralised EU State, could overnight bring the economic crisis in Europe to an end, and put in place the basis of a reconstruction of Capital.I have tried to set out what I think are the economic circumstances that we face at the moment, and the dangers and possibilities which that leads to. On the one hand, the existence of the Long Wave boom creates huge potential. The economic crisis faced by the US and Europe, is a function of the policies adopted during the downturn to avoid a repeat of the 1930's. Given the context of the Boom, that crisis, which requires a radical restructuring to resolve it, is not actually difficult to resolve from a purely economic theory standpoint. It requires a monetisation of existing debt, it requires a continuation of fiscal underpinning (which does not preclude a gradual reduction), and it requires an element of strategic planning and assistance for the development of the new dynamic industries of the future. Some elements of that exist already.
Yesterday, for example, the Pickens Energy Plan, designed to encourage the conversion of US haulage to liquid natural gas with the injection of several billions of Federal Aid, is being discussed. The US has given considerable financial support to the production of bio-fuels, and now the US actually exports ethanol. In the 1960's one of the primary roles of the EEC was to facilitate the development of atomic energy. The spark to the current crisis in the Bond Markets was a suggestion by Merkel that some Bondholders would have to take a haircut i.e. they would have to recognise that the price for having lent money to people they shouldn't, and on a scale they shouldn't, is that they will lose money. That is also the message from that Fathom Consulting suggestion quoted by Stephanie Flanders, though they also suggest setting up a Bad Bank by the State to take over these mortgages. Monetisation of the debt also implies that Bond Holders and Creditors take a haircut, but as I demonstrated at the beginning of 2009- Paying For The Crisis - this is a solution that Big capital can live with. It pushes the price for the crisis down the road, and provides the basis for shifting the burden on to workers via a number of means.The obvious advantage of a State Capitalist regime such as China is that, having resolved upon solutions, the State can proceed to implement them effectively. But, as I have set out, in a bourgeois democracy things are not so simple. The main question now is will the political solutions facilitate or frustrate the economic solutions. I fear it may be the latter.
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