Friday, 17 December 2010

Cuts, Inflation And Interest Rates - Part 3

If we are to be able to fight the Cuts effectively we need to understand the context in which they are taking place. For example, it quite clearly is not the case as the Liberal-Tories tried to present earlier in the year, and has continued to be part of their narrative since, that the UK had to make immediate Cuts, because we faced the same problems that Greece was facing in the Spring. As I said at the time, Britain Is Not Greece. Greece's problems stemmed not just from the fact that it had massive debts, but that its economy lacked many of the requirements to be able to deal with them. As a small economy it was largely dependent upon the benevolence of strangers to lend money to it, and within the confines of the Eurozone, it lacked the mechanism by which such economies in the past have dealt with such problems in the short term via devaluation. Its economy was highly dependent upon tourism, and a speculative property boom similar to the situation in Spain and Ireland, and so did not even benefit from the limited reduction in the value of the Euro, which occurred, but which did benefit a strong exporting economy like Germany.

But, the UK economy, for all of its sclerotic nature, was not at all the same. A lot of its Public Debt is actually held not by foreigners but by British Financial Institutions, and Pension Funds. Where Greece was paying up to 15% on its debt, the UK was paying less than 4%. The UK has massive overseas assets of its own, and has control of its currency and printing presses. Finally, although a lot was and is made of the fact that the UK had a high degree of dependence on Financial Services, the reality of the modern global capitalist system, is that in a world where the most important form of Capital, IS mobile Money Capital, which whizzes around the globe in search of the highest return at that split second in time, Financial Services ARE a most profitable, most high value added industry! In the 19th Century, when railways first began to appear, there was massive speculation in them – a Bubble – that like all such events was accompanied by corruption swindling, and an inevitable bust. But, it did not mean that Railways were NOT one of if not the most important industries of the time. The same was true of the Tech Bubble in 2000. Like these other events, we will almost certainly be left at the end of this crisis with a much smaller number of very powerful, very profitable Financial Institutions – whatever Vince Cable thinks he might be able to achieve by breaking them up – and, whichever country is home to them, will have a significant economic advantage.
Not only is this view that the Cuts in the UK were not necessary – at least not of the scope the Liberal-Tories have proposed, and as early as they have proposed – shared by many economists, both Right and Left – but as I've previously demonstrated, the Liberals themselves, even during the Coalition negotiations, continued to hold to that position - Liberal Economy With The Truth. Of course, the reality is that even in Greece – and particularly in Ireland, which had been held up as an example by the Tories – the austerity measures have had the exact opposite of the effect that was intended. At the same time as causing massive economic and social unrest, which is never a good state of affairs for Big Capital to proceed with the kind of long-term Capital Accumulation that modern economies require, the fact, that these measures have reduced economic growth, reduced tax revenues, and increased the need for welfare expenditure through higher unemployment, has meant that they were less likely to be able to repay their creditors, and more likely to default. As a consequence, instead of the interest rates for these economies falling, they have actually risen, because they have become WOSRE credit risks than they were before! But, as I have previously written, in terms of Europe, these economies represent less than 5% of Eurozone GDP. If the Eurozone is taken as a single economy, which is that it should be, then these problems are pretty insignificant for that economy. The reality is that they are merely a manifestation of a political struggle taking place within Europe itself. The most likely outcome of that struggle is that Germany will increase its dominance within the EU, and in return for bailing out the deficit countries – either by the establishment of a more permanent and much larger stability Fund, or else by the introduction of Eurobonds, which is the obvious solution – will win a much greater centralisation of Europe, a greater degree of integration of fiscal policy, and thereby a further step towards the establishment of a Federal European State.
At the moment, it looks like the Tories position will leave the UK once more sitting on the sidelines of that development, and damaged as a consequence. In the meantime, the Liberal-Tories policy amounts to administering the economic medicine being imposed on the peripheral economies, but without the long-term benefits that will stem from the establishment of that EU State. The reality is that the political messages in Europe, are a necessary form of right-wing populism used by parties needing to get elected, and by Government's such as the Germans to persuade their electorates that it will be worth paying up in the short term, in return for a federal Europe, in which the profligate will be brought under the kind of Teutonic restraint and discipline that has made the German economy strong. The Tories position is also a form of right-wing populism. The truth of that can be quite easily seen by the position of the Liberals. In order to garner votes they held a completely OPPOSITE position to the Tories before the election, and even into the Coalition negotiations as set out above, just as they did over Tuition Fees. But, as I have pointed out previously Victims Of Their own Incompetence, the Tories populism has led them to move their position on the question of the deficit for electoral advantage too.

“Last night's “Newsnight” looked at the changing position of the Tories. It is illustrative as a response to those on both Right and Left who claim that the Tories actions are unavoidable. The report demonstrated that back in 2007 David Cameron and George Osborne were far from being deficit hawks. On the contrary they were deficit deniers. In fact, they criticised Labour for not spending enough on Health Education! At that time with Public Spending already having risen sharply as Gordon Brown attempted to use counter-cyclical measures, they announced that under their leadership their would be under a future Tory Government not just increases in Public Spending, but real terms increases year on year in Health and Education! Only in 2008 as Lehman's collapsed did the Tories change their tack, and argue for cutting spending. Even then the extent to which this was electorally driven can be seen from the fact that as this narrative proved to be unpopular, the Tories changed tack once again. As late as January of this year, David Cameron was appearing on TV to announce that no one was talking about “swingeing Cuts” in the first year - See Here."

And, as I have written there and elsewhere, the incompetence of the Liberal-Tories lies not in the fact that they have made such “swingeing Cuts” in the first year – in reality they have not, they have made plenty of high profile announcements about Cuts, but the biggest actual Cuts in 2010 have probably been those stemming from the immediate ending of the Building Schools For the Future Programme, again only some of which falls in 2010 – but in the fact that they have seriously damaged the economy by their continual talk about how disastrous the situation was! It is that, together with the Cuts they have made in 2010, which has had the effect of collapsing business and consumer confidence, with an inevitable effect on aggregate demand. The growth that was returning to the economy as a result of Labour's fiscal stimulus ensured that things continued to look okay, for a few months, but already we now see growth slowing significantly, unemployment rising, and every prospect for that trend continuing into next year. In fact, it has only been the growth in the global economy, which has created demand for UK exports that has enabled UK Manufacturing industry to perform reasonably well, and keep growth from completely stalling.

Yet, even in the area that the Liberal-Tories placed most of their attention in justifying the need for immediate deep Cuts, their narrative has collapsed. In January 2010 the UK was paying less than 4% on its borrowing via the Ten Year Gilt. That figure continued to fall from that figure even prior to the Election. The Liberal-Tories attempted to claim credit for this falling Yield, saying that it was a consequence of their Cuts agenda. But, the FT last weekend had a chart (page 23) showing that, in fact, having fallen from a level of 3.6%, down to 2.9% in July, the yield on UK 10 Year Gilts then rose fairly steadily to around 3.7%, where it currently sits. That is a 25% increase in yield from just after the Liberal-Tories Cuts Budget was announced in June, and is consistent with the rise in yields on the Bonds of other countries that have initiated similar policies in Ireland, Greece, Spain and Portugal. The conclusion is that either the Big Capitalists and Financial Institutions who buy these Bonds believe that the Cuts will be detrimental to their interests, or else as Ed Yardeni put it, they simply don't believe Governments will make the Cuts,

"Individually, it is driven more by fear than a vigilante desire to punish Governments. But, as a group investors are in effect maintaining law and order, because they have given up on expecting fiscal and budgetary discipline."

In reality, its more likely as I have pointed out before, and as happened under Thatcher, that Cuts will be made in those areas where the Liberal-Tories can push them through with little or only fragmented opposition – for example cuts in Welfare – or else where they do not affect the long-term interests of Big Capital, only for the size of the State to expand in other areas, and to the benefit of that same dominant section of Capital, and its representatives within the State.

In a sense, this is also why we should not get hung up on the question of the size of the Cuts, which ultimately becomes a question of how big or small we think the Capitalist State itself should be.
Marx was not in any sense in favour of a large Capitalist State, quite the contrary. But, we have to start from where we are after 100 years of Fabianism and Statism, and the growth of an oppressive, bureaucratic and paternalistic State apparatus. We cannot just go Cold Turkey in withdrawing the working-class dependence on it. We can only begin to rebuild working-class independence from that Capitalist State gradually. We have to find ways of achieving that at the same time as opposing the Cuts and Privatisation. In the final part, I will look at the strategies that are open to Capital in resolving the current situation in the UK, and the responses that workers can adopt.

Back To Part 2

Forward To Part 4

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