The Economy Of Analysis - Part 6

This could be the week that sees the shit hit the fan of the global economy. On Thursday of last week, the US, along with four other central banks, made available a supply of dollars to European Banks, that were running perilously short, as US Banks stopped supplying them, for fear that they might not get their money back. In the end, this means the US Federal Reserve standing behind this supply of dollars. You might think that European politicians, increasingly ensnared in a spiralling debt crisis, might then have shown some gratitude to US Treasury Secretary, Timothy Geithner.

As global markets showed themselves increasingly frustrated at the apparent inability of European politicians to recognise the seriousness of the nightmare they were walking into, the action of the Federal Reserve, and the other Central Banks, and the statements from Geithner – backing up similar calls from Christine Lagarde of the IMF, and Robert Zoelick of the World Bank – for the EU to take drastic action to recapitalise European Banks, to beef up the EFSF into some kind of European Monetary Fund able to adequately – at least in the short term – bail out Greece, and other peripheral economies, led to a sizeable rise on global markets, as they thought that at last something might be done.

Instead, Geithner was sent away with a flea in his ear. Geithner, has spoken, in recent days, about the damage that was done to the US by the actions of the Tea Party Taliban, which held the country to ransom over the question of raising the US Debt Ceiling.

It was not so much that there was concern about the possibility of the US going into a technical default, as a consequence of that – everyone knew that ultimately the US would pay its debts. But, what it demonstrated was that the US political system was not fit for purpose. As Obama put it, the US did not have a Triple A political system. The US political system was deliberately set up to prevent the Government having too much power, that could be exercised by any one party. A complex set of checks and balances, means that, in everything other than the pursuit of War, Presidents, and Congress have to win cross party support for proposals. When there is a good measure of common ground between the parties, which there usually is in the US, as both parties, more than in Europe, are closely tied to the interests of Big Business, this does not matter too much. But, at the moment, the US is experiencing a period of sharp party political conflict, reflecting deep social divisions in a society that is showing the scars of an economy with such a vast gulf between the rich and poor, exposed now all the more clearly as the US's economic star is on the wane.

But, the political stalemate in the US, was minimal compared to the almost lackadaisical attitude of European leaders, who also have to contend with seventeen different electorates within the Eurozone.

Not, only was Geithner attacked, for attempting to advise the Eurozone, at a time when the US has its own large deficit, but the converse of that was a complete failure to take any decisive action, to either shore up European Banks, to boost the resources of the EFSF, or to put forward any plausible solution for the problems of Greece – a situation that is also causing conflict with the ECB, which is left trying to put its finger in the dyke, through the buying of peripheral European Bonds in the secondary market – a course which has led to one of its German members resigning. In fact, as Greece is at best a couple of weeks away from running out of money, the EU has withheld the latest bail-out payment, which will not be considered until its likely too late, and Greece has been advised to cut even deeper, and to sack another 100,000 Public sector workers!!!

At least that is the position the Germans, in particular, want to hold until after the next set of German elections. Merkel is worried that being seen to be too quick to provide further money for Greece will not go down well with her Party, or with electors. But, in fact, the parties that are sweeping the CDU away in election after election – The SPD and the Greens – are both in favour of the bail-outs, and in fact both favour, the establishment of a fiscal union, some form of political union to control it, and the establishment of EU Bonds, the one thing that is likely to be able to raise the finance needed to recapitalise and restructure EU Capital, without being a massive drain on the fiscal resources of northern Europe.

Merkel, and others may think they have the space to play these political and electoral games. The experience over the US Debt Ceiling suggests they do not. Having once again demonstrated their incompetence, and unfitness to govern, the markets are likely to react at some point this week, if not on Monday.

They may have some period of grace until Ben Bernanke pronounces on the 23rd. what he is going to do about QEIII. It looks as though he will propose buying a considerable amount of US Bonds at the long end of the curve i.e. those that are due to mature in 20-30 years time. This manouevre has been called “The Twist” after Chubby Checker's 1960's hit. It involves a switch of maturities from the short dated securities the Fed has previously bought, and whose value have risen sharply. In fact, another suggestion has been to issue a huge amount of these short dated securities, the yield of which has fallen to historic lows, thereby allowing the Government to borrow at ridiculously low interest rates.

However, that is at complete variance to the situation that was developing in Spain and Italy last week. About a month ago, both those countries were seeing the price of their Bonds fall, which means the Yield rises. Yields had risen to over 6% for 10 year Bonds, a figure which is unsustainable, and means that Governments have to seek a bail-out. The ECB intervened to buy billions of €'s of these Bonds in the secondary markets, thereby pushing down the yield, to below 5%. But, last week as concerns mounted again over the debt crisis, and questions rose over the security of European Banks, should a default arise, these yields started to rise towards 6% again.

The action of Central Banks on Thursday sent the shares of French Banks much higher, as these are thought to be some of the most at risk due to a Greek default, which now seems inevitable. There are other Banks in danger in Germany and in Belgium. The extent of concern over this was illustrated by Paul Mason in his blog. He comments,

“As banks shares have been dumped by scared investors, six major EU banks are valued at below half their tangible book value.

That is, below half what shareholders would get if the bank went bust tomorrow and sold all its assets at their notional value. Even the perennially solid and diversified banks - HSBC, Santander, Nordea - are trading at just above book value. Analysts believe investors are pricing in the exit of all five PIIGS countries from the eurozone.”

But, the important phrase here is “notional value” of these banks assets. It is not just that these assets in the form of sovereign debt are of dubious value. The more important point is that many of these Banks either directly or indirectly are also tied into a vast amount of private debt, which dwarfs the sovereign debt. In the event of a further economic downturn, which now seems also inevitable, throughout Europe, increasing amounts of that debt will also be forfeit. Huge amounts of it remain tied to fictitious values for property across Europe, that remains inflated.

Its not this debt that will be the first to fall off the cliff, but as the repercussions of the debt crisis, and of the effects of austerity unwind, it will be the final nail in the coffin. As one economist put it last week, ultimately all of this debt will backwash to the US, because it is the US, which has acted through the Federal Reserve, as the lender of last resort. It is no wonder that Geithner is concerned at the abyss that the EU politicians are rushing headlong towards. It is no wonder, he believes that now is not the time for austerity, but to do everything needed to avoid that abyss.

Of course, its not surprising that the US sees this as the means of escaping the crisis. In the US, Financial Capital is very important, but it is not as important as Productive Capital. If Britain could not live by the proceeds of its Financial Services industry alone, it is certainly the case that the much larger US economy, and its much larger population could not do so. From WWII on, the US has been the centre of Productive Capital par excellence, including in its multinational form.

Even today, with the growth of China that remains true. If the US is to survive and prosper it can only be by rebuilding and restructuring its Productive Capital, and for that to work, it is also dependent upon a growing global market for the products of that industry. Given, the potential size of the Chinese domestic market, and the fact that it already has privileged access to other Asian markets, the US is more dependent upon the growth of that world market, than is China. As 2008/9 showed, even in a significant crisis in the West, China, with its still largely directed economy, can quickly shift its focus to meeting the needs of its domestic market, and of its new trading partners in Latin America, and Africa, and the Middle East.

It can use its vast financial reserves to finance increased expenditure on even greater infrastructure projects such as its planned opening up of the interior, and the driving of new communication networks to Western China, and the resources rich area of Central Asia. A serious global crisis will weaken the US and Europe, and bring about the dominance of China sooner than that would otherwise have happened.

But, the dangerous element here too is this. If politicians in the bourgeois democracies are seen as ruling over political systems no longer fit for purpose in a fast-moving globalised world, if they show themselves incapable of providing leadership, and of driving forward to the establishment of new international structures such as a United States of Europe, then that will be contrasted with the decisive action taken by authoritarian governments, such as that of the Chinese Stalinists, which still oversees a largely directed economy, where the Five Year Plan is carried out via the State's ownership of the Banks, and through its control over credit, local and regional planning, and other such levers. Already, the success of this State Capitalist economic model, combined with authoritarian power is being favourably measured against the decline and dithering of the old economies, and their political systems.

Within Europe, and on its borders, where many countries are new to democracy or still struggling towards it, that presents severe dangers, not just for Capital, but for the working-class too.

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