Sunday, 10 August 2014

The Three Year Cycle Kicks In

For several years, I have been referring to the fact that, in addition to the long wave cycle, there has been, for at least the last 30 years, a three year cycle. That cycle, probably connected to the technology upgrade cycle, sees growth slowing every three years, with the slowdown lasting for around four quarters. A slowdown does not necessarily mean a recession. The 3 year cycle coincided with the financial crisis of 2008, but was not the cause of that crisis, nor caused by that crisis. Both simply reinforced the effect of the other. As I have pointed out more recently, the three year cycle, was clearly visible in the latter part of 2011 in most economies around the world. Again, it was more pronounced in those economies such as the UK, and peripheral Europe, that were already suffering from the self-imposed damage caused by austerian economic policies.

The cycle usually kicks in around the third quarter of the year, and I have been predicting that it would be likely to manifest itself in the 3rd, Quarter of 2014, for some time. As I wrote a while ago,

“The final element, in this respect, is the operation of the three year business cycle. For at least thirty years, this cycle, which seems to be linked to the technology upgrade cycle, has caused a slow down, which lasts for around 4 quarters. It coincided with the financial crisis of 2008, and its effect can be seen in the annualised growth figures cited above, around the third quarter of 2011, which again intensified the consequences of the austerity measures, in the UK and EU periphery, but also manifested itself on global growth, which is why it seems to have have carried forward into the start of 2013.

After that period, growth appears to have picked up again, particularly in the US, but also in the UK, where it has been fuelled by renewed attempts by the government at stoking a property and consumer bubble. But, the cycle is due to cause a renewed slow down, in the second half of 2014, and alongside rising global interest rates, the chances of the latter succeeding look slim.”

There have been signs that the conditions were being created for that slowdown for a few weeks now, and the latest data indicate that the cycle has now begun to manifest itself. The clearest sign is the fact that Italy has now once more gone into recession. This means that Italy will have had three recessions since 2008, a triple dip recession.

The UK economy, which as was suggested above, has been growing on the back of a new debt fuelled binge, promoted by George Osborne, is also showing signs of the slowdown predicted.

Germany is showing signs of slowing both because it cannot escape the consequences of a slowing EU economy, as the continued effects of austerity in the periphery, and of the three year cycle cause weakness in its main export markets, but also because the sanctions that the US is pressing the EU to impose on Russia, will badly affect the German economy, because of the amount of its sales to Russia, and its dependence on Russian energy. 

 China's growth was slightly higher, than expected, and up for the first time in three quarters, but is unlikely to escape the effects of the three year cycle, as growth slows down elsewhere. 

The exception at the moment is the US. It shocked analysts in the first quarter by initially posting mildly negative growth, on an annualised basis. It then shocked them further, when that was revised down significantly to a drop of 1.9%. However, there was considerable evidence that this was due to exceptionally bad weather during the period. Other survey data suggested that the US economy was continuing to recover, despite the effects of the Tea Party and Republicans, in trying to limit the further use of fiscal stimulus by the Obama administration, and the negative effects of the introduction of the sequester.

The proof that the bad first quarter figure was a fluke caused by bad weather came with the second quarter data. Not only did it revise the first quarter data up from a 1.9% drop to a 1.2% drop, but it posted second quarter annualised growth of 4%. The latest survey data suggests that the first quarter data may be revised higher again, whilst there are suggestions that the second quarter data may be revised up to 4.2%. Data suggests, 3rd quarter GDP may come in as high as 4%, again. However, its unlikely that if the rest of the world is experiencing a slowdown due to the 3 year cycle that the US will escape it.

What the data once again demonstrate, however, is that it was the policies of fiscal stimulus used in the US, and not the policies of austerity used in the UK and imposed on the EU periphery, which were the correct prescription. The US managed to recover the ground it had lost as a result of 2008, much quicker than did the UK. The main damage to its economy over the last couple of years, have been due to the attempts of the Tea Party to impose similar austerity measures, and the uncertainty that has caused due to the resulting political crises over the debt ceiling and sequester. Despite that, the US is growing much more strongly than the UK, or the EU, which suffers as a whole from the austerity measures imposed on the periphery. That is also despite the fact that the US, is in long-term relative decline compared to rising economies in Asia, like China.

As stated recently, the onset of the cycle is likely to spell doom for the Tories hopes of election in 2015. Osborne's economic policy has been a one-trick pony based on encouraging the maintenance of the biggest property bubble in history, and the bolstering of consumer spending on the basis of encouraging one of the greatest levels of private household debt in the country's history. It now stands at more than 140% of GDP, twice the level of public sector debt. With wages stagnant or falling, whilst inflation once more begins to rise, and with large numbers of debtors already in default, and many more subject to the tender mercies of the pay day lenders, or worse, that strategy – which has been the Tory strategy since Thatcher in the 1980's – has a very limited lifespan, and when it ends, the results will be catastrophic.

Rising inflation, combined with rising global interest rates, and a slowing economy mean that the policy of trying to prop up an already failing property bubble is doomed, and the attempt to prop up consumer spending on the back of it, and even more extended debt are doomed along with it. Already, banks like Lloyds, have seemed to understand the message that Mark Carney has been sending them subliminally. They have effectively pulled out of the government's “Help To Buy” scam, and have started to increase their mortgage rates. Others are likely to follow. Even some of the “Buy To Let” merchants seem to have got the message. Fergus and Judith Wilson have recently put up for sale their entire portfolio of 1,000 houses, because they believe the market has peaked.   Another similar sized portfolio of student accommodation has also been put up for sale, and even in London, prices are now starting to fall.

When property prices collapse, by up to 80-90%, the banks will be taken down with them. In the economic environment developing there is no chance that the government or Bank of England can save them with lower official interest rates. But, that situation exists across Europe.  Banco Espirito Santo was only the latest manifestation of the fact that Europe's banks, and effectively this is true of banks globally, are bust. Like the British banks they are zombies that only have a semblance of life because they rest upon thoroughly fictitious balance sheets propped up by massively inflated asset prices, largely of property, but also of shares, bonds and other financial instruments. The Italian Bank Banco Dei Monte Di Sienna looks likely to be one of the next candidates for the basket.

In fact, a proper clear out of all this fictitious capital will be beneficial to capital in the longer-term. As Marx put it,

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”

(Theories of Surplus Value Part 2, p 496) 

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