Is This A Depression - Or What?
Tuesday 10 February 2009 at 01:57 Something very curious is happening, at least in the UK. A state of ‘denial’ about the scale of the crisis seems to be coming to an end.
As recently as Davos, reporters like Bob Peston noted that bankers were in just this state, believing that whatever was happening would eventually blow over. It would then be ‘business as usual’.
Unfortunately for them and for the politicians who had placed excessive faith in finance capitalism, reality is proving bigger than hopes and dreams.
How Bad Is It Now?
The Financial Times Front Page this morning illustrated both the problems in the real economy and the collapsing confidence of politicians. Nissan yesterday announced that 9% of its global work force (20,000 jobs) would go and that the car company would now go into a loss.
Renault, the car company whose Parisian workers in ’68 almost triggered a revolution in France, owns 44% of Nissan and the job losses are not designed to preserve the fat cats – executive pay will go down and the second half dividend is suspended.
The other story has Ed Balls, the somewhat historically cocky New Labour politician closest to the Prime Minister, being quoted as saying that the UK now faces the ‘most serious global recession for over 100 years’.
Younger generation New Labour politicians are not known for their understanding of history but is he really saying that this crisis could be worse than the 1930s?
The 1930s, alongside the two world wars, are etched into the national political culture as Britain’s own contribution to the European Calvary that lasted from 1914 to 1947.
The Conservatives seem set merely on point scoring and Mr. Balls may have been caught at an ‘off moment’ but he is not the first in Government seemingly to go this far. Another ‘slip of the tongue’ had the Prime Minister refer to ‘depression’, a word quickly denied by a spokesperson afterwards.
Yet this is clearly what is being spoken of in Government circles privately and it is confusing business and the public. This inability to be open about the scale of the disaster in order to hold back the horses of political change may now be part of the problem rather than the solution.
Vincent Cable, the Liberal Democrat Shadow Chancellor, put it thus: “Government Ministers are oscillating between complacent optimism and this doom-laden picture of Armageddon”. He is, of course, referring to the now ridiculous references to the green shoots of recovery from Ministers earlier in the year.
Facing Facts
What do we mean by this ‘denial’ being part of the problem?
We mean that, up to a certain point, business people, whose grand vision is often limited or else they would be doing something else with their lives, might have shown justifiable irritation at journalists and commentators talking the economy down last year.
Unfortunately, in a free market society, the madness of bubbles, whether of tulips or loans, is easily transformed into the madness of busts. Business may moan but those who live by the sword, most certainly tend to die by the sword.
If you have had cheap or easy credit in an unsustainable boom built on the magic of ‘confidence’, you cannot really complain when the ‘confidence’ dissipates and you are left holding the parcel at the party. You are in the game, you play by the rules.
And, if ‘confidence’ is magical, then perhaps we could learn from the Wiccans who say that you will get back thrice what you sowed in an unwise magical act.
At a certain point, rather like the Conservative mainstream of the 1930s in regard to Hitler’s peaceful intentions, wishful thinking and denial become far more damaging than trying to keep the magic going.
Perhaps in Neville Chamberlain’s case, it was the invasion of the Sudetenland that forced reality on to an unprepared Government, but where things were going should have been clear from the time of the Anschluss with Austria.
The British Government is almost certainly in the same state today in regard to the UK economy. Brown’s Government is hoping that Obama’s stimulus package might, like waving a magic wand, re-stimulate a British economy that is excessively dependent on international services, especially finance capital.
Many Governments, always assuming an American leadership that has long been in doubt (and, strategically, has been proven to be in doubt at the recent Munich Security Summit), have placed all their hopes on an American economic stimulus programme.
Expecting Too Much of America
Treasury Secretary Geithner was readying himself at the weekend to announce the next round of cash injections into the banks and associated measures to ring fence toxic assets. This and the $820bn fiscal stimulus are the great hope of economic liberals for the salvaging of the global economy.
Obama drove Congress hard to deliver the stimulus package since the second stage bank rescue, with taxpayers’ money going to the ‘bad guys’, was scarcely going to fly publicly without the wider dole out of goodies in the bill. He needs the stimulus bill enacted at least by the end of the weekend if not earlier.
His position is being reinforced by the announcements of the worst job losses in a generation. Accordingly, he initially postponed the bank rescue plan to concentrate on the economic stimulus.
The world is nervously watching events in the US – the expectation is that, once the pork barrel stuff has been sorted, both bills will be in place within weeks. The foundations for recovery will be laid. If not or the measures fail, we are in uncharted territory.
The delays themselves may one day be blamed for the Second Great Depression but this would miss the point. Despite all the global efforts against protectionism, the entire American recovery programme is an ‘America First’ project built around infrastructural investment for the future.
Sufficient employment is needed to keep America going. It is to be doubted whether the package will offer enough to pull the world out of its slump, simply because the scale of ‘toxicity’ in the market is so vast and the first call on funds is still primarily for the benefit of finance capital.
OK, it may be that we are painting a picture that may be too bleak. Perhaps the US stimulus will turn round the global economy quickly. Perhaps Gordon Brown will be able to pull global leaders into some sort of plan for the reconstruction of global capitalism at the planned Spring Summit.
Perhaps fear and anxiety may give a mandate to the Tories to undertake just sufficient reform to clean up the system and leave it otherwise intact. Certainly, the British system survived even the 5% GDP fall in the 1930s and it unified well enough in the war.
The Political Problem
On balance we too think the British system will survive but we should not be complacent. A refusal by Government to tell it like it is and show a degree of Churchillian leadership is ready to become a material fact in unnerving the population.
Just as lonely voices in the 1930s suggested a necessary defensive rearmament (or cutting a deal with Hitler against the Bolsheviks) and were ignored, so lonely voices in the last decade suggested greater caution in allowing finance capital to internationalise without regulatory safeguards on lending.
New Labour’s close association with global finance capital might now be seen as part of the solution (a strategy called ‘just-hanging-on-in-there-and-waiting-for-recovery’) in a recession but, if we are moving towards depression, it is now more likely to be the part of the problem.
This is especially so for hard-pressed businesses who see measure after measure failing to get credit into the system and taxes being diverted into buttressing distressed banking balance sheets.
In other words, you do not have to be a screaming Leftie to wonder why so much effort and cash is going into saving a busted system instead of transforming it radically through determined executive action.
By failing to take decisive action fast to control credit, regardless of dogma – in other words, by failing to take the Swedish approach of nationalising credit, cleaning up banking and then reprivatising it - the New Labour Government may be digging its own political grave.
At this rate, the Conservatives (on 42 points with New Labour trailing at 28 points) will become the new management, shifting responsibility for ‘toxic policies’ on to their predecessor and driving New Labour from political life for a generation, possibly for ever given the weakened state of the centre-left’s grassroots.
If things deteriorate to ‘worse than the 1930s’, the entire political elite may face a revolt from new political movements of the Left and Right with as-yet unknown consequences.
No Way! Revolution in the UK? Won’t Happen, Mate!
Politically, the recent wildcat strikes in the refinery and related sectors capture the seriousness of the situation. These are on the cusp of both worker resistance to unemployment and liberal economics on the one hand and nationalist resistance to migration on the other.
They are revolts of the Left that could morph quite rapidly into revolts of the Right. Both Radical Left and Radical Right, and much popular feeling, have been in support of the workers.
Such revolts usually mobilise the anxious middle classes into Conservatism – as De Gaulle demonstrated in ’68 – but such reaction tends to happen when things are otherwise going well in the economy.
Now it is the middle classes who are living in the greatest anxiety, as in the Weimar era: we have the threat of job losses, repossessions, wealth diminution, pensions and house price collapse.
Some were close to the edge financially in any case – two adults earning to keep flaky businesses going with a reliance on the house for the pension. Our point is not that bad things will happen but that bad things are more likely to happen if the Government acts in fear of radical measures because of dogma.
Just because the UK system has absorbed and managed very bad things in the past, there is no reason to be complacent during this down turn.
The 1970s involved some very dark political developments that never made it beyond the drawing board but they were there nevertheless, as Mosley and the Communists lurked on the fringes of the Great Depression.
There are two linked but separate issues here. The actual scale of the economic (rather than purely financial) disaster and the responses that politicians will be forced to give, under pressure from below.
Currently, politicians are mounting a rearguard action to try to hold together a system in which they have invested everything – and political capital, to a politician, is worth far more than the cash-based kind.
A Shift of View
We have seen what is happening as the Great Correction. We have consistently advised that we were moving into a ‘1970s global recession with 1930s characteristics’.
We advised this while others were still muttering about it being a 1990s-type event yet we resisted (one year ago) any talk of ‘collapse of capitalism’. We are very cold-hearted analysts. We just see things as they are. We saw capitalism as highly resilient.
What we did not perhaps expect was that the interconnectedness of globalization might shatter all previous models to the degree that it has. Now, we are shifting our view again but still not towards the ‘collapse of capitalism’ scenario (since the market, like the weather, is always with us)
We now think that we intend moving towards something closer to a full-blown 1930s-type event globally with massive unknown political effects.
We think that the seriousness of the situation, almost certainly out of the control of the current political class, derives directly from the early failure of that class to disconnect itself from finance capital and take drastic and immediate action late last year.
For example, the Financial Times today refers to the ‘speed and ferocity of the [Asia] region’s economic downturn, which have shocked even pessimists’. It links this to the reliance on trade rather than domestic demand. This collapse has happened very quickly indeed
It is trade as a system based on credit that is now at threat. Excess cash from one side of the world was poured into bad investments to an unprecedented degree. It may take a long time to persuade all the parties involved to give in order to get.
This is still a ‘Great Correction’ but China and India (let alone Brazil) have not yet adjusted by creating the sort of self-sustaining domestic consumer economy that can pull in imports and get the global flow of trade going again.
It may take four to ten years for that process to take place and this assumes that these major economic powers-in-the-making can maintain their internal cohesion and political stability. So, we should start to expect our Government to think more like Winston and Clem and a lot less like Neville.
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