“Financial markets at their wits’ end”, was the headline in the Financial Times.
In a matter of weeks, trillions of dollars have been wiped from equity market values worldwide. The rush out of equities (shares in companies, banks etc) to alleged ‘safe havens’ of gold is now greater than at the time of the collapse of Lehman Brothers in 2008. This indicates the depth of the present crisis which threatens to become a prolonged slump.
The credit-worthiness of the USA, the most powerful economy in the world, has been questioned. Eurozone leaders are stumbling from one summit to another without being able to solve the crisis.
On Friday 5 August, the credit rating agency Standard and Poor (S&P), downgraded US government bonds from AAA to AA+. This, they said, was due to the debacle between Democrats and Republicans over the debt ceiling for the US – now standing at $14 trillion, the highest in the world. These are the very same ‘experts’ who gave an AAA rating to the sub-prime lending spree in the first place which helped to lay the basis for the present crisis.
Big investors in US ‘treasuries’, including the Chinese government, are still not likely to move out significantly, but China’s official People’s Daily newspaper took the opportunity of the S&P assessment to chide the US government with its own interests in mind. It should not “become blind to the great risks that a weak greenback could pose to the world’s fragile economic recovery by lifting dollar-denominated commodities prices”, it wrote.
The S&P found the sums on which it based its assessment were wrong – by $2 trillion – but, pessimistic as they are about growth prospects, they still believed that lenders would have doubts about buying US government bonds. The latest figures for January to July show the US economy already crawling along at a rate of just 0.8%.
The US economy is now almost certainly facing a ‘double dip’ recession. There are legitimate fears, now widespread, that the austerity measures being imposed in the US and many other countries to tackle high levels of debt, will actually stifle their already weak economic recoveries and plunge them further into crisis.
This is behind the renewed expectations that the US Federal Reserve will announce a new round of ‘quantitative easing’ (QE – printing money) in response to forecasts of the US having a 50-50 chance of entering recession before the end of the year. But QE1 and QE2 have not solved the problems and it remains to be seen whether a new ‘stimulus package’ will be sufficient to stem the crisis.
Fears about the future of the world economy have been reflected in the price of gold and oil. Gold – not ‘paper value’ but a store of real value – is always a favourite ‘investment’ in uncertain times. Its price has jumped to new nominal records well over $1,720 an ounce and could, in some estimates, go as high as $2,500 by the end of the year.
Another ‘safe haven’ for investors – the Swiss Franc – has reached in the last month record highs against the euro and the dollar. The ‘Swissie’ has now moved into negative interest rate territory, which means investors paying the banks to hold their assets safe!
On the other hand, the price of oil has considerably declined. This is because of the grave concerns about downturns in growth leading to a fall in demand.
As the CWI has explained on many occasions, the very feeble recovery in most countries has not been accompanied by any sizeable growth in total output. Apart from some notable exceptions, it did not bring jobs for the tens of millions of unemployed, nor stem what seems like a war on the poor – massive cuts in public spending.
Further cutbacks and downturns in the prospects for young people lie behind the outbursts of anger recently seen on the streets of England. Seriously prepared strikes and general strikes are urgently needed in a series of countries now to stem the attacks on pension rights.
Without the trade union leaders giving a clear lead in the struggle against cuts across Europe and in other countries, clashes with police and attacks on property could erupt in the most deprived urban areas.
A programme of jobs and homes for all has to be accompanied by a struggle for the nationalisation, under democratic workers’ control and management, of the banks and big monopolies. This can channel all the anger and frustration of youth and workers against the system.
On 21 July a special meeting of Eurozone finance ministers agreed another bailout for the Greek government. But within days it was clear this would not solve Greece’s underlying problems or prevent a default of its national debt. Before the 21 July agreement can even come into force, it has to be ratified by all of the Eurozone governments, mostly through their parliaments which are not in session during August.
Only two weeks after this, under pressure from the Eurozone leaders, especially Merkel and Sarkozy, the European Central Bank (ECB) was forced to announce new measures to try and prevent the stock markets going into a tail-spin after Friday’s news from America! Its previous policy of not buying Italian and Spanish bonds on the open market was reversed.
This reduced, at least temporarily, the rates on these countries’ borrowings. However, stock markets remain volatile, reflecting investors’ doubts over effective EU measures to solve the eurozone sovereign debt crisis.
Other discussions have taken place about expanding the powers to intervene by using the €440 billion in the European Financial Stability Fund but they are hampered by the need for unanimity across the zone.
Italy and Spain’s governments alone need to find an extra €840 billion over the coming 18 months – more than the total of bailouts already found for Greece, Ireland and Portugal.
The ECB measure will ease the situation in relation to the debts of Italy and Spain but the strings attached will bring them into head-on confrontation with their populations.
Italy’s prime minister, Silvio Berlusconi, has tried to give the impression there is no major problem in Italy. But his country has one of the biggest debts as a percentage of GDP (nearly 120%) and an economy which has failed to grow more than a fraction of 1% for the past two decades.
He has now agreed, with his government, to bring forward the deadline by which budget cuts will balance the state books – from the original 2014 (well after the next general election) to 2013 (still after the next election is due!).
Extra austerity measures, nearly double those already announced, have been put through the cabinet by decree. Already, even in a summer period, opposition is mounting. Berlusconi has said he will not stand next time round, but he desperately needs a government in power that will not allow three major court cases against him to proceed.
Spain’s prime minister, José Luis Rodríguez Zapatero, has also declared he will not stand in November’s election, sensing the widespread dissatisfaction with his inability to get Spain’s economy back into healthy growth.
He has nevertheless agreed to increase austerity measures as a condition of the new loans. The massive level of youth unemployment in Spain and a feeling of utter neglect by politicians have been behind the mass movement of the ‘indignados’ – young people disillusioned with political parties and looking for radical, even revolutionary solutions.
Richard Hunter, a broker from Hargreaves Lansdown, said: “The markets are looking for a concrete plan out of Europe and the US in terms of how they are going to deal with their deficits.” But because of private ownership and the states’ role in defending the national interests of their own capitalists, a clear plan is something that capitalism, by its very nature, can never provide.
Trying to control an anarchic and blind system, none of the measures they take seems to stem the downward spiral into the worst crisis since the 1930s.
The measures they take to try and rescue their system will mean yet more cuts and austerity, yet more suffering and anguish for the vast majority of the world’s population. The accumulating crises – economic and political – of the last few weeks, have only served to underline the chaotic and wasteful way in which capitalism works or fails to work.
Only 58.1% of Americans of working age now have a real job. Tens of millions of people worldwide are on the scrapheap when they could be producing goods and providing services.
On the basis of public ownership and democratic planning, all the human and physical resources of society could be harnessed for the benefit of the vast majority instead of the increasingly rich minority.
The stranglehold of the banks and capitalist politicians over the lives of millions, in fact, billions, has to be broken. Mass movements, including general strikes, will show the power that the working class can wield in society.
Linked with the energy and anger of the youth, new mass workers’ parties can be rapidly built. Confidence in the idea of a socialist alternative to capitalism can and must be renewed without delay.