Some
economic commentators and financial journalists have divined the
‘green shoots’ of economic recovery’ growing out of the present
crisis. Perhaps the wish is father to the thought. Are they right?
Most
obviously stock exchanges in Britain and all over the world have been
booming since the beginning of March. We have to be careful here.
Remember there were four 20% or more rallies on the NYSE between
1929-32, when the overall trend for share prices was definitely down.
These are often described as suckers’ rallies that take place in a
‘bear market’.
More
to the point there is no one-to-one correspondence between the health
of stock exchanges and that of the real capitalist economy. After all
what does a feeding frenzy on the world’s bourses represent? Often
it is no more than what Keynes called ‘animal spirits’ and what
Greenspan called ‘irrational exuberance’. The stock exchange is a
hysterical indicator of economic activity. But the core of what the
traders are guessing and gambling about is what these pieces of paper
will pay out and what they will be worth in the future. Dividends and
the hoped-for capital gains on shares are both based on expected
future profitability.
Expected
future profitability is at best a guess. Secondly it is relative to
what was expected yesterday. So, if things look not so grim today as
they did yesterday, shares are likely to go up. That is what is
happening to share prices at the moment. It’s about mood swings
more than economic realities. The same is true of the reported
improvements in consumer confidence. Shock and despair have given way
to resignation and a recognition that we are in this for the long
haul. So the index goes up.
Other
indicators flicker an irregular light of improvement. Housing sales
went up in April. Hey – guess what? They always sell more houses in
April. As David Blanchflower (the only one at the Bank of England who
saw the recession coming) points out in the Guardian (08.06.09, UK),
“House prices still have a long way to fall. It should be
remembered that during the period of declining house price of the
early 1990s, in approximately one month in three house prices
actually increased.” The commercial property market is in the
doldrums both here and in the USA. Commercial property is one of the
links from the burst housing bubble that drags down firms in the rest
of the economy.
Across
the pond (USA) the outlook still looks gloomy for house prices too.
The housing market is not really going to recover as long as house
prices keep falling – people will wait till prices hit bottom
before they buy. Prices are still going down, and 12% of ‘home
owners’ are behind in their payments or facing foreclosure. This
ghastly statistic tells us that millions of American families don’t
know whether they’re going to have a roof over their head next
year.
The
Great Depression in the USA was scarred by Hoovervilles – shanty
towns of the homeless and jobless named after the President
who presided over the economic collapse. Already Obamavilles are
springing up all over the country
Upturns
in factory output have been reported, though it is always risky to
base projections on a single month’s figures. It is possible that
some shops, after months of austerity, have found their warehouses
bare and sent back to the manufacturers for more supplies in order to
restock. Likewise some mortgage holders have seen a big drop in their
monthly payments and have money in their pockets to spend. But
neither of these factors is important enough to provide the basis for
a sustained recovery. Some of the green shoots that the capitalists
are grasping look more like straws.
One
thing is for sure – as long as capitalism is not overthrown it will
remain in existence and will eventually recover from the depths of
the present crisis. But when will it happen? What form will this
recovery take? No doubt capitalist commentators hope that the
recovery will go into boom, mop up all the unemployment and provide
us with ever-improving standard of living – but we doubt it.
If
we are seeing any ‘improvement’ at present, it is that the rate
of decline is itself in decline. Things are not going to the bad as
fast as they were a few months ago. But, as David Blanchflower points
out, in Britain “unemployment is going to rise at an average of
100,000 a month for at least a year.” Next year we’ll be
looking at unemployment levels last seen under Margaret Thatcher.
The
Financial Times 03.06.09, UK) asks the question ‘is the recession
over’ in the USA. Some say so, but it concludes, “This is still
very much a minority view. Most economists think the economy is
stabilising but the low point has not yet been reached. ‘It
is not impossible. But it seems early to me, with payrolls still
contracting at 500,000 plus as of May,’ said Jan Hatzius, chief
economist at Goldman Sachs.”
What
is required for a big recovery? First the banks have to be restored
to health. Banks provide the liquidity, the oil that lubricates the
wheels of industry.
The
Financial Times (03.06.09, UK) reports that loans to companies and
households fell in April for the first time that records began in
1997. If firms can’t borrow, in a situation where they are hanging
on by a hair, many will go under.
For
consumers, credit-fuelled boom is a distant memory, and likely to
remain so for the future. "With lending growth to the
non-financial sector still sluggish, we still find it hard to see how
a strong and sustained recovery in the wider economy is possible,"
said Vicky Redwood, of Capital Economics.
The
banks have guzzled unprecedented quantities of our money, and still
they’re not ready to lend. It is true that a semblance of order has
been restored in the financial system compared to the chaos that
ruled six months ago.
Balance
sheets – of people, companies, and financial institutions – still
have to be rebuilt, and that takes years. The optimism of the boom
years has drained away. Nis Pratley echoes the point in the Guardian
(04.06.09, UK). “Yet these green shoots, if that’s what they are,
appear terribly delicate.
As
Invesco Perpetual’s Neil Woodford… points out, individuals and
banks have barely started the process of paying down debt and
rebuilding their balance sheets, which would seem to be a critical
ingredient for lasting recovery. Meanwhile, the levels of financial
lending continue to be depressed, unemployment is still rising and
it’s hard to find chief executives who are as cheerful as the PMI
(Purchasing Managers’ Index) data suggests they should be.”
What
else do we need for a boom apart from financial stability? We need a
boom in investment. Investment is the most volatile part of national
income. A capitalist boom is essentially an investment boom, while a
recession is hailed by a collapse of investment. It’s no good going
to the banks now for a loan for long term investment. They’re too
busy recapitalising their books. Investment really comes from
profits. Investment is capitalised surplus value, as Marx
called it – the unpaid labour of the working class ploughed back
into production.
And
profits have fallen off a cliff since 2007. So there’s no
wherewithal for investment. And there’s no market out there for
goods, even if capitalists found the money to invest. On the contrary
too many firms are lumbered with unsold stocks. It seems likely that
the destruction of capital and the destruction of jobs could drag on
for years.
It
gets worse. The present recession started in America. The US is still
dominant in the world economy. If a recovery is to take hold, it must
sweep across the US economy. But the governments in the USA and in
the UK have thrown the sort of money at the banks that they could
have waged a world war with.
Now
the immediate financial panic has subsided for the time being, but we
still have the bill to pay. This is a ball and chain for an economic
recovery. The mighty US government is forecast to be borrowing at the
staggering level of 13% of GNP. This is the sort of budget deficit we
associate with banana republics.
This
borrowing will have to be paid for and eventually repaid. The
government can usually borrow by issuing government securities to
rich people. But the rich are looking quite queasy in Britain and the
USA at the amount of government paper they are being asked to
stomach.
They
can go on strike or demand a higher and higher interest rate for the
money they lend, at the expense of the rest of us of course. The
alternative is that the government increases taxation, dipping its
hand into our pockets just as the economy is due to recover a little.
Either way, we pay.
The
crisis of state finances could choke off the economic upturn.
All
the evidence is that the economy is not just going to bounce back.
Nils Pratley concludes his assessment, “There is nothing the data
to suggest that we face anything other than a very long haul back to
the start of the next period of sustained expansion. Woodford
suggests three or four years, which sounds perfectly plausible.”
Capitalism
has failed, and the present crisis is the evidence for this. The
world economy resembles the man who fell off a 100 storey sky
scraper. At the 44th floor another man pokes his head out of the
window and asks him how he’s getting on. The falling man replies,
“So far, so good.” This is a doomed system. We need to kill it
off.