Some notes from October
1. The euro zone debt crisis is the most pressing problem weighing on the outlook for global economic growth.
• It is depressing consumer and business confidence, causing uncertainty over future job and income prospects, and investment returns.
• As euro zone growth prospects worsen, investors pull out of stocks, currencies, government bonds, suspecting they won't get paid or paid enough.
• This has affected the stocks of banks, especially those who lent lots to Greece. Again, this has made banks reluctant to lend to one another: don't know how much each other are exposed.
(An aside: corporate profits in US are highest in 50 years, but they are holding on to cash because of poor growth outlook: like an aeroplane, capitalism must keep moving, or it falls out of the air.)
• You would expect a slowdown in manufacturing as sales to foreigners fall and as firms invest less in production capacity—machines, premises and jobs.
2. What is a debt crisis, and how does it come about?
• Governments borrow, from home and abroad, to cover budget deficits.
• This accumulates into public debt.
• If budget deficits are too high for too long, and/ or debt gets too high—both in relation to the size of the national economy, which is not fixed—the lenders start to think that inflation could rise and/or that the government might not be able to pay them back (a "default").
• If they are willing to lend, they only do so at higher interest rate, to keep the real rate of return stable or to compensate for perceived increase in risk.
• At some point, the cost of borrowing to cover new spending shortfalls or to cover the costs of paying back old ones becomes unaffordable.
3. Because of (1) we now find ourselves on the brink of another global recession, but probably not as severe as the last.
• The euro area will go into a shallow recession next year.
• Negative feedback loops from the financial market disturbances generated there could push the US into recession too.
• The chance of a break up of the euro area is also high.
4. Why do we find ourselves here?
• High debt loads left over from before the last recession, and as a consequence of it: the credit induced property and/ or asset bubbles, followed by increased debt burden, because local currency cost of foreign-currency borrowing rises after the local-currency falls.
• On top of the consequences of the global recession of 2008-09, or as part of the response to them, a series of negative shocks that have kept the prices of commodities—notably food and fuel—very high by historical standards:
> the Arab Spring (oil supply shock, keeps oil prices high);
> the Japanese earthquake and tsunami (demand shock and supply disruptions);
> bad harvests in 2010, eg Russia's wheat ban (supply shock);
> the squabbles over the US debt ceiling and the ratings downgrade;
> the prolonged ad hoc approach to the euro debt crisis (point 1).
> US quantitative easing? (boost equity markets, but some "surplus liquidity" has driven rises in commodity prices, in part contributing to this year's global inflationary wave, eg pushing up energy prices and restraining growth because of the supply side shock)
5. What are they trying to do? Will the latest deal work?
They are split, but measures possible include:
• reduce (restructure) Greek debt so that investors only get of their money back;
• recapitalise banks so that they can absorb more losses if need be;
• expand EFSF so it can buy Italian and Spanish government bonds, bringing down the yields on them and so making continued borrowing possible
6. What will be the consequences if the euro breaks up for countries leaving?
• Bank run as try to move money out of country threatening bank system;
• the government defaults, reducing debt burden: can't pay, won't pay;
• capital controls as new currency introduced;
• the new currency falls.
• import compression but trade partners in recession: no benefit to exports.
• Euro debts increase.
• Companies and firms become insolvent.
• Much reduced external funding.
• Further austerity or printing money: with depreciation, this produces high inflation, which is the same as a rapid fall in living standard.
7. Why should we care? How will it affect us?
• UK banks hold shares in the European banks that have lent a lot of money to Greece (and Italy and Spain). This will affect lending in the UK. Without a reasonable rate of lending, household spending and investment could be much lower for longer.
• Low foreign demand will affect firms' foreign sales at the same time as the government is cutting spending and jobs, and when business and consumer confidence—partly because of the expected govt cuts
• Boosting exports vital to offset weak domestic demand: low confidence, fiscal tightening
• This will mean large-scale loss of jobs and declines in living standards, not to mention the mental anguish and misery that goes with it.
• These will keep UK growing at below trend rate longer, prolonging the misery.
8. What does it mean for Labour and what should it mean?
• Understanding basic economic terms and ideas is important for Labour members, because it's one of the main languages of class power, and without a basic grasp of it, it's easy to be misled—or worse, bored into submission. But all it is is category definitions, relationships between categories, and processes: shorn of the maths, it's no harder than accountancy, but a lot easier than physics or philosophy, or even some kinds of sociology.
• Too fast, too soon is right: on the one hand, this is how capitalism works.
• On the other hand: this is not 1997, the hold of the dominant ideology—"there is no alternative"—has been decisively weakened loosened for the first time since the 1970s. So this is not the time for another fight out of new and old labour: both of them have had their day. We need something new, again.
